The estate of Michael Jackson recently won a major victory against the Internal Revenue Service in a valuation dispute where the Estate and the IRS’s valuations of three intangible assets, including Jackson’s image and likeness, differed by over $950 million dollars. The case is an important reminder that, although valuing most assets is relatively straightforward and such wildly different valuations are not the norm, certain unique assets, including an individual’s image and likeness, are difficult to value. Taxpayers and the IRS often do not see eye to eye on the value of these assets. Moreover, with the rise of social media platforms such as Instagram and TikTok, more and more taxpayers do own these kinds of assets, and we should expect to see similar valuation disputes more frequently.

Summary Of The Case
According to the Tax Court opinion, on Michael Jackson’s estate tax return, the Estate valued three intangible assets—Jackson's image and likeness, his interest in a trust through which he owned an interest in Sony/ATV Music Publishing LLC, and his interest in a second trust through which he owned interests in a music-publishing catalog that owned the copyrights to compositions that Jackson wrote or cowrote—at $2,105, $0, and $2,207,351, respectively. Although Michael Jackson is one of the most successful musicians of all time, the Estate justified these low valuations because of Jackson’s fall from fame. The Estate asserted that Jackson’s reputation at the time of his death had been badly damaged, due largely to multiple criminal allegations. When Jackson died in 2009, he was deeply in debt (which was secured by the Sony/ATV Music Publishing LLC and music-publishing catalog owned by the trusts) and had not recorded any new music or toured for years. 

On audit, the IRS adjusted the value of Jackson’s image and likeness to $434,261,895, the value of the Sony/ATV Music Publishing LLC trust to $469,005,086, and the value of the music-publishing catalog trust to $58,478,593. As a result, the IRS sent a bill to the Estate for almost $700 million, including nearly $200 million in underpayment penalties. A significant portion of this bill was due to the increase in value the IRS placed on these three intangible assets on the basis that Jackson is one of the most well-known artists of all time and had some of the highest grossing records of all time. The IRS also saw future potential revenue from sources such as shows and merchandise.

In a 271-page decision that traces Jackson’s notoriety and assets through his life and dives into complex financial analysis, the Tax Court valued Jackson’s image and likeness at $4,153,912, the trust owning Sony/ATV Music Publishing, LLC at $0, and the value of the music-publishing catalog trust to $107,313,561. The Tax Court reasoned that, although interest in a musician’s work usually increases for a time after the musician’s death, this occurred with Jackson’s music and the Estate successfully capitalized on this interest and generated revenue from it, the post-mortem revenue streams were not foreseeable as of the date of Jackson’s death (which is the valuation date generally used for estate tax purposes). The Tax Court further observed that the fact that Jackson earned not a penny from his image and likeness in 2006, 2007, or 2008 shows the effect the allegations against him had, and continued to have, until his death. Importantly, despite the fact that Tax Court’s valuations for two of the three intangible assets differed significantly from the Estate’s valuations, the Tax Court also rejected all of the penalties that the IRS imposed for the understatement of value, because the Tax Court found that the Estate reasonably and in good faith relied on its appraiser’s valuations of these assets.  

Broader Lessons Learned
The case highlights how difficult and speculative the valuation of certain assets, particularly intangible assets such as image and likeness or intellectual property, can be. The sum of the Estate’s valuations differed from the Tax Court’s by over $100 million and the IRS’s by over $950 million, and yet the Estate was found that have reasonably and in good faith relied on the valuations it provided on the estate tax return. The case also shows how popular taste, which can change on a whim, dramatically impacts the value of these intangible assets. As the Tax Court’s opinion notes, “[p]opular culture always moves on.”

While most taxpayers and estates do not need to worry about the value of image and likeness or similar unique intangible assets, with the rise of Instagram, TikTok, and similar social media platforms, an increasing number of taxpayers, many of whom are more akin to ordinary people than to celebrities like Michael Jackson, and think of themselves that way, do own such assets. For some, those assets may have significant but difficult to determine value. Studies estimate that there are approximately 37 million influencers with at least 1,000 followers on Instagram. It is estimated that between 20,000 and 40,000 of these influencers have more than 1 million followers and between 300,000 and 2 million of them have between 100,000 and 1 million followers. Many of these influencers make significant income from their marketing activities on social media. A significant and increasing number of businesses use influencer marketing to grow their businesses and their revenues. Some studies project that, in 2021, influencer marketing is expected to be worth $13.8 billion.

As more and more young entrepreneurs in direct-to-consumer businesses, influencers and similar individuals generate income and wealth from unique assets such as image and likeness or goodwill derived from social media, they and their advisors should keep in mind their value and the issues, time and expense that valuing such assets can bring with it.

Stephanie Vara, an associate in Lathrop GPM’s Denver Office, focuses her practice on estate planning, probate and trust administration, business succession planning and charitable giving. She advises a wide range of clients, including high net worth and ultra-high net worth individuals and families, fiduciaries, nonprofits and family businesses.

Amanda Kruse, an associate in Lathrop GPM’s Minneapolis Office, focuses her practice on assisting clients with estate planning, charitable giving, business succession planning and estate and trust administration. She drafts wills and trusts, advises clients on tax minimization strategies, and guides families through the estate administration process.