The IRS Disagrees: Billy Jean Was Rich and His Lover

Michael Jackson is dead. The world agrees this is tragic. However, his estate’s war with the IRS is alive and well. But it too could end tragically for Jackson’s beneficiaries, along with beneficiaries of celebrity estates that increased in value after the death. You may be aware the IRS imposes an estate tax on individuals who die, conceptually speaking, “rich.”  What does rich mean in this context? The amount of wealth a person can die with and escape estate tax changes each year per statute. If the decedent owned less than the statutory amount of wealth at the time of death, then he or she was not “rich” in the eyes of the IRS, and was therefore not subject to the estate tax. For example, in 2016, a person has to die owning property in excess of $5.45 million (net) to be subject to the tax.  In 2009 when Jackson died, the estate tax exemption was a mere $3.5 million.

But was Michael Jackson “rich” at the time of his death in 2009? Did he own property exceeding $3.5M of net value? At first blush, the answer is “yes, of course.” The intellectual property rights to his music alone would absolutely dwarf the $3.5 million estate tax exemption.  Right?

At the time of his death, Jackson’s estate claimed it was worth just $2,105, due to Jackson’s hundreds of millions of dollars of debt. That’s right – according to the estate representatives, Michael Jackson was worth less than a 1994 Geo Metro (in good condition) at the time of his death.

The estate asserted Jackson was still reeling from the molestation allegations: he had no merchandising deals when he died, and he had not toured in several years. In fact, Jackson died when he was on his “come back” tour.  This circumstances support the low valuation, the representatives claim.  Further, the estate claims the $2,105 valuation is supported by appraisals made by experts that specialize in valuing intellectual property of famous, deceased people.

The IRS did not buy it.

Nope, the IRS claimed the estate was worth $434 million.  Per the IRS Jackson’s name and likeness remained extremely valuable, as evidenced by the $261 million earned from the This Is It documentary, which was released after Jackson’s death. The IRS also cites a Cirque du Soleil tribute show, music and video releases, and the sale of Jackson’s portfolio of IP to Sony for approximately $750 million.

It is probably safe to expect a court battle given the massive discrepancy between the government and estate’s valuations.  Practitioners estimate the battle, which will take place at a Los Angeles tax tribunal in 2017, could be worth more than $1 billion after considering interest, penalties, and attorneys’ fees. Epic.

A fascinating aspect of this dispute: this is reportedly the first time the Internal Revenue Service has ever pursued an estate for the value of the decedent’s name and likeness at the time of death. This case could spell trouble for other celebrity estates that have increased in value if the IRS wins.

Adam Streisand, a probate attorney who has worked with celebrity estates including Ray Charles, Marlon Brando and Marilyn Monroe, says he does not expect the IRS to be able to point to other celebrities' post-death earnings as part of the valuation process. However, since this is the first time the IRS is pursuing estate taxes for name and likeness, it is difficult to predict how a court might factor in the “Jim Croce effect” — which stands for the proposition that some entertainers are worth more dead than alive.

— By Michael S. Cooper, Esq., Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.