Michael Jackson’s estate offers a lesson in valuation: David Leeper

Written by MLHA Team

May 27, 2021

One of the interesting things in tax law is valuation. Just exactly how much is something worth?

This is an extremely important matter in so many areas of tax law. If someone wants to give away property to his friends or family, he may have to pay a gift tax on the proper value of the gift. If a corporation distributes property to a shareholder, he may have to pay an income tax on the proper value of that gift. When someone dies, the estate may need to pay an estate tax on the value of its assets.

The importance of this issue was made clear last week in the tax case involving the Estate of Michael Jackson, the musician who died of an accidental drug overdose.

When Jackson died, his estate prepared and filed an estate tax return. It valued his assets at $5.3 million. The Internal Revenue Service audited that return and determined the value to be $481 million!

As you can see, the method of determining value can be a critical issue in tax law.

There are a variety of ways of determining value. The IRS issued a revenue ruling back in 1959 that contained a number of different ways to establish value. The typical one is what would a willing buyer and a willing seller, with knowledge of all facts, pay for the property. Another way would be to apply a multiplier against the income the property is expected to produce. Another factor would be to consider the replacement cost of that property. The process goes on and on.

What doesn’t work is what the appraisal district decides. Typically such an entity has very little credibility with the IRS or with the U.S. Tax Court. Often times its decisions are made by non-experts and may be politically influenced. Stated differently, the appraisal district valuation should not be relied upon other than as an indicator of possible value.

The Tax Court ultimately ruled that Michael Jackson’s estate was worth $111 million. This represented the value of his image and likeness, and a large number of unreleased musical recordings as well as compositions from other musicians that he had written or co-wrote. The Tax Court used the income approach, estimating how much in gross revenue they would likely produce over 10 years.

So the moral of the story is this. If you are about to engage in a transaction that requires a valuation of a significant asset, you want to make damn sure you know what you’re doing because there can be a lot of tax money at stake in selecting the right valuation process.

Using the wrong valuation process cost the estate of Michael Jackson around $50 million. That’s cash money that his heirs did not receive. It is likely the estate did not have those funds and will have to sell or borrow against its assets to pay the IRS — a further and possibly devastating hardship.

You don’t want to make the same mistake.

David Leeper is a Board Certified federal tax attorney with 40 years of experience.  He can be reached at 915-581-8748, by email at leepertaxlawelpaso@gmail.com, or visit leepertaxlaw.com.

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