Michael Jackson estate faces billion-dollar tax court battle

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This story first appeared in the May 6 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

Of all the befuddling legal matters in the entertainment business, there's perhaps none that causes attorneys to scratch their heads like the battle between Michael Jackson and the Internal Revenue Service over what the late entertainer should be paying in estate taxes. In the years after his death in 2009 at age 50, Jackson has experienced a commercial rebirth thanks to the savvy executors who have managed his assets. The 2009 documentary This Is It grossed $261 million, a Cirque du Soleil tribute show packs in fans, and there have been albums, video games and other lucrative memorials. Now the IRS wants its share, claiming the value of Jackson's name and image upon death amounted to more than $434 million. The estate's own valuation? Just $2,105.

That's a huge discrepancy, and even that difference undersells the stakes. With interest and penalties, lawyers estimate the case -- set for trial at a Los Angeles tax tribunal in 2017 -- could be worth more than $1 billion. Some tax specialists even wonder if it could lead to criminal tax evasion charges. The outcome could impact celebrity estate planning. "This is the biggest estate tax case I've ever seen," says attorney and tax specialist Gary Wolfe.

See photos of Michael Jackson through the years:

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Michael Jackson estate faces billion-dollar tax court battle
CIRCA 1969: R&B quintet 'Jackson 5' pose for a portrait in circa 1969. Clockwise from bottom left: Michael Jackson, Tito Jackson, Jackie Jackson, Jermaine Jackson, Marlon Jackson. (Photo by Michael Ochs Archives/Getty Images)
American singer Michael Jackson poses at a hotel while on tour with Jackson 5, London, England, November 1972. (Photo by Express Newspapers/Getty Images)
American pop singer Michael Jackson attends the opening of the stage musical 'Dream Girls,' In Los Angeles, 1983. (Photo by Frank Edwards/Fotos International/Getty Images)
Undated picture of US pop singer Michael Jackson. Michael Jackson died on June 25, 2009 after suffering a cardiac arrest, sending shockwaves sweeping across the world and tributes pouring in on June 26 for the tortured music icon revered as the 'King of Pop.' AFP PHOTO (Photo credit should read /AFP/GettyImages)
(FILES) US pop star and entertainer Michael Jackson (R) and actress Brooke Shields arrive at the shrine Auditorium in Los Angeles where Jackson is expected to run away with a major part of the Grammy awards on Febuary 28, 1984. Michael Jackson died on June 25, 2009 after suffering a cardiac arrest, sending shockwaves sweeping across the world and tributes pouring in on June 26 for the tortured music icon revered as the 'King of Pop.' AFP PHOTO/Alan ZANGER (Photo credit should read BERTRAND GUAY/AFP/Getty Images)
American singer Michael Jackson (1958 - 2009) performing on stage, circa 1987. (Photo by Dave Hogan/Getty Images)
American singer Michael Jackson performing, 1987. (Photo by Dave Hogan/Hulton Archive/Getty Images)
LANDOVER, UNITED STATES: American pop music star Michael Jackson sings 13 October 1988 at the Capital Center in Landover, Maryland. AFP PHOTO/Luke FRAZZA (Photo credit should read LUKE FRAZZA/AFP/Getty Images)
(FILES) US pop star and entertainer Michael Jackson performs during the opening concert of the Asian leg of his 'Dangerous' world tour in National Stadium in Bangkok on August 24, 1993. Michael Jackson died on June 25, 2009 after suffering a cardiac arrest, sending shockwaves sweeping across the world and tributes pouring in on June 26 for the tortured music icon revered as the 'King of Pop.' AFP PHOTO/Pongsak CHAIYANUWONG (Photo credit should read PONGSAK CHAIYANUWONG/AFP/Getty Images)
NEW YORK, NY - SEPTEMBER 7: Singer Michael Jackson (R) and guitarist Slash of 'Guns and Roses' perform the opening number at the 1995 MTV Video Music Awards 07 September held at the Radio City Music Hall in New York. Jackson and sister Janet Jackson have been nominted for 11 awards for their video 'Scream.' AFP PHOTO (Photo credit should read DON EMMERT/AFP/Getty Images)
US pop star and entertainer Michael Jackson performs during a concert at Vincennes hypodrome on September 13, 1992. Michael Jackson died on June 25, 2009 after suffering a cardiac arrest, sending shockwaves sweeping across the world and tributes pouring in on June 26 for the tortured music icon revered as the 'King of Pop.' AFP PHOTO/Bertrand GUAY (Photo credit should read BERTRAND GUAY/AFP/Getty Images)
(FILES) US pop star Michael Jackson waves to photographers during a press conference in Paris on March 19, 1996. Michael Jackson died on June 25, 2009 after suffering a cardiac arrest, sending shockwaves sweeping across the world and tributes pouring in for the tortured music icon revered as the 'King of Pop.' AFP PHOTO / VINCENT AMALVY (Photo credit should read VINCENT AMALVY/AFP/Getty Images)
NEW YORK, NY - SEPTEMBER 7: Michael Jackson (C) performs at Madison Square Garden in New York 07 September, 2001. It was the first of two performances in New York as part of his '30th Anniversary Celebration, the Solo Years.' AFP PHOTO (Photo credit should read BETH A. KEISER/AFP/Getty Images)
NEW YORK, UNITED STATES: (FILES) This 06 July, 2002, file photo shows pop singer Michael Jackson (L) waving from his limo to fans in the Harlem neighborhood of New York. The child molestation trial against Jackson is scheduled to start 31 January, 2005, in Santa Maria, California. The star has denied 10 charges, including child molestation, plying a child with alcohol to seduce him and of conspiring to kidnap and falsely imprison a child and his family at his Neverland Ranch. He is free on a three million USD bail. AFP PHOTO/Doug KANTER/FILES (Photo credit should read DOUG KANTER/AFP/Getty Images)
LOS ANGELES, UNITED STATES: US pop singer Michael Jackson salutes the audience after recieving the Artist of the Century Award during the 29th Annual American Music Awards at the Shrine Auditorium in Los Angeles 09 January 2002. AFP PHOTO/Hector MATA (Photo credit should read HECTOR MATA/AFP/Getty Images)
NEW YORK, UNITED STATES: US singer Michael Jackson and guitarist Dave Navaro perform during the Democratic National Committee (DNC) benefit concert, 'A Night at the Apollo', at the world-famous Apollo Theater 24 April 2002 in New York. The concert was to kick off a nationwide voter registration drive. AFP PHOTO/TIMOTHY A. CLARY (Photo credit should read TIMOTHY A. CLARY/AFP/Getty Images)
404248 10: Musician Michael Jackson performs at the taping of 'American Bandstands 50th...A Celebration' television special honoring the music show April 20, 2002 in Pasadena, CA. (Photo by Vince Bucci/Getty Images)
BERLIN - NOVEMBER 19: Singer Michael Jackson holds his son eight-month-old son Prince Michael II over the balcony of the Adlon Hotel November 19, 2002 in Berlin, Germany. Jackson is in Berlin with his three children to accept a lifetime achievement award. (Photo by Olaf Selchow/Getty Images)
BERLIN - NOVEMBER 19: Singer Michael Jackson appears at the balcony of the Adlon Hotel with an unidentified child November 19, 2002 in Berlin, Germany. Jackson is in Berlin with his three children to accept a lifetime achievement award. (Photo by Olaf Selchow/Getty Images)
SOWETO, SOUTH AFRICA - JULY 18: US musician Michael Jackson holds a child 18 July in Soweto, South Africa, where he laid a wreath at the memorial for students who died in an uprising on 16 June. Jackson sang a happy birthday song to South African President Nelson Mandela at a surprise meeting with the president shortly after he arrived in the country. AFP PHOTO (Photo credit should read WALTER DHLADHLA/AFP/Getty Images)
SANTA MARIA, UNITED STATES: (FILES) This 13 November, 2002, file photo shows pop singer Michael Jackson arriving inside the Santa Maria Superior Court for a trial in which he is accused of canceling concert appearances and costing the promoter several million dollars. The child molestation trial against Jackson is scheduled to start 31 January, 2005, in Santa Maria, California. The star has denied 10 charges, including child molestation, plying a child with alcohol to seduce him and of conspiring to kidnap and falsely imprison a child and his family at his Neverland Ranch. He is free on a three million USD bail. POOL/SPENCER WEINER/FILES (Photo credit should read SPENCER WEINER/AFP/Getty Images)
SANTA MARIA, CA - NOVEMBER 14: Musician Michael Jackson signs autographs for fans as he arrives at his civil trial in Santa Maria Superior Court November 14, 2002 in Santa Maria, California. The artist is being sued for $21 million by his longtime promoter for backing out of two concerts. (Photo by Bryan Chan-Pool/Getty Images)
SANTA MARIA, CA - NOVEMBER 15: Pop star Michael Jackson testifies during his civil trial in Santa Maria Superior Court on November 15, 2002 in Santa Maria, California. The pop star is being sued for $21 million by his longtime promoter for backing out of two concerts. (Photo by Ed Souza-Pool/Getty Images)
SANTA MARIA, CA - DECEMBER 4: Singer Michael Jackson testifies during the morning session of his civil trial in Santa Maria Superior Court on December 4, 2002 in Santa Maria, California. The artist is being sued for $21 million by his longtime promoter for backing out of two concerts. (Photo by Jim Ruyman-Pool/Getty Images)
LAS VEGAS - OCTOBER 27: (TABLOIDS OUT) Singer Beyonce' Knowles and singer Michael Jackson, winner of the 2003 Humanitarian Award, hug onstage at The 2003 Radio Music Awards at the Aladdin Casino Resort October 27, 2003 in Las Vegas, Neveda. For more information on Jackson's humanitarian efforts, go to musicforgiving.org. (Photos by Kevin Winter/Getty Images)
SANTA MARIA, CA - APRIL 30: Singer Michael Jackson gestures while departing the courthouse after his arraignment on April 30, 2004 in Santa Maria, California. Jackson plead not guilty to the grand jury indictment of numerous child molestation charges. (Photo by David McNew/Getty Images)
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Given that, it might be surprising to learn the Jackson reps have little idea about what to expect in the case. Speaking publicly about the IRS battle for the first time, Howard Weitzman, the estate's lead attorney, says both sides haven't exchanged much information and the IRS hasn't explained how its independent auditor determined the huge valuation. Executors John Branca and John McClain have overseen a remarkable turnaround, wiping out Jackson's debt and making enough revenue to generate about $100 million in tax payments already. But Weitzman estimates that Jackson earned no more than $50 million from the licensing of his name and image when the pop star was alive, even during Jackson's Thriller heyday. "It seems preposterous that the IRS would arrive at a value 10 times this amount," he says. "This is bizarre."

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And importantly, what matters most for tax purposes is the value of Jackson's name and likeness at the time of his death -- not now, after his executors have worked their magic. "Michael Jackson had no merchandising deals then," says Weitzman. "Only after we began the resurrection and This Is It did things begin to change. The IRS says, 'You should have known about the documentary.' That's like [saying] we should have known he was going to die."

And why didn't the King of Pop earn licensing money in the years before his death? See: charges of child molestation, rumors of drug use and no tours back then. In fact, when he died of an overdose, he was preparing for a "comeback" tour. It's enough to take a wonky tax case into sensational territory.

The IRS declined to comment, but one source in Hollywood's legal community says the agency has asked for some of the documents in the Jackson family's wrongful death case against AEG, the concert promoter that was set to stage the Jackson tour before he died. (AEG won the case against Jackson's estate, and the family lost its attempt to appeal.)

Wolfe speculates the IRS could be interested in rebutting the estate's position that Jackson's likeness held no value at the time of his death by showing interest from AEG and others. "Who were the corporate sponsors?" asks Wolfe. "This is a total clusterf-- that makes zero sense. You're telling me that Jackson's name was worth less than a bottle of expensive wine?"

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Adam Streisand, a probate attorney who has worked with celebrity estates including those of Ray Charles, Marlon Brando and Marilyn Monroe, says he doesn't expect the IRS to be able to point to other celebrities' post-death earnings as part of the valuation process. Instead, a judge's valuation could focus on what licensors were willing to pay to be associated with Jackson rather than what he actually got in sponsorship and merchandise deals. Weitzman thinks this is a "once in a lifetime" case, but others aren't sure. If the IRS wins, it likely will pursue other celebrity estates that have increased in value. The business of commercializing dead stars has boomed in recent years as publicity rights have expanded and technology such as holograms and CGI has allowed the dead to live on in entertainment. For that reason, those with the ability to profit from their fame should start preparing -- or they will sock their heirs with a huge tax bill.

Streisand helped write the California law that gives celebrities posthumous rights to their names and images. It's been a boon to the spouses and children of these famous people, but there have been ramifications, the Jackson case serving as perhaps the most high-profile example. Asked if he's partly responsible for the IRS' hunt, Streisand responds: "I plead guilty as charged. It's the statute that really codifies the concept that a celebrity's name and image is a property right like a house -- and it's hard for me to say it doesn't have value."

***

Tax Tips: How to Plan for Death

FORGET THE AFTERLIFE Robin Williams restricted commercial use of his image for 25 years. Beastie Boy Adam Yauch made a similar deal. If the name can't be exploited, the value of such rights is nil. What's 40 percent of nothing? The IRS can do the math.

CHECK IN WITH THE BRAND DOCTOR The IRS has an opening in the Jackson dispute because there's room for disagreement about the value of the singer's name/likeness at the time of death. Had his appraiser made the $2,105 valuation before death, that likely would be the best evidence. Regular appraisals could be one strategy.

GIVE MANY GIFTS There are unlimited estate tax deductions for charity, plus legal ways to gift assets tax-free to spouses. Trusts provide another valuable option.

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