Jackson v. Comm'r

• Decision Date: 03 May 2021
• Docket Number: Docket No. 17152-13.,T.C. Memo. 2021-48
• Parties: ESTATE OF MICHAEL J. JACKSON, DECEASED, JOHN G. BRANCA, CO-EXECUTOR AND JOHN MCCLAIN, CO-EXECUTOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

ESTATE OF MICHAEL J. JACKSON, DECEASED, JOHN G. BRANCA,
CO-EXECUTOR AND JOHN MCCLAIN, CO-EXECUTOR, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2021-48
Docket No. 17152-13.

UNITED STATES TAX COURT

May 3, 2021

Avram Salkin, Steven R. Toscher, Robert Samuel Horwitz, Lacey E. Strachan, Howard L. Weitzman, Jeryll S. Cohen, Sharyn M. Fisk, Paul Gordon Hoffman, Edward M. Robbins Jr., and Loretta Siciliano, for petitioners.

Donna F. Herbert, Ray Malone Camp, Sebastian Voth, Jorden S. Musen, and Denise H. Larson, for respondent.

CONTENTS

FINDINGS OF FACT .............................................. 6

I. Early Life .............................................. 6

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II. The Rise ............................................... 8

A. Off the Wall ....................................... 8
B. Thriller ........................................... 9
C. Victory .......................................... 11
D. Bad ............................................. 13
E. Dangerous ....................................... 15

III. The Fall .............................................. 17

IV. The Collapse .......................................... 20

A. The Bashir Documentary and Criminal Case ............ 22
B. Financial Peril .................................... 23
C. Jackson Leaves Neverland .......................... 25

V. The Unconsummated Comeback ........................... 27

A. This Is It Tour .................................... 29

1. The This Is It Tour Is Announced ................ 32
2. Discussions for a Tour Merchandising Agreement . . 32

B. Jackson Cleans House ............................. 33

VI. Jackson's Death ........................................ 34

A. The Executors Take Charge ......................... 35
B. The Memorial Service .............................. 37
C. The Motion Picture: Michael Jackson's This Is It ........ 38
D. Cirque du Soleil ................................... 41
E. General Merchandising Agreement With Bravado ........ 44
F. Miscellaneous Agreements .......................... 46
G. Posthumous Albums and the Hunt for Unreleased Songs . . 46

1. Michael and Xscape .......................... 48
2. Bad 25 ..................................... 48

H. Estate Sells Jackson's Interest in Sony/ATV to Sony ..... 48

VII. The Estate Prepares Its Return ............................. 49

VIII. The Audit ............................................. 51

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IX. Pretrial Preparation and Stipulation ........................ 52

X. Trial ................................................. 53

A. The Estate's Experts ............................... 53
B. The Commissioner's Expert ......................... 57

1. The Valuations .............................. 57
2. Anson's Credibility ........................... 59

C. Issues Left for Decision ............................. 61

OPINION ....................................................... 62

I. Estate Tax Valuation Principles ........................... 62

II. Expert Opinions ........................................ 64

III. Valuation ............................................. 65

A. Basics ........................................... 65
B. Discounted Cashflow Method and Its Discount Rate ...... 66
C. Synergy ......................................... 69

IV. Tax Affecting .......................................... 75

A. The Basics ....................................... 75
B. The Experts' Positions .............................. 78

V. Rights in Music Intellectual Property for . . . Tax Lawyers ...... 83

A. Composer ........................................ 83

1. Income Streams .............................. 85
2. Publishers .................................. 87

B. Performer ........................................ 89
C. Right of Publicity ................................. 92

VI. Image and Likeness ..................................... 98

A. The Code ........................................ 98
B. Summary of the Parties' Positions ................... 100

1. The Estate ................................. 100

i. On the Return ......................... 100
ii. At Trial .............................. 103

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2. The Commissioner .......................... 120

i. Discount Rate ......................... 121
ii. Revenue Projections .................... 122

C. Analysis ........................................ 133

1. Commissioner's Expert ....................... 133

i. Wrong Assets ......................... 133
ii. Unforeseeable Assets ................... 137
iii. Faulty Calculations ..................... 142

2. The Estate's Expert .......................... 145
3. Our Calculations ............................ 147

VII. New Horizon Trust II and Sony/ATV ...................... 150

A. The Asset ....................................... 150
B. The Experts' Opinions ............................. 151

1. The Commissioner .......................... 151

i. Market Approach ...................... 151
ii. Income Approach ...................... 156
iii. Discounts ............................. 162
iv. Value of NHT II ....................... 163

2. The Estate ................................. 163

i. Income Approach ...................... 163
ii. Market Approach ...................... 171
iii. Sony/ATV Value ...................... 175
iv. Jackson's Interest ...................... 176
v. NHT II's Value ........................ 180

C. Our Analysis .................................... 180

1. Market Approach ........................... 180
2. Income Approach ........................... 182

i. Discount Rate ......................... 182
ii. Revenue Projections .................... 185
iii. Sony/ATV Value ...................... 192
iv. Jackson's Interest ...................... 193
v. NHT II's Value ........................ 195

VIII. New Horizon Trust III .................................. 196

A. The Asset ....................................... 196
B. Mijac's Value and Writer's Performance Royalties ...... 199

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1. Unreleased Songs ........................... 200
2. Starting Point ............................... 206

i. The Experts ........................... 206
ii. Mechanical Revenue .................... 209
iii. Performance Revenue ................... 218
iv. Synch Fees ........................... 224

3. The Spike/Projected Growth ................... 227

i. Anson ............................... 228
ii. Dahl ................................. 231
iii. Our Opinion .......................... 235

D. NHT III ........................................ 246

IX. Penalties ............................................. 247

X. Conclusion ........................................... 252

APPENDICES .................................................. 254

MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: "The arts . . . proceed by the use of reason to the selection and adoption of what is appropriate, and to the avoidance and rejection of what is alien to themselves, contemplate the one class of objects with direct intent and by preference, and yet incidentally contemplate the other class also, and in order to avoid them."¹

From the time he was a child Michael Jackson was famous; and there were times in his life, testified his executor, when he was the most famous person in the world. There were certainly years when he was the most well-known

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popular-music star, and even after his death there have been years when he was the world's highest-earning entertainer.

But there were also many years when he was more famous for his unusual behavior and not his unusual talent. And there were some years where his fame was turned infamous by serious accusations of the most noisome acts. We make no particular judgment about what Jackson did or is alleged to have done, but we must decide how what he did and is alleged to have done affected the value of what he left behind.

His Estate and the Commissioner agreed on the value of many of his assets, but continue to dispute the values of three intangible ones:

? Jackson's image and likeness;

? his interest in New Horizon Trust II, through which he held an interest in Sony/ATV Music Publishing, LLC; and

? his interest in New Horizon Trust III, which contained Mijac Music, a music-publishing catalog that owned the copyrights to compositions that Jackson wrote or cowrote, as well as compositions by other songwriters.

FINDINGS OF FACT

I. Early Life

Michael Jackson was born in August 1958. He was the eighth child in a family of modest means that lived in a small house in Gary, Indiana. Jackson

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began his career by singing with his brothers Tito, Jackie, Jermaine, and Marlon. He was not yet six years old.

Within a year Jackson became the lead vocalist for what became the Jackson 5. From late 1966 to 1968 the Jackson 5 played in nightclubs and music venues across the Midwest and Northeast. In 1968 the group auditioned in Detroit for Motown Records and its founder, Berry Gordy. They soon signed with Motown, and their first four singles on the label reached number one on the Billboard Hot 100 Chart--the first time that had ever happened.

The success of the Jackson 5 gave Jackson a springboard to launch his solo career. In April 1971 Jackson became the youngest individual ever to appear on the cover of Rolling Stone. In 1972 he released his first two solo albums, Got To Be There and Ben. The eponymous song "Ben" was the first of Jackson's solo songs to become a number-one best seller. It is proof of his talent or the oddity of the era's popular culture that it appears to be a song about the love of a boy for his rat.

In 1975 the growing popularity of Jackson and the Jackson 5 enabled the family to move from Motown to Epic Records, a subsidiary of CBS Records, and to change their name to "The Jacksons." The Jacksons released albums and performed together until the mid-1980s. During this time Jackson's talents as a

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songwriter and composer emerged, and he wrote or cowrote 20 of the 84 compositions that The Jacksons recorded.

II. The Rise

Jackson had long had a difficult relationship--one he would later claim was abusive--with his father. His performing...