Michael Jackson estate embroiled in tax fight with IRS

The spectacle that was Michael Jackson’s life shows no signs of abating with his death.

There was the conviction of the doctor who gave him the fatal overdose of a powerful anesthetic, battles over his will, attempts to remove the executors of his estate and the wrongful death suit against the promoter of his doomed comeback tour.

Now, Jackson’s estate is in the midst of a fight with the Internal Revenue Service.

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The agency has told Jackson’s executors that the estate owes $505 million in taxes and an additional $197 million in penalties, for a total of more than $702 million.

According to documents filed with the U.S. Tax Court in Washington, Jackson’s executors placed his net worth at the time of his June 2009 death at slightly more than $7 million.

The IRS placed it at $1.125 billion, a difference so vast it looks like a typo.

Jackson’s return was so inaccurate, the IRS said, that it qualified for a gross valuation misstatement penalty, which would allow the government to double the usual 20% penalty for underpayment.

“I’ve never even heard of the gross valuation misstatement penalty being asserted,” said Andrew Katzenstein, an estate tax expert at the law firm Proskauer Rose in Los Angeles.

Few estates are valuable enough that they are required to file with the IRS. In 2012, the latest year for which statistics are available, only 9,400 estate-tax returns were filed in the nation. Because the value of the estates that file is relatively high, they usually are audited, tax experts said, but few end up in Tax Court.

“Estate planning is like playing a game of hot potato, and the potato is wealth, and you don’t want to die with the potato in your hands,” said Edward McCaffery, a professor in USC’s Gould School of Law. “You want to get it out to your kids or into trusts.”

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Most of the dispute is over the value of Jackson’s image, along with his interest in a trust that includes the rights to some of his songs and most of the Beatles catalog, including “Yesterday,” “Sgt. Pepper’s Lonely Hearts Club Band” and “Get Back.”

The estate valued Jackson’s likeness at just $2,105.

The IRS put it at $434.264 million.

A dead celebrity’s image and likeness, used on things such as T-shirts and television commercials, can be a lucrative source of income. Elizabeth Taylor, for example, directed that 25% of the income from her image go to the Elizabeth Taylor AIDS Foundation.

The estate put the value of the pop star’s interest in the trust that owns the Beatles’ and Jackson’s songs at zero. The IRS put it at $469 million.

A certified public accountant testified during the wrongful death suit last year that Jackson had taken a $320-million loan against the music catalog.

The IRS also said Jackson’s interest in another trust was worth $60.6 million, not $2.2 million, as the estate claimed.

Experts agreed that it was hard to imagine that someone would price a catalog that included some of the world’s most memorable songs at zero and think it would pass muster with the IRS.

McCaffery and Katzenstein suspected that while he was living, Jackson may have tried to pass the catalog on to his children as a trust but that the IRS found problems with the transfer.

Neither the IRS nor Howard Weitzman, the attorney for Jackson’s estate, would comment.

Tax experts said the Jackson estate would have hired appraisers to determine how much his assets were worth at the time of his death, including his likeness. One document mentions a report by the venerable firm Bonhams & Butterfield.

Most estates are much easier to value than Jackson’s. You can look up the prices of stocks and bonds. You can check comparable properties for real estate. With a business, you can compare sales with a similar firm. But how do you value Jackson’s likeness?

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“This is something unusual,” Katzenstein said. “He was one of the premier entertainers of our time. So there are really no comparables, and it leaves the valuation question open to a huge range of possibilities.

“Do I think his likeness was worth $2,105? No. But was it worth $400 million?”

The Jackson estate probably would argue that before he died, the singer had neither toured nor released a CD for several years, and his public image had been severely damaged by allegations of child molestation. Companies were not exactly begging Jackson to endorse their products or trying to make deals with him.

Since he died, Jackson’s recordings have gained new life. The estate had earned $475 million, according to a court filing in July 2012. Forbes magazine reported in October 2013 that Jackson was the highest-paid celebrity that year — dead or alive — earning $160 million.

Much of the money, according to Forbes, came from two Cirque du Soleil shows based on Jackson’s music, one at Mandalay Bay Hotel and Casino in Las Vegas and another that tours the world.

“You have the Jim Croce effect,” McCaffery said, referring to a singer who was killed in an airplane crash in 1973. “Before he dies, everyone is tired of his songs. But after the tragic death, there is a spike up.”

The court documents also list other disagreements between the estate and the IRS. The documents often refer to assets, such as a company or a trust, but do not go into detail about them and often do not explain why the IRS disputes the estate’s figures.

Listed under stocks and bonds, the IRS said MJJ Ventures Inc. was worth $81.13 million, $67.4 million more than the estate said.

The IRS also took issue with the valuation of Jackson’s share of the rights to the Jackson 5 master recordings. The estate valued them at $11.193 million, while the IRS placed their worth at nearly $45.5 million.

The tax court documents show that Jackson had three Rolls-Royces and a 2001 Bentley Arnage that the IRS said were worth $250,000, not the $91,600 the estate placed on them.

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The IRS also found other automobiles, saying, “Tangible personal property including vehicles not reported otherwise” were worth $47.467 million instead of the $0 the estate reported.

If it is found liable for the taxes, the Jackson estate could pay them off by selling assets or asking the IRS if it could pay over 15 years, Katzenstein said.

Although most inheritance tax disputes are settled before trial, the Jackson estate appears to be taking a hard line, having hired the top tax litigators in Los Angeles — Hochman, Salkin, Rettig, Toscher & Perez — Katzenstein said.

“They’re trial lawyers,” he said. “They’re a firm not afraid of litigating these matters to resolution.”

But the IRS, McCaffery said, signaled it is not backing off when it said Jackson’s likeness was worth $434 million. “They’re saying, `Bring it on.’”

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