The U.S. Tax Court began holding hearings this week on a long-running dispute between the Internal Revenue Service and pop star Michael Jackson’s estate over estate taxes.

The hearings, before U.S. Tax Court judge Mark Holmes, began Monday with testimony from Jackson’s former attorney, John Branca, who told the court his client was $400 million in debt at the time he died, forcing his attorneys to struggle to prevent foreclosure on his music and real estate assets, according to the Hollywood Reporter.

Michael Jackson memorial at the Staples Center in Los Angeles in July 2009
Michael Jackson memorial outside the Staples Center in Los Angeles in July 2009 Jonathan Alcorn/Bloomberg News

Depending on the outcome of the case, Jackson’s estate could be on the hook for more than $500 million in taxes and $200 million in penalties, according to the IRS’s notice to the estate of its deficiency. The estate originally said it considered his name and likeness essentially worthless, as Jackson’s reputation was tainted by child-abuse allegations and strange public behavior. It initially estimated his name and image to be worth only $2,105, though it later stipulated they could be worth $3 million. The IRS contended they were worth more than $434 million. After Jackson’s death in 2009, the documentary on his rehearsals for his comeback tour, “This Is It,” grossed $261 million, according to the Hollywood Reporter. Cirque de Soleil put together a successful show based on his music, and Jackson’s songs and memorabilia continue to generate lucrative sales.

However, the valuation on the date of Jackson’s death is what counts most when it comes to estate taxes, according to estate-planning attorney Laura Zwicker, a partner at Greenberg Glusker in Los Angeles, who chairs the law firm’s Private Client Services Group and represents high net worth individuals with more than $100 million in assets.

“For estate tax purposes, what you need to determine is, what is that asset worth on the date of death, not necessarily how did the decedent exploit it,” she said. “What was the value of that asset? What would a willing buyer come in and pay for that asset on that date? The IRS looks to post-valuation date events to say what the value is. Because the estate did such a fabulous job in exploiting the music catalog and the name and likeness after the date of death, there is a whole lot of evidence of what the value of his name and likeness might have been worth on the date of his death. The estate is going to argue you can’t look at those post-valuation date events. Those have nothing to do with what it was worth on the day he died. He had none of these licensing agreements in place. His image was damaged. Nobody wanted to touch him.”

The tax authorities are taking a contrary position. “The IRS, on the other hand, is going to say that’s irrelevant,” said Zwicker. “It doesn’t matter what Michael Jackson was doing with his name and likeness. It’s as if you gave a willing buyer the right to take this and exploit it in the way that they think is going to be best, what would that willing buyer pay for it?”

She believes the estate damaged its case by initially assigning a ridiculously low value to Jackson’s name and image on the return. “They assigned a $2,000 value to name and likeness,” said Zwicker. “That doesn’t make any sense at all. They’ve now come back and stipulated that maybe a $3 million value is closer to reality. But when you don’t take a position on a return that is well reasoned and supported by valuation data, then your arguments at this point in the Tax Court are I think harder.”

The fact that the music promoter AEG was funding a multimillion-dollar comeback tour for Jackson at the time of his death indicates he was worth far more in the eyes of the entertainment industry.

“You had the comeback tour that was going on prior to that and then you had all of these events that happened immediately after death that people are willing to fund,” said Jackson. “That suggested that perhaps it wasn’t just his death that caused the renewed interest, but if he had lived another year maybe all of this cash flow would have been coming in anyway. The Tax Court has the difficult job of looking at the taxpayers, the estate’s expert testimony as to what the valuation should be, looking at cash flow generated, looking at what similar celebrities might have earned and then looking at the IRS valuation data.”

Zwicker cautioned that she hasn’t been able to examine the valuation reports and other documents in the case, which are mostly under seal, but she anticipates the judge will make a determination somewhere in between the estate’s estimates of Jackson’s value and the IRS’s. “Sometimes when the judge looks at the IRS reports, it’s worth $500 million or it’s worth a billion, and the estate says, oh no, it’s only worth $3 million,” she said. “The judge may have to take pieces of the experts’ testimony from each side and come to some compromise position. I think that might happen.”

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.