The Tax Court decision in the case of the Estate of Michael Jackson is a rare combination. The celebrity nature of the case broke it out of the tax ghetto of the blogosphere, which doesn’t happen every day. And within the tax world it sets a sort of precedent in the area of celebrity “image and likeness”. Like Yankee Doodle Dandy George M Cohan, tax geeks may remember Michael Jackson even as his prominence in pop culture inevitably fades. In reviewing this case many planners will be focusing on the exposure that it creates for major celebrities. I think we might want to consider the opportunity that the decision presents to lesser celebrities. And we can see from that analysis that the stakes in the case might not have been quite as high as we thought.
The Income Tax Effect
Going into Tax Court the Michael Jackson estate valued the King of Pop’s “image and likeness” at $3,078,000. The IRS valued image and likeness at $161,307,045. This was a significant narrowing from the original difference of $434,259,790 ($434,261,895 on IRS notice of deficiency versus $2,105 reported on the return). Still the matter was high stakes. The top estate tax rate in 2009 was 45% which would make for a deficiency of $72,588,170 on that item alone.
The estate tax is not the whole story though. There is also an income tax effect and that goes in the other direction. The image and likeness is an intangible asset being used in a trade or business. The heirs are entitled to an amortization deduction under Section 197. I was concerned that there is an anti-churning rule that might get in the way. Michael Gans’s article Publicity Rights and the Estate Tax in the Columbia Journal of Law & the Arts pointed me to PLR 199949037 where the IRS ruled that inherited goodwill is amortizable.
Using round numbers and looking at it from the viewpoint of 2009, the $160 million in image and likeness value besides producing an estate tax increase of $72 million would have also allowed a stream of income tax deductions at 35% that would save $56 million over 15 years. Discounting that stream at 3.5% would make it worth $43 million. For someone dying this year the spread is even smaller with the top estate tax rate being 40% and the top individual income tax rate at 37%,
Don’t get me wrong it was still worthwhile for the Estate of Michael Jackson to fight the large notice of deficiency, I do question whether it made sense for the IRS to fight the issue so hard, because they may have created an opportunity for valuation shenanigans that will drain more income tax than the estate tax that it yields.
An Opportunity?
Nowadays you have to have done pretty well to have much worry about federal estate taxes. The unified credit will cover $11.7 million. I am old enough to remember when being a “millionaire” was a really big deal. There was a TV show dedicated to that premise – The Millionaire. And rough numbers $11.7 million today is in the vicinity of a single million in the fifties.
At any rate you can be pretty celebrated and have some high earning years and finish up with a net worth far south of ten million. A likely example of that would be F Lee Bailey who died on June 3, 2021. He was probably the most famous lawyer in the United States in the second half of the twentieth century. He must have earned a good bit of money but he was probably better at spending it. And there were tax troubles, which I covered. His New York Times obituary closes with:
In 2016, Mr. Bailey filed for bankruptcy in Maine, saying he owed more than $5 million in taxes and had minimal assets, including a condo in Yarmouth, Me., with a $365,000 mortgage.
In recent years he had been running a business consultancy out of an apartment above a Yarmouth hair salon owned by his girlfriend.
You never know, but I think it is a reasonable inference that Mr. Bailey’s assets as we conventionally think of assets are well below $11.7 million. But what about his image and likeness (IL) which according to Professor Gans would include his name? If his heirs can ascribe a significant value to that, they can get a stream of deductions. In the alternative they can forgo the potential return that they have documented and donate the rights to an appropriate charity. The latter course opens the potential for the sort of shenanigans that have been going on with syndicated conservation easements.
Valuation Inspiration From The Jackson Case
So far I have not been able to drum up a lot of enthusiasm for this notion. When I spoke with Timothy Speiss, Co-Leader of the EisnerAmper Personal Wealth Advisors Group, we were able to have a really good discussion of the Michael Jackson case, but he did not develop any enthusiasm for my good news for D list celebrities idea. It all comes down to the knotty problem of valuation.
He make a particular point of the clever thought experiment that Judge Holmes suggested as an ideal way to value image and likeness:
As a purely theoretical exercise, one might imagine that the right way to value an estate with such assets is to imagine an auction at the side of the decedent’s deathbed, with the auctioneer seeking a single price for all his assets. This would make it easy to determine — especially in an extreme case like Jackson’s, with its very difficult-to-value assets that turned out to be quite lucrative — the total value of those assets as of the date of death.
The difference between this bid and the winning one would then be the expected marginal contribution of the winning bidder in managing the estate. This would allow a hypothetical judge to easily distinguish the value of a decedent’s assets from the value added by the management of those assets.
There is a lot to chew on in the Jackson decision. Mr. Speiss believes that it will be used in MST finance courses in the future.
What State?
If you are thinking about this for yourself or your clients, you will need to consider the issue of domicile. The hypothetical instance of Bailey ends up being a good illustration of this point. According to his obituary he died in hospice care in Georgia. Previously he had been living in Maine, where F Lee Bailey Consulting had an office in Yarmouth. That is the sort of fact pattern that can make domicile a little questionable.
Professor Jennifer Rothman of Loyola Law University in Los Angeles and author of The Right of Publicity -Privacy Reimagined for a Public World has a site that provides a roadmap to the publicity laws of various states. If his heirs want his image and likeness to have value, they will want to lean toward Georgia where the right of publicity survives death and is inheritable. Maine on the other hand does not recognize a distinct right of publicity, although it does recognize a right to privacy and against appropriation. Whether the latter is inheritable is unclear.
In the Jackson estate, the IRS argued that valuation should take into account any rights the estate may have under the law of any state (or country). Professor Gans had suggested in the article mentioned that this was the correct approach. Judge Holmes, however, took a narrower view. It ruled that only rights under the law where the decedent was domiciled need be considered. Jackson was domiciled in California which does provide significant rights.
Might Be Something To It
As I have been trying this idea on for size I can’t but reflect on Reilly’s Third Law of Tax Planning – Any clever idea that pops into your head probably has (or will have) a corresponding rule that makes it not work. I have not been able to get a handle on the business practicality of monetizing the image of likeness of lesser celebrities. When I reached out to experts in monetizing image and likeness of dead celebrities, they were not too optimistic about lesser celebrities like Bailey having significant value.
And this is where the opportunity for shenanigans might arise. If the heirs donate the image and likeness to an appropriate charity which will commit to making sure it is not sullied, they might be able to find an appraiser who will be able to construct a narrative that yields significant value. Since the plan will never be executed you can’t say that it would not work.
An entrepreneurial heir might use their parent’s image and likeness in promoting a business – a restaurant or a clothing store for example. If the business thrives, it will be tough to argue about whether it would have thrived anyway.
Other Coverage
There is a lot of coverage on the Jackson decision, but I have not found anything on the income tax effects. This may be one of the rare instances when one of my original ideas turns out to be really original. Of course just because an idea is original, doesn’t mean it’s a good idea.
Unrelated Note
I fancy that some of my readers rely on me to keep them up to date on the doings of Kent Hovind and Dinosaur Adventure Land. I have something on the latest drama concerning his marital woes, but it was not quite Forbes worthy. You can check it out here.