With all of the media focus on the recent decision in the Jackson family’s wrongful death suit against AEG, in which a jury found AEG not liable over Michael Jackson’s death, there is another court battle generating less press but which could cost hundreds of millions of dollars. This case pits the estate of Michael Jackson against the Internal Revenue Service, and centers on the $7 million taxable value of the estate’s assets which were reported to the IRS. There’s little doubt that the valuation of Michael Jackson’s name and likeness rights at a paltry $2,105 raised a few eyebrows at the IRS offices — the IRS’ valuation was greater than $434 million and, in all, valued Michael Jackson’s estate at more than $1.1 billion. The IRS has issued a notice of deficiency — a bill for debts owed — of estate taxes totaling more than $505 million. And because the IRS contends the executors significantly undervalued the estate’s property, it tacked on additions of $196 million for good measure!
In response to the IRS’ notice of deficiency, sent on on July 26, 2013, the Jackson estate filed a petition with the U.S. Tax Court, contending the valuations of the assets “were accurate and based upon qualified appraisals by qualified appraisers who had extensive experience valuing entertainment industry assets.” On August 20, 2013, the IRS filed its response to that assertion, which detailed all of the proposed IRS valuations of Michael Jackson’s assets, including his name and likeness. The disagreement has set the stage for a contentious valuation battle.
There’s little doubt that the IRS knows that the exploitation of dead celebrity names and likeness is big business. What makes the estate of Michael Jackson’s battle with the IRS of extreme interest is that, while the valuation of an estate’s assets for federal estate tax purposes is usually made when a person dies (there is an election of value estate assets as of six months after the date of death), any subsequent dispute with the IRS over the worth of celebrity “name and likeness” rights rarely become public.
The rights of a deceased celebrity’s estate to that celebrity’s name and likeness rights are governed by state, not federal, law. So unless a deceased celebrity died a resident of a state affording posthumous protection for rights of publicity, such rights literally go to the grave along with that celebrity. This happened in the hotly litigated cases involving Marilyn Monroe, where the ultimate determination of her status as a New York and not a California resident meant Monroe’s rights of publicity failed to survive her (since New York has no law protecting posthumous rights of publicity).
Conversely, California has for many years statutorily protected the rights of both living and dead celebrities in their names, voices, signatures, photographs and likenesses. In fact, these rights extend for 70 years after death, and, like most property rights, are licensable, transferable and descendible.
The holder of the deceased celebrity’s right of publicity must, however, register the claim with the California Secretary of State (a simple procedure), and until that is done, damages cannot be recovered for any use prior to such registration.
To come within this statutory protection, California law requires that a decendent’s right of publicity must have had “commercial value at the time of his or her death, or because of his or death.”
Determining the value of intellectual property based on projected future earnings and discounted to a present value is not an exact science. In the case of the King of Pop, his estate has generated hundreds of millions of post-mortem licensing dollars, which the IRS no doubt factored into its valuation. So now the IRS and the estate of Michael Jackson are locked in a hotly contested battle over just how valuable the future earnings power of Michael Jackson’s posthumous celebrity rights could be. While the Jackson case may settle prior to the Tax Court’s adjudicating what these rights are worth, the litigation between the IRS and the Michael Jackson’s estate could signal similar IRS scrutiny of other high-profile celebrities’ name and likeness rights. Accordingly, the administrators of such estates need to be aware of the necessity to engage both qualified appraisers to value such rights and experienced tax professionals to defend against the inevitable IRS audit.
