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

Fleeced Madoff Ponzi Investors Receive Partial Payments on Initial Investments

by Mayer Nazarian and Geoffrey A. Weg 

Geoffrey Weg

Mayer Nazarian

On Thursday, September 20, 2012, Irving H. Picard, Securities Investor Protection Act (“SIPA”) Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS")(the “Trustee”) announced that checks for the second pro rata interim distribution to eligible account holders totaling $2.5 billion were mailed on Wednesday, September 19, 2012. This second distribution, when combined with the funds already returned to account holders, fully satisfies more than 50 percent of the total current accounts with allowed claims.

 

The Trustee also reported the following: 

• 1,230 accounts will receive approximately 1/3rd of the allowed claim amount;
• The average payment will be slightly more than $2 million;
• Of these 1,230 accounts, previously 892 were fully satisfied; an additional 182 accounts will be fully satisfied by this second distribution;
• A total of $3.625 billion has been returned to account holders;
• The Trustee has recovered or reached agreements to recover more than 50% of the approximately $17.3 billion lost by claimants.  

“In addition to recovering as much stolen money as possible for Madoff’s victims, we are also moving forward aggressively to resolve litigation and appeals which are delaying further distributions to BLMIS customers,” said David J. Sheehan, Chief Counsel to the SIPA Trustee. “We are confident in our positions and we look forward to putting more recovered funds back in the hands of their rightful owners in the near future.”

 

Amounts not recovered by claimants may be claimed as a theft loss deduction on the taxpayer’s federal income tax return, which may offset other income and result in a tax refund. For taxpayers who suffered similar losses from investment fraud, IRS offers tax relief in Revenue Procedure 2009-20 (the “Revenue Procedure”). The Revenue Procedure provides that investors may deduct up to 95% of the investment loss, less any actual recovery and any potential recovery from SIPC or other insurance claim. The investor may have to report income or an additional deduction in future years depending on any actual recovery.

 

For more information, contact Mayer Nazarian or Geoffrey A. Weg
Tax & Wealth Planning Group.

TAX SEASON ALERT: Beware Of Fraudulent Refund Claims Using Your Social Security Number

 by Bruce Sires

We were made aware of this fraud when the IRS sent a letter inquiring about a 2011 Form 1040A allegedly filed by our client, who happened to have died in January of 2011.  The taxpayer's 2011 tax return had not been prepared or filed, and it was clear that someone had obtained the taxpayer's Social Security Number ("SSN") and filed a falsified return in the taxpayer's name, claiming a fraudulent refund.  The return requested a direct deposit into an account which was not in the taxpayer's name.  The IRS was alerted to the possible fraud, because they had received notice from the Social Security Administration of the taxpayer's death.  However, in many cases there are no obvious indicators of fraud, and we've heard that the Service has made direct deposit refunds into accounts shown on fraudulent returns, which do not belong to the taxpayer!

What should be done if the IRS notifies you that someone has claimed a fraudulent refund under your SSN?  Immediately call the IRS to confirm the fraud and ask them to flag your return.  The Service will flag your account regarding potential identity theft.  Also, notify your accountant, bank, financial advisor, and credit card companies that you may be the victim of identity theft.  All of your accounts should be closely monitored for any suspicious activity, and consider closing all existing accounts (and opening new ones) to prevent unauthorized purchases, cash transfers or withdrawals. 

If you haven't received such a letter, it is still a good idea to carefully review your bank and brokerage statements as well as credit card bills to be sure there is no unfamiliar activity, and where there is a suspect transaction follow up to be sure the issue isn't anything other than authorized use by your spouse, partner or children, or a memory lapse.  Finally, in this era of identity theft and fraudulent refund claims, you may want to regularly check your account with the IRS to be sure that only returns you have actually filed are reflected on their records.

You can order tax return transcripts online (www.irs.gov and go to the "Order a Return or Account Transcript" link), with a call to the IRS at 1-800-908-9946, or by filing the appropriate form with the IRS:  Form 4506,  Request for Copy of Tax Return; Form 4506-T, Request for Transcript of Tax Return; or, Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript.   The time spent carefully and regularly monitoring your finances could save you from a major disaster.

Contact Bruce Sires

IRS Reopens Offshore Voluntary Disclosure Program

by Geoffrey Weg

On Jan. 9, 2012, the Internal Revenue Service ("IRS") reopened the Offshore Voluntary Disclosure Program ("OVDP"), which provided taxpayers with undisclosed income from offshore accounts an opportunity to "get current with their taxes" and limit potential penalties.

IRS Commissioner Doug Shulman stated, "Our focus on offshore tax evasion continues to produce strong, substantial results for the nation's taxpayers. We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation's tax system."

Commissioner Shulman added, "people need to come in and get right with us before we find you," and that IRS is "following more leads and the risk for people who do not come in continues to increase."

With a few key differences, this OVDP is similar to the 2011 program, which allowed participating taxpayers to avoid potential criminal prosecution by filing missing tax returns and paying applicable taxes, penalties and interest. Unlike the 2011 program, there is no set deadline for taxpayers to apply to the 2012 OVDP. It is important to note, however, that the terms of the 2012 program could change at any time - IRS could end the program entirely at any point, or increase penalties for all or some of the affected taxpayers.

The overall penalty structure is essentially identical to prior programs, but with an increase in the highest penalty rate to 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. During the 2011 program, the highest penalty was 25 percent. Like the 2011 program, taxpayers whose offshore accounts did not exceed $75,000 in any calendar year covered by the 2012 OVDP will be eligible for a lower 5% or 12.5% penalty. In addition, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

In announcing the 2012 OVDP, IRS highlighted the success of past offshore voluntary disclosure programs, which to date have resulted in $4.4 billion in collections for the federal government from some 33,000 taxpayer voluntary disclosures. Taxpayers who have made voluntary disclosures to IRS since the closure of the 2011 program will be eligible to participate in the 2012 OVDP.

Any taxpayer who wishes to participate in the 2012 OVDP must file all original and amended tax returns and include payment for back taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

Should you have any questions or concerns about the OVDP, please contact any of the attorneys in the Valensi Rose Tax and Wealth Planning Group for assistance.

Email: Geoffrey Weg