What's in a Michael Jackson Name? Plenty Says the IRS!

By:  Michael R. Morris

Michael R Morris

With all of the media focus on the recently decided wrongful-death action in which a jury found AEG not liable in 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 ("IRS") and centers on the $7 million taxable value of the estate's assets reported to the IRS.  Undoubtedly eyebrow raising to the IRS was the valuation of Michael Jackson's name and likeness rights at only $2,105, to which the IRS has countered at greater than $434 million.  In all, the IRS has valued Michael Jackson's estate at more than $1.1 billion, and issued a notice of deficiency in estate taxes of more than $505 million.  And because the IRS contends the executors significantly undervalued the estate's property, it tacked on additions to tax of $196 million for good measure!

In response to the IRS notice of deficiency on July 26, 2013, the estate filed a petition with the U.S. Tax Court, contending the valuations of the assets on the estate tax return "were accurate and based upon qualified appraisals by qualified appraisers who had extensive experience valuing entertainment industry assets."  And on August 20, 2013, the IRS filed its answer, which detailed all of the proposed IRS valuations of Michael Jackson's assets, including his name and likeness. This sets the stage for a contentious valuation battle.

No doubt, the IRS is aware that the exploitation of dead celebrity names and likeness is big business.  In 2009, CNN's story "A Living for the Dead" profiled Mark Roesler and his company, CMG Worldwide, which represents the estates of such icons as James Dean, Buddy Holly and Marilyn Monroe, to name but a few.  What makes the Estate of Michael Jackson's battle with the IRS of extreme interest is 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 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.  Cal. Civ. Code §§3344 and 3344.1.   In fact, these rights extend for 70 years after death, and, like most property rights, are licensable, transferable and descendible.
  
The holder of the decedent 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. Cal. Civ. Code §3344.1(f)(1).

To come within this statutory protection, California law requires that a decedent's right of publicity must have had "commercial value at the time of his or her death, or because his or death." Cal. Civ. Code §3344.1(b).  Indisputably, Michael Jackson's right of publicity (name, likeness, etc.) had commercial value when he died. But how much such rights were worth when he died is the pivotal question facing the U.S. Tax  Court.

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 licensing post-mortem 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 is the future earnings power of Michael Jackson's posthumous celebrity rights.  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 Estate of Michael Jackson could well signal similar IRS scrutiny of valuations placed on other high profile  deceased 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.

Contact: Michael Morris