The Jackson Estate Continues to Tangle with the IRS

Almost five years after Michael Jackson’s untimely death there is still dispute over the estate taxes owed.
Jeffrey S. Freeman, J.D., LL.M
Nearly five years after his death, Michael Jackson is still making headlines, but not for his musical abilities. This time it is for a fight with the IRS over his estate. The IRS recently informed Jackson’s executors that the estate owes $505 million in taxes and an additional $197 million in penalties, all together totally over $702 million.
At the time of Jackson’s death in June 2009 Jackson’s executors estimated his net worth to be $7 million. That was not a typo, the IRS states that the Jackson estate owes 100 times the amount of its estimated net worth in taxes. How can this be? The difference is in the estate valuation, which the IRS did not agree with Jackson’s return. The IRS valued the estate at $1.125 billion, a difference so vast that it qualifies for a gross valuation misstatement penalty which allows the government to double the usual 20% underpayment penalty.
So where did the estate go wrong? The first error was not realizing the high-potential for an IRS audit. There are less than 10,000 estates that are valuable enough to be required to file with the IRS. Since the value of these estates are relatively high, they have a very high probability of being audited, but few actually end up in Tax Court.
Second, the valuation of many items in Jackson’s estate were highly suspect. For example the estate put the value of Jackson’s interest in the trust that owns the rights to most of the Beatles’ catalog and Jackson’s songs at zero. The IRS disagreed and valued Jackson’s interest at $469 million. Equally confusing is the fact that Jackson took out a loan against the catalog for $320 million. Jackson may have tried to transfer the catalog to his children while he was alive, but the IRS found issues with the transfer and thus it is valued with the estate.
Valuations for celebrities can be challenging as there are not always comparable items to estimate the value. Jackson’s likeness was estimated at $2,105 which the IRS deemed drastically low and estimated it at $434 million. Additional disputes were over tangible property like Jackson’s extensive line of vehicles including three Rolls-Royces and a 2001 Bentley Arnage.
The Jackson estate seems to be preparing for a hard trial by hiring a top litigation team. But, looking at the IRS valuation of Jackson at $434 million they are not backing down either. Estate planning is a complex business and when not handled properly it can leave a mess than carries on for years.
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