February 21, 2014

Michael Jackson had an amazing 13 number 1 hits as a solo artist, but the enormous disparity between the IRS and his estate’s executors in the valuation of his assets – to the tune of more than a billion – really tops the charts. 

How bad is it? Well, the IRS will tell you Michael Jackson’s estate was worth $1.125 billion at his death. Yet if you ask the estate’s executors, they’ll say it was more like $7 million. Yes, you read that right: billion versus million. From the IRS’s point of view, the estate’s undervaluation is so egregious that it qualifies for double the typical 20% penalty for underpayment. The agency is asking for the $505 million in taxes it finds the estate owes and an additional $197 million in penalties, totaling over $702 million.

There are points of contention between the two sides on almost every kind of asset, from music rights to automobiles. For starters, the IRS believes the use of Jackson’s likeness to create income is worth $434 million, yet Jackson’s executors assert it’s worth just $2,105. We can’t be sure who’s right on this one, but come on, there are washer/dryers worth more than that. Here’s another one – the IRS claims Jackson’s rights to certain Beatles songs are worth $469 million, not $0 as executors claim. Again, we’ll never know for sure who’s more on target, but a CPA did previously testify that Jackson borrowed $320 million against the music catalog.

As for MJ’s share to the rights of Jackson 5 master recordings? The IRS believes it’s worth $45.5 million, and the Jackson estate says $11.193 million. The battle that ensues over the taxable value of all these assets will be a big one, with both teams already singing vastly different tunes.

Getting agreement from the IRS on an asset’s value doesn’t just affect the likes of pop stars and celebrities. It’s true few of us deal with assets as unique and challenging to appraise as Beatles songs, master recordings, and the marketability of our likenesses. But even so, making sure appraisals of stocks, real estate, businesses, or any other more standard assets are fair and creditable can make all the difference when it comes to sailing swiftly through a potential audit – and maybe even avoiding one altogether.