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Michael Jackson Estate Owes $702 Million in Estate Taxes & Penalties

What small business owners and those who own intangible assets need to know.

The executor of Michael Jackson’s estate says the king of pop’s estate was worth only $7 million. The IRS disagrees, valuing the estate at $1.125 billion. According to the Los Angeles Times, the IRS has told the estate it needs to pay $505 million in estate taxes and $197 million in penalties for underreporting the value of the estate.

The dispute hinges on the value of Michael Jackson’s image. How valuable is a star’s image in the future when it is licensed for t-shirts, television commercials and other uses? Jackson’s estate values it at $2,105. The IRS says it is worth $434 million.

The other major dispute is over the value of the Beatle’s catalog of songs that was owned by Jackson. His estate says the value of the catalog that includes songs, “Yesterday” and “Sgt. Pepper’s Lonely Hearts Club Band”, is nothing. The IRS puts the value at $469 million.

One interesting aspect of the case is that it illustrates that the IRS does not have a defined method for how to value intangible assets. That means there is no defined method for valuing typical intangible assets such as intellectual property (patents, trademarks, copyrights, business methodologies) goodwill and brand, which are usually included in the value of a business.

Another interesting take-away from the case is that if the IRS places a large value on an allegedly undervalued estate, it could render the estate insolvent if there are insufficient liquid assets to pay the estate tax bill.

Small business owners and others with intangible assets should take note. If the IRS believes that the value of your estate is larger than your executor, your estate could end up insolvent.

One possible strategy to consider is placing a value on the asset while alive and then transferring it into a trust to remove the value of the asset from your estate. If the asset increases in value, it also keeps the appreciation out of the estate.

To learn more about how to minimize your estate taxes, visit our video tips page here.