The headline news about the U.S. Tax Court’s decision on the value of Michael Jackson’s estate might have been a shock to some – or, perhaps, to many. The King of Pop’s inflation-adjusted earnings since his death in 2009, according to the Forbes magazine, were $2.1 billion. His annual earnings in 2016 were $825 million, the highest single-year payday ever recorded by a front-of-camera celebrity. And yet his image and likeness at the time of his death was valued at a meager $4 million by the U.S. Tax Court.
The Opinion, filed on May 3, 2021 (and linked below), is a brisk read – all 276 pages of it. To Jackson’s fans, the first 50 or so pages walk through Jackson’s life, from childhood to fame, aptly called “The Rise,” “The Fall,” “The Collapse,” and “The Unconsummated Comeback.” To students of valuation approaches, the Opinion provides a treasure trove of information, starting with diligent data collection, followed by the discussion of methodologies, and a deep dive into the mechanics of the Discounted Cash Flow (“DCF”) analysis, including the discount rates and useful lives.
The tenacity of the Court in fact finding is impressive. Of the three intangible assets covered in the Opinion, Jackson’s image and likeness required the least amount of legwork by the Court because the Estate’s experts, in the Court’s view, were “much closer to reality”: the Court, through its own calculations, arrived at a value of $4.1 million, as compared to the value determined by the Estate at $3.1 million and the value estimated by the Commissioner at $161.3 million. Not so with regard to Jackson’s interest in Sony/ATV Music Publishing, LLC and his interest in Mijac Music, a music-publishing catalog. With the IRS’s and the Estate’s experts diverging by almost $350 million in valuation of Jackson’s interest in Sony/ATV Music Publishing, LLC, and by over $100 million in Mijac Music—and being dissatisfied with both sides’ experts—the Court had to undertake its own due diligence. The Court’s roadmap in search of reliable financial projections provides for a fascinating read. We learn the intricacies of the copyright law, the various revenue streams to composers, publishers, and performers, and celebrity marketability factors.
The discussion of methods is equally rewarding. There are the market and income approaches, with elements of comparable uncontrolled pricing (“CUP”), profit split, and auctions. The analysis of discount rates, synergy and size premium, and tax affecting are thorough and detailed.
Anyone embarking on a valuation journey of their intangible assets—whether for purposes of estate valuation, M&A, or transfer pricing—would be well advised to read the Opinion carefully in order to avoid the traps and pitfalls associated with appraisals of such assets.