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Valuation disparity leads to conflict between estate and IRS

A difference in valuation has led to a serious conflict between the executors of the late pop star Michael Jackson’s estate and the Internal Revenue Service. There are a few main points of conflict. First is the problem of the appropriate date of valuation, since Jackson’s estate was in serious debt and financial troubles at the time of his death but shortly after began increasing in value as prudent estate executors effectively managed assets. For tax purposes, the value can be assessed either on the date of death or six months after the person’s passing, but there must be agreement between the IRS and the estate on the appropriate date.

The second issue is the valuation of specific assets within the estate, particularly of Mr. Jackson’s own likeness as it is used on promotional materials and merchandise, and in his interest in his own copyrights and the substantial portion of The Beatles catalog copyrights. The estate executors valued Mr. Jackson’s likeness at $2,105 when he passed away and valued the catalog of copyrights at zero dollars, possibly based on a large loan that was taken out on those assets. The IRS saw things differently, valuing Mr. Jackson’s likeness at $434.264 million and the catalog at $469 million.

Those discrepancies along with several others have led the estate executors to claim a total taxable value of $7 million, while the IRS believes it is $1.125 billion. This large gap means that the IRS is pursuing harsh penalties against the estate for intentionally undervaluing the assets.

While this is certainly one of the more extreme cases, the lesson of thoughtful and accurate estate valuation is important for everyone putting together an estate and tax plan. It is crucial to strike a balance between finding tax saving strategies and pushing the limits too far and winding up in conflict with the IRS.

Source: Los Angeles Times, “Michael Jackson estate embroiled in tax fight with IRS,” Jeff Gottlieb, Feb. 7, 2014.