The IRS and Mr. Jackson’s estate are in a serious dispute over the value of his estate at the time of death on June 25, 2009. Attorneys for Mr. Jackson’s estate say he was $400 million in debt and his estate was virtually worthless, while the IRS contends the value is north of $1 billion dollars. Depending on the outcome, Jackson’s estate may owe over $500 million in taxes and another $200 million in penalties. The discrepancy is so large that tax specialists are wondering if it could lead to criminal tax evasion charges.
Of critical difference, is the value of Mr. Jackson’s name and likeness, which his estate attorneys originally valued at $2,105 (not a typo or shorthand). They claimed child abuse scandals and strange public behavior had tarnished his reputation, but later revised that amount upward to approximately $3 million.
The IRS claims the value of his name and reputation at $161 million (lowered from an initial value of $434 million). They contend that music promoter AEG was funding a multimillion-dollar “This Is It” comeback tour and the documentary alone (after his death) grossed over $261 million. Additionally, his music and merchandise are still selling at a remarkable rate.
Although the documentary generated huge profits, estate attorneys argue it is irrelevant to the value of his image at the time of death. They also claim the licensing agreements currently in place were not signed before death, with Mr. Jackson never earning more than $50 million from the licensing of his name when he was alive. They argue that his name was not valuable when he died, but his decedents have done a remarkable job of monetizing his music and reputation.
Valuation Date – Facts and Circumstances
Accepted valuation theory states that analysts reach their conclusion based on information that is known or knowable as of the valuation date, and that facts or circumstances that become known after the valuation date should not be considered in determining value. For example, if valuing a coal mine as of December and the mine floods in January due to a dam failure, that event should not be considered in determining value as it was not known, and could not have been known as of the valuation date.
Without knowing the exact position of Mr. Jackson’s estate, the valuation theory of unknown facts and circumstances should generally apply if the subsequent licensing agreements had never been discussed or considered. However, admitting that the initial valuation was understated by a magnitude of 1,500x (revised $3M compared to the original $2K) may not help defend the valuation. On the other hand, the IRS decreasing their value from $434 million to $161 million also may not help defend their position.
STEELGATE ADVISORS, INC.
SteelGate Advisors is a multidiscipline investment bank specializing in buy- and sell-side representation, corporate finance, business valuation and tax planning/structuring for middle market companies. Our expertise, objectivity and individualized approach have helped stakeholders develop the important – and often challenging – business strategies that help them achieve their professional and personal financial goals.
Thomas Krahe, CPA/ABV/CFF; Managing Director; 724.719.3220; Tom.Krahe@SteelGateAdvisors.com
Bill Collier, CPA/MST; Managing Director; Bill.Collier@SteelGateAdvisors.com
Christopher Miller, CPA/ABV/CFF; Director of Valuation Services; Chris.Miller@SteelGateAdvisors.com
Some associates of SteelGate Advisors are registered representatives of, and securities transactions are conducted through, Stillpoint Capital LLC, Member FINRA and SIPC, Tampa, FL. Stillpoint Capital is not affiliated with SteelGate Advisors.