New York Estate Planning & Elder Law Blog
What’s In a Name Depends on Who You Are. It Could Be Hundreds of Millions According to the IRS
There has been an ongoing battle in recent years between decedents’ estates and the Internal Revenue Service (IRS). While it is only to be expected that the IRS attempt to collect as much as it can, their recent focus has turned to a rather contentious area in their quest for collections: intangibles. This category that includes property interests like computer software, patents, copyrights, publicity rights and literary, musical and artistic compositions can be difficult to put a price.
Most recently, the estate of former singer Whitney Houston has been fighting off an inexplicable valuation of Ms. Houston’s publicity rights, according to The Hollywood Reporter. Ms. Houston’s estate is just one of many in recent years, most notably, Michael Jackson, who are embroiled in heated tax claims over the valuation of certain assets, most contentiously the valuation of the celebrity’s public image. How exactly does the IRS come to the conclusion of the worth of the decedent’s image, and why are valuations of this intangible so hard to get right?
The Valuation Process
There is no step by step process that the IRS uses to determine the value of a decedent’s image. The valuation process is governed by Section 4.48.5.1 of the Internal Revenue Manual. While there may be directions and rules for the valuator of intangible property like a decedent’s publicity rights and image, the entire process may be summed up as a sort of ‘totality of the circumstances’ when putting an actual dollar amount of value on an intangible. A valuator must consider all relevant information and material facts when assigning a value to an intangible, including but not limited to:
- The value of the net economic benefit to be received over the life of the asset
- Valuations of similar intangibles
- The risk associated with future income of the intangible
- Historical income generation of the intangible
While this may seem to give a good starting point for a valuator from the IRS to begin with, the actual guidelines acknowledge that in many cases, valuation may be difficult to accurately predict due to quantification problems related to future income potential, economic obsolescence and reliance on probability analysis of the actual value of the intangible.
Millions of Dollars at Stake
For an estate like Michael Jackson’s, the uncertainty of the value of his publicity means the difference between hundreds of millions of dollars owed and millions owed. Mr. Jackson’s own lawyers valued his estate at just $7 million dollars, while the IRS valued it at a whopping $1.125 billion. Chief among the valuation fight is Mr. Jackson’s likeness, which the estate valued at just $2,105, while the IRS put it at $434.264 million according to the LA Times.
While it may be difficult to put a price on Mr. Jackson’s likeness, the estate’s valuation is obviously too low to be accurate. The ‘King of Pop’s’ likeness is obviously worth more than the price of a junk used car, but Mr. Jackson’s lawyers argue that Mr. Jackson’s publicity rights were in no way worth the hundreds of millions that the IRS claimed due to over two decades of scandals involving accusations of child molestation. When Mr. Jackson died, he was arguably at the lowest point in his career and his publicity rights and image would not be worth as much as they would say during his Thriller days.
More likely than not, the true number will fall between the two of the valuations put forward. However, should the estate lose, the Jackson estate will face over $505 million in taxes and an additional $197 million in penalties. With much of this tax bill hinging on the valuation of an intangible that is hard to put a dollar amount on, it is easy to see why it is such a contentious battleground in estate planning.