“There was never a doubt that the Michael Jackson estate was on a clear collision course with the Tax Court,” said Bridget Crawford, a tax professor at Pace Law School, who reviewed the Tax Court filings.
The pop artist’s Estate paid off his massive personal debt, $500 million, in November 2012. However, the IRS believes that his Estate still owes the agency money because it undervalued many of Jackson’s assets by hundreds of millions of dollars.
Jackson passed in 2009, at the age of 50, from an overdose on a surgical-grade anesthetic. That same year, his Estate showed $9 million in taxable value. To the dismay of the Estate executors, the IRS sent the Estate a $702 million bill in July 2013: $505.1 million in taxes unpaid and $196.9 million in penalties.
Under U.S. Estate Tax law, the penalties could be as high as 40 percent of the difference between the taxes paid and those allegedly owed by the undervalued estate.
The Federal Estate Tax is based on the date of death values for the Estate or based on the value as of the Alternate Valuation Date (AVD), which is six months after the date of death.
When valuing, the IRS considers all assets under the control of the decedent at his or her death taxable per IRC §2036 & 2038A. These assets may include corporate interests, real estate, and contracts for future earnings.
To calculate the Federal Estate Tax, you total those assets we mentioned, deduct the debts owed by the decedent at his or her death, and finally, take that total and subtract all reasonable costs of administration: trustee, attorney, accountant, and appraiser fees.
Similar to the federal income tax, the estate tax is calculated at a progressive rate. Simply put, the more you own at death, the more that you owe in taxes.
Curiously, in Michael Jackson’s case, the Estate reported a taxable estate value of approximately $9 million; however, some other estimates put his taxable estate value near $400 million.
Forget $400 million; the IRS suggests that Jackson’s Estate is worth nearly $1.25 billion.
Nevertheless, the Executors for the Estate have filed a petition in U.S. Tax Court essentially telling the IRS to “beat it.”
According to court documents, the IRS does not believe the asset valuation is correct for the artist’s Neverland ranch, his “image and likeness,” and some recording properties. Maybe, the IRS has found Jackson’s other white glove and still has not told the Estate…?
To understand the severity of the disagreement, Jackson’s Estate believes that the artist’s image and likeness valued at $2,105 at the time of his death; on the other hand, the IRS has determined the value to be closer to $434 million. Wow!
Jackson’s Estate will not have to pay this bill unless the court rules in favor of the IRS’s claim.The Estate will want the court to side with the lower valuation; it means that less tax is due, and more money will pass to the heirs. Since the court treats estate valuation subjectively, testimony in the case will be quite interesting.
Many consider the tax law world has mundane, but this particular estate case should provide it with some excitement. How will either side prove what the assets are actually worth? We will give you updates on the Estate’s battle with the IRS as they occur.
JDKatz, P.C. is a full-service law firm focused on tax law, business and transactional law, estate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.jdkatz.com.