Tax lawsuit of the century…[1]

What Doesn’t Belong: Bad, Thriller, Moonwalk, Tax Court. Actually, it’s not a fair question as they all have one thing in common, Michael Jackson. The latest being the estate of Michael J. Jackson c. Internal Revenue Commissioner[2].

Michael Jackson died in June 2009. The executors of his estate filed an inheritance tax return showing the value of his property, which included the image and likeness of Jackson, his 50% stake in Sony / ATV, a music catalog and a music publishing company,[3] and his interest in Mijac Music, which possessed musical compositions by various artists, including Jackson.[4]

The IRS disputed the reported values ​​of these three assets, leaving it to the Tax Court to determine their fair market value as of the date of Jackson’s death. (The estate and the IRS reached a pre-trial agreement regarding Jackson’s other property.) The disputed assets were reported at $ 2.2 million, while the IRS claimed those assets were worth $ 964 million. dollars.[5]

Fair market value for inheritance tax purposes is defined as the price at which property would change hands between a willing buyer and a willing seller, neither of whom is obligated to buy or sell and both have knowledge reasonable of the relevant facts.

Being unique, the disputed assets lacked apparent market values. Thus, professional appraisers were retained by the parties to appraise these assets according to various parameters deemed appropriate. Tax Court Judge Holmes discussed the three approaches used by courts and appraisers to value unique assets: income, market and cost. The income approach values ​​an asset by projecting how much income will be produced in the future and determining the present value of the projected income. The market approach values ​​an asset by comparing it to the prices at which similar assets changed hands in arm’s length transactions shortly before the date of death. The cost approach values ​​an asset by calculating the cost of its recreation.[6] As the Court said, valuation disputes are questions of fact that are often expert battles. The Court, however, is not bound by any particular expert opinion and is free to accept or reject an expert opinion on the basis of its own judgment.

The estate retained various experts to assess the three elements while the IRS used only one. Justice Holmes felt that the credibility of the IRS expert was a particularly important part of the case. “And he suffered a lot at the trial.”[7] After finding that the IRS expert lied on the stand – then corrected himself after a suspension – Justice Holmes determined that the appropriate remedy would be to disregard the weight given to that opinion’s opinion. expert.[8]

The Court carried out an in-depth analysis of the evaluations[9] and also performed his. The main factors affecting the value of assets were Jackson’s declining celebrity status due to, among other things, accusations of pedophilia and the crushing debt against his stake in Sony / ATV, which effectively wiped out his value. The court discussed Jackson’s expenses. With insufficient income, Jackson borrowed against his stake in Sony / ATV, which at the time of his death had obtained more than $ 300 million in loans.

In the end, the court drew the following conclusions as opposed to the estate and IRS assessments:

In response, Jackson’s executors said, “This thoughtful US Tax Court ruling is a huge and unambiguous victory for the children of Michael Jackson. For nearly 12 years, Michael’s Estate has argued that the government’s valuation of Michael’s assets on the day of his death was outrageous and unfair, a valuation that would have imposed a heavy tax burden of over $ 700 million on his heirs. . While we disagree with parts of the ruling, we believe it makes it clear how unreasonable the IRS assessment was and provides a way forward to finally resolve this matter fairly and fair. “[10]

[1] Hollywood journalist, Director Michael Jackson’s executor was ordered to testify in a billion dollar tax battle on December 8, 2016.

[2] Memo CT. 2021-048, May 4, 2021.

[3] Owned by New Horizon Trust II.

[4] Owned by New Horizon Trust III.

[5] At the time of trial, the parties were only worth $ 476 million from each other.

[6] Decision of the Tax Court at p. 65.

[7] Decision of the Tax Court at p. 59.

[8] The estate wanted all of his testimony and reports to be struck.

[9] Estate and IRS experts have used the income approach.

[10] Hollywood journalist, The Michael Jackson likeness valued at $ 4.1 million in a grand estate tax win on May 3, 2021.