Mixed Victory for Jackson Estate in Tax Court
May 18, 2021
On May 3rd, the U.S. Tax Court issued the long-awaited decision in the long-running litigation over the estate taxes owed by the Michael Jackson estate. In a sweeping 253-page opinion (with additional appendices) the Tax Court, clearly cognizant that this opinion will likely be read by many more people than the usual tax decision, quotes and cites to Plutarch, Hemmingway, and Shakespeare. The decision tells the story of Jackson’s downfall from being the celebrated King of Pop, to being an accused child molester, who at the time of his death was deeply in debt and had not been able to procure any significant endorsement or merchandise deals in more than a decade.
In part due to Jackson’s sullied reputation, the Estate challenged the IRS’s valuation of his name and likeness rights. The litigation arose out of the estate and the IRS being more than $400 million apart in valuing those rights. The Estate listed name and likeness rights as property of the estate, but valued them at a surprisingly low number, $2,105—a value the court compared to that of a “heavily used 20-year old Honda Civic.”
The decision and dispute also involved two trusts that included various music catalogues. I will focus here only on the opinion’s analysis involving Jackson’s name and likeness rights. This is both the most interesting and likely most controversial aspect of the opinion.
What’s in a Name (or Likeness) Right?
Initially, the Estate listed “name and likeness” as if it were a single item, when in fact, as us IP folks know, those rights can be composed of copyrighted works (like music videos and photographs that include a person’s image (and voice)), trademark rights (in Jackson’s name and image), and potential false endorsement, false advertising, and right of publicity claims. While the first two categories (copyrights & trademarks) are commonly included in property of an estate, it is less clear that future legal claims, like potential right of publicity claims, should be included in the property of and valuation of an estate. (For more on this topic you can see a talk on the subject that I gave at the Smithsonian, accessible at https://www.rightofpublicityroadmap.com/news-commentary/who-owns-you-when-you-are-dead).
The court did not tackle this issue, and tried to avoid engaging with such questions by limiting the scope of “name and likeness” rights solely to those flowing from California’s statutory postmortem right of publicity (Cal. Civ. Code § 3344.1). After it jettisoned copyrighted works from name and likeness rights, the court then confusingly both expressly excluded and expressly included trademarks in its analysis. After explicitly excluding trademarks that used Jackson’s name or likeness from being part of the “name or likeness” property of the estate, the court then defined the right of publicity as including trademark rights. Part of this confusion stems from the court idiosyncratically (and improperly) defining the right of publicity [“ROP”] as “generally consist[ing] of two separate components: ROP and associated trademarks,” while at the same time acknowledging that the “ROP is a distinct legal category, ‘not just a ‘kind of’ trademark, copyright, false advertising or right of privacy.” Perhaps, the court meant to say that on the basis of a person’s identity there can be trademark rights, claims under the Lanham Act (such as false endorsement), and state-based right of publicity claims. Of course this latter understanding—which is accurate as to the law—doesn’t fit with the court’s insistence that it only consider as the included property that stemming from Cal. Civ. Code § 3344.1. (The court also misunderstands the origins and nature of the right of publicity more broadly (though it is not alone in doing so). As I have established in my book on the subject, the right of publicity long predates the 1953 decision in Haelan Labs. and contrary to the Tax Court’s claim, public figures had been able to bring appropriation clams long before that decision.)
Inclusion of the Right of Publicity in the Estate
Even if one adopted the court’s purported limit on Jackson’s name and likeness rights as only those that flow from California’s statutory postmortem provision, there are still questions about its inclusion in the estate, as well as whether other states’ postmortem rights should be included. This issue—the inclusion of publicity rights in the estate—was not challenged by either of the parties. The parties only disputed the valuation of the assets. Nevertheless, the court briefly considered the question of whether the right of publicity was part of Jackson’s taxable estate and concluded that it was because “all property” whether “tangible or intangible” is included in an estate. The court then noted that California’s postmortem right of publicity statute designates such rights as “property rights,” that are “freely transferable or descendible.”
This decision does not provide binding precedent on whether publicity rights should be included, and notably not every state that has a postmortem right classifies the right as a form of transferable property. Moreover, even if one classifies it as property, that doesn't mean that it is the sort of property that should be included in an estate valuation. (For more on this issue, see Rothman, The Inalienable Right of Publicity.)
State Law of Domicile
There is also the question—left unaddressed by the court—about whether state right of publicity laws other than those of the state of domicile of the deceased are relevant either for purposes of inclusion or for valuation. The court followed the majority view that postmortem rights are determined by the existence of such rights in the state in which a person was domiciled at the time of death. The court therefore exclusively considered Jackson’s postmortem rights under California law. This approach, however, does not consider the inclusion or value of postmortem rights that flow to the estate of the deceased in states that do not root postmortem rights in the place of domicile; Washington State and Hawaii, for example, both extend rights to those who died domiciled elsewhere but whose identity is used without permission in those states.
Valuation and Jackson’s Bad Reputation
The most likely impact of the tax court’s decision both on the trajectory of possible appeals and on future estate valuations, will be the court’s acceptance of the Estate’s theory that Jackson’s poor reputation at the time of his death is determinative of the valuation process. The fact that the Estate subsequently did an extraordinary job in (partially) rehabilitating Jackson’s image and marketing his postdeath personality could not be factored into the valuation pegged to the moment of death.
If you are an estate tax expert though, this really isn’t groundbreaking. Estates are valued at the time of a person’s death—so any value in Jackson’s name and likeness would be based on the value at the time of his death. And if that value was depressed, regardless of what happens thereafter, that low value is what will count.
Although Jackson in 1984 was thought of as “the most famous person in the world,” by the time of his death in 2008, he was a pariah and more than $450 million in debt.
According to the court’s findings of fact, even during Jackson’s heyday in the 1980s, his merchandise sales were abysmal. For example, although Jackson received $18 million for a licensing deal in 1984 to use his name and likeness on merchandise, including a clothing line, fragrances, and other merchandise, “the merchandise didn’t sell and the deal ultimately proved disastrous” to the licensee. Similarly, sales arising out of Jackson’s endorsement deal for sneakers with L.A. Gear “proved so bad that L.A. Gear’s stock price tanked.”
The 1993 Dangerous World Tour was Jackson’s last in the United States, and in the wake of accusations of child molestation and the cancellation of tour dates, Pepsi, which was Jackson’s only major sponsorship deal, cut ties with him. From that time forward Jackson had virtually no merchandising or endorsement deals.
Jackson’s reputation worsened further in the early 2000s with the release of a documentary that highlighted his alleged pederasty, skin bleaching, and apparent addiction to plastic surgery. Jackson was prosecuted several times for child sexual abuse, but was acquitted in each instance. However, as the Tax Court noted, “[a]cquital did not rehabilitate his reputation.”
At the time of his death, Jackson was trying to improve his reputation (and pay off some of his staggering debt) by launching a concert tour—what was to have been the This is It tour. But Jackson died during rehearsals for the show, leaving in his wake a mountain of debt, a reputation in shambles, and no endorsement or merchandising deals in place or on the horizon, even for concert-related merchandise. As the court observed, at the time of his death, Jackson's "image and likeness was not producing any noticeable income.”
The Tax Court’s Valuation and the “Postdeath Spike”
While the Estate successfully rebranded Jackson after his death and made a number of lucrative deals, at the time of his death there was no reason to think that any of these deals would be forthcoming. Thus, it was no surprise to the court that Moss Adams, a large accounting and consulting firm, valued Jackson’s image and likeness at only $2,105 at the time of death. The Tax Court found this assessment “reasonable,” and rejected the IRS’s request for the assessment of penalties.
Nevertheless, the court concluded that $2,105 was too low a valuation, largely because it did not take into account the common “postdeath spike” in value of a celebrity personality, even a disgraced personality. Perhaps ironically, one of the Estate’s experts highlighted this spike in value. Mark Roesler testified to the common postmortem bump in the value of dead celebrities. Roesler pointed to Marilyn Monroe, Princess Diana, Elvis Presley, James Dean, Bettie Page, and Jackie Robinson, as celebrities who all became more popular and generated more income in their after lives. Nevertheless, both Roesler and ultimately the court significantly discounted Jackson’s likely postdeath income because of his reputation as a child molester.
Considering an anticipated postdeath spike, as well as looking back over 30 years of time (instead of just 10) for endorsement deals, led the Estate’s experts at trial to suggest a revised value of $3 million for Jackson’s name and likeness rights.
The IRS’s expert at trial, Weston Anson, valued Jackson’s name and likeness rights at substantially more than this, at $161.3 million. (Notably, however, this was substantially less than the IRS’s initial assessment of more than $400 million.)
The court was unimpressed (if not downright angry) with the IRS expert. This was in large part because the expert Anson repeatedly lied in his testimony. The court also discounted his valuation because he failed to limit the name and likeness rights to those under § 3344.1, a statute that expressly excludes uses in plays, books, magazines, newspapers, audiovisual works, art, or advertisements for those works. The court also discounted Anson’s estimate “as fantasy” because it seemed to be based almost entirely on postdeath information and events. The court additionally criticized Anson for considering trademarks, false endorsement, and false advertising claims in his valuation. This basis to reject Anson’s assessment is the least convincing, as the court allowed Roesler, the Estate’s expert, to incorporate such rights into his valuation.
Ultimately, the court largely adopted the Estate’s valuation at trial with some adjustment up to approximately $4.1 million ($1 million more than the Estate’s assessment at trial).
The Inflationary Impulse and the Valuation Expert Dilemma
One problem with valuing celebrity estates is the dearth of individuals in the business of doing so, and approved of by the IRS. There is an inherent bias for these individuals to provide high valuations because these celebrity valuation experts usually themselves benefit from the commercialization and monetization of such celebrities. For example, one of the experts at trial for the Jackson estate on name and likeness valuation was Mark Roesler, who runs CMG worldwide, a company that manages and profits from dead celebrities. Roesler knows how to market dead celebrities and is unquestionably knowledgeable about the going rate for “delebs,” but he also has an incentive for such deceased personalities to be valued on the high end as his livelihood depends on it. The IRS’s expert, Weston Anson, also earns his living primarily from serving as an expert witness in valuation cases, including repeat business valuing celebrity identities, including several evaluations for the IRS.
The Forced Commodification Problem Remains
Even though the IRS did not get the valuation it wanted, this decision provides a precedent that name and likeness rights, and the right of publicity (at least California’s postmortem one) are part of the taxable estate of a deceased celebrity. This will lend more fuel to the IRS’s aggressive pursuit of taxing such rights, as it did recently in the context of the Whitney Houston estate.
The inclusion of such rights in an estate poses a significant problem for those who don’t wish to be commercialized after they die or whose families don’t want to have to sell t-shirts or bobble head dolls of their loved ones simply to pay off a massive tax bill. Estate taxes do not recognize the choice not to commercialize or sell property. So a person’s identity will be valued at “its highest and best use,” which is understood to be its fully commodified value in the market. (For more on why we might not want A Market in Dead People, see this op-ed I wrote on the subject.)
Robin Williams tried to avoid such a fate by designing a trust instrument that limited the commercialization of his identity for twenty-five years after his death and vested the right in a nonprofit organization. The Tax Court in the Jackson litigation acknowledged Williams’ estate plan, but did not evaluate its legitimacy, which remains an open question.
There are a number of bases to appeal this decision, but given that the Estate’s tax bill is substantially less than what the IRS wanted but also substantially more than what the Estate wanted, this decision may be the end of the road for this particular case or at least lead to a settlement rather than an appeal. But this is likely only the beginning of litigation raising the larger questions about whether the right of publicity should be included in the property of estates, and, if it should be, how it should be valued.
Some things to keep an eye on going forward: (1) Will we see many more Robin Williams-style estate plans and will these survive a challenge by the IRS? (2) Will there be any movement at the federal level to carve publicity rights out of the estate tax system in the same way that a family farm has been? This would not eliminate taxation on any postmortem income generated by uses of a person’s name or likeness, but would be a straightforward way to avoid the current forced commodification problem; (3) Will other estates list “name and likeness” rights or will they break apart the relevant IP that involves a person's name, likeness, and voice?; (4) On a related note, will other courts interpret name and likeness rights in the same narrow way as this court?; and (5) if the law at issue does not exclude expressive works, how will this alter the valuation?
Finally, one cannot erase the the vision of Michael Jackson that the Tax Court leaves us with: An accused abuser of children whose “postmortem spike” will be short-lived and “fade with time.” “Just as the grave will swallow Jackson’s fame, time will erode the Estate’s income.” His copyrights will expire and “his image and likeness [will] shuffle first into irrelevance and then into the public domain.”