photo by Ricardo Diaz
At last weekend’s Grammy Awards, the music industry recognized the late David Bowie’s artistic worth by presenting him with five posthumous awards for his final album, “Blackstar.”
Meanwhile, the Internal Revenue Service has recognized Michael Jackson’s worth by presenting his estate with a bill for over $500 million in taxes, and an additional $200 million in penalties.
The dispute over Jackson’s estate is exhibit A in the case for repealing the federal estate tax. The four-year legal fight between the King of Pop’s executors and the IRS illustrates the arbitrary and unfair outcomes that are almost inevitable when a high-rate tax is applied to property without an easily measured value.
The U.S. Tax Court began hearings on the dispute earlier this month. The crux of the disagreement rests mainly on the value of Jackson’s name and likeness, as opposed to that of his music. The estate initially assigned a value of merely $2,105, arguing that Jackson’ reputation had been so battered by his legal troubles, rumored drug abuse and erratic public behavior that his name and image alone were nearly worthless at the time of his death. Even as of the day Jackson was found dead in his mansion, however, this figure is inarguably low; if someone had offered me the rights to his name and image for $2,106 that day, I’d have bought them on the spot. In fact, the estate later stipulated that the rights could be worth as much as $3 million.
That figure, however, is still a far cry from the IRS’ claim: $161 million, down from as much as $434 million when the Service first came knocking in 2013. It seems clear that the IRS is largely basing these estimates on the way Jackson’s name and likeness have been used in the years since his death. The IRS’ position is that, essentially, anyone could have used Jackson’s name and likeness to generate the profits that his executors created through projects such as the documentary “This Is It” and a pair of Cirque du Soleil shows featuring the singer’s image as well as his music. The IRS’ assessment completely ignores the post-mortem hard work and sheer luck involved in capturing this value.
An estate tax return is meant to reflect the value of a person’s assets on the date of his or her death (or an alternate valuation date six months later if the executor elects to use it). What happens after that should be immaterial. As Jackson’s case illustrates, however, the government is more than willing to argue that every dollar captured and created for the benefit of a famous decedent’s heirs should go to the government – above and beyond income tax which, as Bloomberg notes, Jackson’s estate has paid throughout the course of this dispute.
It seems likely that the Tax Court will settle on a number higher than $2,105 and lower than $161 million. Laura Zwicker, a partner at the law firm Greenberg Glusker in Los Angeles, told Accounting Today it was probable: “The judge may have to take pieces of the experts’ testimony from each side and come to some compromise position.” The reality is that, no matter the outcome, the estate tax puts the judge in the position of weighing two contrary guesses and applying a third guess of his own. Meanwhile, Jackson’s heirs continue to wait in limbo nearly eight years after the singer’s death.
The government will continue to capture income tax on money generated from Jackson’s likeness in the future. The estate tax does not change this fact. But with no estate tax, everyone involved would have been spared a drawn-out dispute based on very little in the way of concrete evidence. Were there no step-up in basis on assets that generate capital gains, sales of assets such as Jackson’s stake in Sony/ATV Music Publishing would have been taxable transactions. The estate would have paid such tax without dispute, because there would have been no guesswork involved in the sale’s value – and, crucially, the sale would have generated ready cash with which to pay the tax.
I have been writing about the problematic nature of the estate tax for years, in this space and elsewhere. As I said back in 2001, the estate tax often asks us to know the unknowable. It is arbitrary and impractical. It is based on a guess – also known as an appraisal – and demands cash up front in situations where there is often no cash to be had.
Taxes, especially on big-ticket assets, ought to be based on more than guesswork. We will all be better off once we can leave the estate tax behind us for good.