UNITED STATES TAX COURT

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T.C. Memo. 2021-48

UNITED STATES TAX COURT

ESTATE OF MICHAEL J. JACKSON, DECEASED, JOHN G. BRANCA, COEXECUTOR AND JOHN MCCLAIN, CO-EXECUTOR, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17152-13.

Filed 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

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

Served 05/03/21

-2[*2] II.

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

Off the Wall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Thriller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Victory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Bad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Dangerous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

III.

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

IV.

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

The Bashir Documentary and Criminal Case . . . . . . . . . . . . 22

Financial Peril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Jackson Leaves Neverland . . . . . . . . . . . . . . . . . . . . . . . . . . 25

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

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

The This Is It Tour Is Announced. . . . . . . . . . . . . . . . 32

Discussions for a Tour Merchandising Agreement . . 32

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

VI.

Jackson’s Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

The Executors Take Charge . . . . . . . . . . . . . . . . . . . . . . . . . 35

The Memorial Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

The Motion Picture: Michael Jackson’s This Is It . . . . . . . . 38

Cirque du Soleil. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

General Merchandising Agreement With Bravado. . . . . . . . 44

Miscellaneous Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Posthumous Albums and the Hunt for Unreleased Songs . . 46

Michael and Xscape . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Bad 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

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

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

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

-3[*3] IX.

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

Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

The Estate’s Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

The Commissioner’s Expert . . . . . . . . . . . . . . . . . . . . . . . . . 57

The Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Anson’s Credibility . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

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

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

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

II.

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

III.

Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Discounted Cashflow Method and Its Discount Rate. . . . . . 66

Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

IV.

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

The Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

The Experts’ Positions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

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

Composer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Income Streams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Publishers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Performer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Right of Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

VI.

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

The Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Summary of the Parties’ Positions . . . . . . . . . . . . . . . . . . . 100

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

On the Return . . . . . . . . . . . . . . . . . . . . . . . . . 100

ii.

At Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

-42.

[*4]

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

Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . 121

ii.

Revenue Projections . . . . . . . . . . . . . . . . . . . . 122

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Commissioner’s Expert . . . . . . . . . . . . . . . . . . . . . . . 133

Wrong Assets . . . . . . . . . . . . . . . . . . . . . . . . . 133

ii.

Unforeseeable Assets . . . . . . . . . . . . . . . . . . . 137

iii. Faulty Calculations . . . . . . . . . . . . . . . . . . . . . 142

The Estate’s Expert . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Our Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

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

The Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

The Experts’ Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

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

Market Approach . . . . . . . . . . . . . . . . . . . . . . 151

ii.

Income Approach . . . . . . . . . . . . . . . . . . . . . . 156

iii. Discounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

iv.

Value of NHT II . . . . . . . . . . . . . . . . . . . . . . . 163

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

Income Approach . . . . . . . . . . . . . . . . . . . . . . 163

ii.

Market Approach . . . . . . . . . . . . . . . . . . . . . . 171

iii. Sony/ATV Value . . . . . . . . . . . . . . . . . . . . . . 175

iv.

Jackson’s Interest . . . . . . . . . . . . . . . . . . . . . . 176

NHT II’s Value . . . . . . . . . . . . . . . . . . . . . . . . 180

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

Market Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . 182

ii.

Revenue Projections . . . . . . . . . . . . . . . . . . . . 185

iii. Sony/ATV Value . . . . . . . . . . . . . . . . . . . . . . 192

iv.

Jackson’s Interest . . . . . . . . . . . . . . . . . . . . . . 193

NHT II’s Value . . . . . . . . . . . . . . . . . . . . . . . . 195

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

The Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

Mijac’s Value and Writer’s Performance Royalties . . . . . . 199

-51.

[*5]

Unreleased Songs . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Starting Point. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

The Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

ii.

Mechanical Revenue. . . . . . . . . . . . . . . . . . . . 209

iii. Performance Revenue . . . . . . . . . . . . . . . . . . . 218

iv.

Synch Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 224

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

Anson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228

ii.

Dahl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

iii. Our Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . 235

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

IX.

Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

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

Plutarch, Demetrius, in IX Plutarch’s Lives 3 (Bernadotte Perrin trans.,

Loeb Classical Library ed. 1920).

-6[*6] 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

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

-7[*7] 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

-8[*8] 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 career had largely taken him away from

formal education, causing him to never graduate from high school (though

credible testimony showed he was highly intelligent). As he approached legal

adulthood, he craved more independence in his career and in his personal life.

He began to plan a solo career and started to assemble the advisers who

would help him manage his wealth and later his estate. He wanted unconflicted

advice in the negotiations for any album and related tour, and the business

opportunities that he correctly saw would open for him. He met and then retained

a twenty-nine-year-old music lawyer named John Branca, and Jackson’s already

successful career began its ascent to unprecedented heights: By the time he died,

Jackson’s nine albums set world-record sales.

Off the Wall

The first of those albums was Off the Wall, which Jackson released in 1979.

It had ten previously unreleased songs, of which Jackson wrote two, “Don’t Stop

‘Til You Get Enough” and “Working Day and Night,” and cowrote a third, “Get

-9[*9] on the Floor.” It was quite successful, and two of the songs reached number 1

on the Billboard Hot 100 Chart, with another two breaking into the top 10.

Around this time Jackson had formed Mijac Music catalog--a catalog that

would end up comprising the publishing rights for compositions composed by a

variety of composers including, most notably, compositions written by Jackson

himself. Beginning in June 1980 Warner Bros. Music2 became the administrator

of Mijac and would continue in that role through Jackson’s death.

Thriller

But Off the Wall was as the widow’s mite to the temple treasury that was his

next album--Thriller. Recorded at the end of 1982, Thriller had nine songs, of

which Jackson wrote four: “Wanna Be Startin’ Somethin’,” “The Girl Is Mine,”

“Beat It,” and “Billie Jean.” (The title song, however, was composed by Rod

Temperton and not Jackson.)

Thriller was a global sensation. Seven of its nine songs became top 10

singles. The album was the number-one record in the United States for an

unprecedented 37 weeks and remained in the top 10 for 80 weeks. The Recording

Industry Association of America (RIAA), which certifies gold and platinum

records, kept having to come up with new awards to symbolize its success, and

This was later renamed Warner/Chappell.

-10[*10] Thriller ended up certified as 33x Multi-Platinum.3 Decades later when we

tried this case, Thriller was still the top-selling album in history.

Jackson’s popularity was not limited by what he did in the studio. In March

1983, during the taping of the Motown 25 television special, he took the stage to

perform “Billie Jean” and debuted his iconic “moonwalk”. Motown 25 aired on

May 16, 1983 to an estimated audience of 34 million viewers in those preinternet,

prestreaming days. These years were also at the dawn of the music-video

business, and “Michael Jackson’s Thriller” debuted in December 1983--eventually

becoming, at over nine million copies, the best-selling music video ever.

By 1984 it was quite probable, as Branca would later testify, that Jackson

was the most famous person in the world. He was also at the peak of his personal

RIAA’s requirements for achieving its awards are:

RIAA GOLD & PLATINUM AWARDS

CERTIFICATION

MINIMUM UNITS

DATE ESTABLISHED

Gold

500,000

1958

Platinum

1,000,000

1976

Multi-Platinum

2,000,000

1984

(increments of 1,000,000 after)

RIAA, Gold & Platinum, https://www.riaa.com/gold-platinum/about-awards/ (last

visited Mar. 12, 2021).

-11[*11] popularity, which was nearly universal if not quite unanimous.4 Branca and

Jackson’s other advisers had negotiated an excellent deal, and Thriller’s success

presented Jackson with a flood of income and unprecedented bargaining power

over his recording company. Jackson’s team used their power wisely, and Branca

renegotiated Jackson’s contract with CBS Records to transfer ownership in

Jackson’s master recordings5 to a corporation--MJJ Productions, Inc.--that Jackson

himself owned.

Victory

Jackson remained on this extraordinarily high plateau for a couple more

years. Later in 1984 The Jacksons released their final album, Victory. The album

contained eight previously unreleased songs, three of which Jackson cowrote. The

group went on the Victory Tour, promoted by Chuck Sullivan--the then-owner of

See, e.g., Memorandum from Fred F. Fielding, Counsel to the President, to

James K. Coyne, Special Assistant to the President for Private Sector Initiatives

(Apr. 30, 1984) (“I think any ceremony involving the President and [Jackson]

would be perceived as an effort by the President to bask in the reflected glow of

the inordinate and at times hysterical publicity surrounding [Jackson], a perception

that would be demeaning to the President.”); Memorandum from John G. Roberts

to Fred F. Fielding (Apr. 30, 1984) (“[A] Presidential award would be perceived as

a shallow effort by the President to share in the constant publicity surrounding

Jackson[.]”).

This case lies at the intersection of tax and music law. In our findings of

fact, we discuss several terms that have a specific meaning in the music world.

Our primer of these is infra pp. 83-98.

-12[*12] the Boston (now the New England) Patriots football team and its stadium-and sponsored by Pepsi-Cola Company. This tour itself grossed more than $70

million, and each brother netted $6 million. Jackson donated his entire share to

charity.

Jackson’s personal fame meant that he received numerous requests for

merchandising licenses for his “image and likeness.” To handle these requests,

Triumph International, Inc.--an S corporation with Jackson as its sole shareholder

--was incorporated in March 1984. In July 1984 Triumph entered into a five-year

licensing agreement with Sullivan’s company, Entertainment Properties, for the

use of Jackson’s image and likeness on a variety of products, including a line of

clothing and fragrances. Under the agreement, Jackson was to receive $18 million

upfront, with a potential total of $28 million. Jackson, however, was the only

winner in this deal. He got the $18 million, but the merchandise didn’t sell, and

the deal ultimately proved disastrous for the Sullivan family.

Jackson recognized the other opportunities that his financial success

presented. He sought the advice of Branca and his team, and he made two

decisions that are important to this case.

The first was to buy up copyrights in musical compositions of other artists

and music catalogs. After making a number of smaller purchases, Branca told

-13[*13] Jackson that the ATV Music Publishing Catalog was for sale. The special

asset in this catalog was at least 175 Beatles songs written by Paul McCartney and

John Lennon. Jackson ran the idea by his investment committee, many of whom

felt the asking price was too high. Jackson was also concerned about buying what

he viewed as the creative property of a friend. So, before bidding on ATV, he told

Branca to call Yoko Ono and Paul McCartney, and they both told him that they

weren’t interested. Jackson decided to go ahead with the deal and in May 1985 he

bought the catalog for $47.5 million.

The money also let Jackson begin to indulge some of his eccentricities--he

purchased a chimpanzee that he took along on part of a tour, installed a hyperbaric

sleeping chamber, and placed a bid to buy the bones of a 19th-century medical

curiosity. By the mid-‘80s tabloid references to him as “Wacko Jacko” started to

emerge.

Bad

At the time, these eccentricities seemed to have a minimal effect on

Jackson’s career as an artist and performer. He continued to release new material.

His next solo album, Bad, came out in 1987. It had ten previously unreleased

songs, of which he wrote eight. A 2001 reissue of Bad had another two songs he

himself wrote, and a third--“Todo Mi Amor Eres Tú” (a Spanish language version

-14[*14] of “I Just Can’t Stop Loving You”)--for which he was a 75% composer.

Bad itself became the first album ever to produce five consecutive singles to reach

number 1 on the Billboard Hot 100 Chart.

Bad also pushed Jackson into his first solo tour in September 1987. The

Bad World Tour was an international success; it grossed $125 million on 123

shows and drew 4.4 million fans--the most of any tour to that time.

Jackson had begun to extend his brand in other profitable ways. As it had

for the Victory Tour, Pepsi again became the tour sponsor, this time paying

Jackson $10-$15 million. But Pepsi wanted more than Jackson’s picture on its

cans, and Jackson agreed to film two Pepsi commercials and create an advertising

jingle for Pepsi that featured the song “Bad”. He then packaged his recordings

and performances into book sales. His autobiography Moonwalk reached the top

of the New York Times bestseller list in April 1988. He starred in a short Disney

film as “Captain EO”. Jackson again put his riches into valuable assets. In the

latter part of 1988, Branca negotiated the purchase of the Sycamore Valley

Ranch--later known as the Neverland Ranch--in Santa Barbara County, California

for Jackson.

At the decade’s end Jackson received the Heritage Award for Career

Achievement at the Soul Train Awards. His friend Elizabeth Taylor anointed--and

-15[*15] perhaps immortalized--him as the “true King of Pop, Rock, and Soul.”

Jackson shortened the epithet to “The King of Pop.”

His fame and fortune was not quite at Thriller levels, but the money kept

flowing. After the Bad World Tour ended, Jackson signed with L.A. Gear to

endorse a line of cobranded sneakers for $4.5 million in cash and $3 million in

L.A. Gear stock. He expected to release the sneaker line to coincide with his next

album, Dangerous. But when that album was delayed, L.A. Gear nevertheless

marketed the sneakers. Sales proved so bad that L.A. Gear’s stock price tanked.

The company responded by suing Jackson for $10 million in damages for fraud

and breach of contract, and the case settled for an undisclosed amount.

Dangerous

In hindsight, Jackson’s eccentricities and these relatively small business

reversals were omens. But at the very start of the ‘90s, all still seemed well. In

1991, his wholly owned company, MJJ Ventures, Inc., signed a joint venture

agreement with Sony that enabled him to distribute his recordings and videos

through Sony Software, Inc. That same year he released his next album,

Dangerous. It contained 14 songs, of which he wrote 3, “Heal the World,” “Who

-16[*16] Is It,” and “Will You Be There,”6 and cowrote nine others. The album

debuted at number 1 on the Billboard album chart and remained in the top 10 for

more than a year, with sales of more than 30 million worldwide.

To promote the album, Jackson embarked on the Dangerous World Tour in

June of 1992. Pepsi again signed on as sponsor--this time for a reported $15

million. Through Triumph, Jackson signed with Winterland Productions for a

tour-merchandising agreement. The agreement gave Winterland the exclusive

right to use “the name, symbols, emblems, designs, trademarks, service marks

and/or copyrights in graphic designs, likenesses and visual representations of

* * * MICHAEL JACKSON” in connection with the manufacture and sale of

posters, paper products, and “upper body garments * * * in, around and at each

concert site” where Jackson appeared as part of the Dangerous World Tour. This

netted Jackson $5.2 million in advances.

Jackson released a concert program about this tour on HBO, and later on

DVD, called Live From Bucharest. This generated some revenue--“enough to

cover the production costs”--but failed to “generate a significant amount of

income.” Jackson quickly rebounded with a halftime performance at Super Bowl

Although the song featured prominently in the memorable film Free Willy,

it is at least possible to read the lyrics as referring to human love.

-17[*17] XXVII in January 1993 that received the highest Super Bowl ratings since

1987.

The Dangerous World Tour, however, was to be his last in the United

States.

III.

The Fall

In the summer of 1993, while Jackson was still on tour, the family of

13-year-old Jordan Chandler sued Jackson for torts that included sexual battery

and seduction. The allegations exploded into the press. Jackson denied any

wrongdoing and he was not charged with child molestation or any other crime as a

result, although a criminal investigation did begin. The allegations had lasting

effects. By November Jackson canceled the remainder of his Dangerous World

Tour and Pepsi cut all ties with him. A confidential settlement was eventually

reached the following year. It was widely reported that the criminal case then died

for want of a cooperating witness. See generally 1997 Cal. Legis. Serv. Ch. 18

(S.B. 115) (West); Gerald F. Uelmen, “Jackson Faces Tougher Laws”, L.A. Times

(Nov. 23, 2003); Jim Newton, “Jackson Not Charged but Not Absolved”, L.A.

Times (Sept. 22, 1994).

Jackson continued to create music and tour, albeit only internationally. In

1995 Sony released his next album, a double-disk set, HIStory: Past, Present and

-18[*18] Future Book I. Disk 1 contained previously released songs, while Disk 2

contained 15 original songs, 7 of which Jackson wrote and 5 others which he

cowrote. The album sold 20 million copies--nowhere near Thriller numbers, but

still the best selling double-disk set of all time.

Jackson launched a 13-month tour to support the album in September 1996,

but none of the dates was in the United States. One could begin to see a growing

fissure between Jackson’s popularity as a singer and his popularity as a

merchandising brand. Despite the excellent album and ticket sales--the tour

grossed $165 million--it went unsponsored. After Chandler’s allegations against

Jackson, it appeared that companies weren’t interested in associating their brands

with his.

The tour did have one merchandising agreement. Triumph granted Sony

Signatures “the sole and exclusive right and license to utilize the Licensed Marks

in connection with the manufacture and [distribution]” of merchandise, with

“Licensed Marks” defined as “name(s), symbols, logos, trademarks, designs,

likenesses and/or images of [Jackson].” Sony Signatures paid a $6 million

advance, and Jackson also got nominal amounts from a few other licensees. Sales

of tour merchandise were, however, significantly less than the advance, and

Jackson had to repay Sony Signatures nearly $4 million.

-19[*19] That year--1995--also marked the beginning of the financial pressures that

would ultimately come close to crushing Jackson towards the end of his life.

Several of his advisers recommended that he sell his ATV catalog to Sony.

Jackson agreed in part and sent Branca to negotiate a merger of the ATV music

catalog with Sony’s music-publishing business. In November 1995 he signed an

agreement with Sony Music Publishing Company and its affiliates to form

Sony/ATV Music Publishing Company, LLC (Sony/ATV).

Jackson and Sony each received half of Sony/ATV. Sony paid Jackson

$115 million as an equalizing payment.7 Sony also promised to pay him $32.5

million over the next five years. The agreement provided that Sony and Jackson

could each appoint an equal number of board members to represent their interests

and that the board had the power to approve various “major decisions.” Apart

from these major decisions, however, “[t]he overall business, operations and tax,

accounting, financial and other affairs” of Sony/ATV was to be “exclusively

managed” by Sony.

The primary purposes of the 1995 agreement were “(a) to own and exploit

[Sony/ATV]’s [a]ssets and to collect income derived therefrom, [and] (b) to

An “equalizing payment” was made because the parties agreed that

Jackson was contributing assets worth more than Sony was to their new LLC.

-20[*20] acquire and/or administer additional music publishing catalogs and to collect

income derived therefrom.” It was also the stated intent of Sony and Jackson to

“actively expand [Sony/ATV] by future acquisitions.” The deal was by all

accounts a good one for both parties and left Jackson with both nearly equal power

over the company and a considerably enhanced pile of cash. But he gave up

complete control of one of his most valuable assets.

In 1997 Jackson released Blood on the Dance Floor: HIStory in the Mix.

The album had eight remixed tracks and only five new songs, of which Jackson

wrote one and cowrote the other four. Sales were not in the same league as those

of his original albums but it still sold more than 11 million copies worldwide,

which made it the most successful remix album of all time. There would,

however, be no associated tour. But a problem began to arise--even with cash

flowing in from the Sony/ATV deal and his music, Jackson’s spending was

starting to outpace his income, and he began to borrow significant sums against

his share of Sony/ATV. By the end of 1998, his interest was burdened by $140

million in debt to Bank of America.

IV.

The Collapse

In the next two years his borrowing against the Sony/ATV interest had

increased to $185 million. It seemed that Jackson was about to become a real-life

-21[*21] Mike Campbell--bankrupt in two ways, first gradually, then suddenly. See

Ernest Hemingway, The Sun Also Rises 72 (1926). It did not help his finances

that he became increasingly reclusive. His public performances were limited to

two tribute concerts at Madison Square Garden to mark the thirtieth anniversary of

the recording of his first studio solo album. They were watched by an enormous

television audience, but for most of the show Jackson sat in what one reviewer

called a “royal viewing box,” and any favorable publicity was soon overwhelmed

by the September 11 attacks days later.

These concerts were to be his last.

Although his tour income vanished, Jackson did continue to release records.

Invincible came out in 2001, with 16 new songs of which Jackson wrote 2 and

cowrote 12. But this album had an extremely large production budget of $30

million and a promotional campaign that cost $25 million. With costs like this and

with Jackson either unwilling or unable to tour in support of it, Sony didn’t want

to distribute the album and refused to renew his recording contract. Epic Records

picked up distribution, but sales amounted to only 4.5 million albums in the first

year. This would have been an astounding number for an ordinary star; for

Jackson they were a disappointment. And he wouldn’t release another wholly

original album as long as he lived.

-22[*22] A.

The Bashir Documentary and Criminal Case

Around the time Invincible shipped to record stores, Jackson agreed to

allow British filmmaker Martin Bashir to spend the better part of a year with him.

This decision proved disastrous. Bashir and his crew--with Jackson’s

permission--followed him around Neverland to make a documentary called Living

With Michael Jackson. The documentary, released in 2002, focused on the most

unusual parts of Jackson’s life--his skin bleaching, his plastic surgery, and his

relationships with young boys.

With the release of this documentary, an even larger fraction of the public

began to view Jackson as a pederast. This included local law enforcement. In the

summer of 2003 the Santa Barbara County District Attorney’s Office began a

criminal investigation into allegations that Jackson had molested another

13-year-old, this one named Gavin Arvizo. Jackson surrendered to the Santa

Barbara County Sheriff's Department in November 2003 and faced seven counts of

child sexual abuse and two counts of administering an intoxicating agent. He

pleaded not guilty and was tried in January 2005. In June he was acquitted of all

counts.

-23[*23] B.

Financial Peril

Acquittal did not rehabilitate his reputation. And this ordeal did nothing to

stanch the outflow of his wealth. He continued to spend great gobs of money in

excess of his now shrinking income. To keep pace, Jackson took out additional

loans secured by his assets. The terms of these loans became ever more onerous

because his acquittal was not an exoneration and fewer banks were willing to even

consider doing business with him after the criminal trial. One very important

instance of this happened in 2005 when Bank of America cut ties for fear of its

own reputation. It did this with a sale of Jackson’s debt to Fortress Capital

Corporation. Fortress was a distressed-debt hedge fund that lent money on terms

that aimed less at repayment and more at ultimately gaining control of the

underlying collateral--which now included Neverland.

Fortress didn’t care that much about Jackson’s reputation. It seemed happy,

in a usurious way, to increase Jackson’s debt to around $270 million.8 This had

two effects. The first was that Sony required him to agree to amendments to the

Sony/ATV operating agreement before it would allow him to further encumber his

interest. These amendments included a grant to Sony of an option to buy 50% of

Branca credibly estimated that Jackson had debts of more than $20 million

to other creditors.

-24[*24] Jackson’s interest at a value capped at a maximum formula price determined

as of March 2006. The second was that Jackson’s annual interest payments to

service the loan increased to around $15 million--well in excess of his annual

distribution from Sony/ATV.

It looked like Jackson was moonwalking from the “gradually” to the

“suddenly” part of going bankrupt as his financial position kept advancing

backward. The difference between the interest he owed and the income he made

forced him into another refinancing in 2007. Jackson got this done in December

with a pledge of additional collateral. Now his primary loan was secured not just

by his interest in Sony/ATV but by his Mijac Music catalog.

The refinancing was not easy. Jackson’s team contacted dozens of banks,

and in the end Barclays Bank and Deutsche Bank offered to fund a loan secured by

Sony/ATV, and HSBC and Plainfield Asset Management offered two separate

loans secured by Mijac Music. Jackson eventually made the following deals:

Barclays refinanced $300 million of the debt, in the form of bonds

fully guaranteed by Sony and issued by a new entity, New Horizon

Trust II, a bankruptcy trust,9 which held Jackson’s economic interest

in Sony/ATV. All of Jackson’s annual distributions from Sony/ATV

were redirected to an interest reserve for this New Horizon Trust II

debt. None of the loan proceeds went to him personally.

A bankruptcy trust allows lenders to isolate collateral securing a loan from

personal claims that future plaintiffs or creditors might make against a debtor.

-25[*25] !

HSBC lent an additional $30 million secured by Mijac Music through

New Horizon Trust III, another bankruptcy trust. In addition to Mijac

Music, Jackson assigned to NHT III his writer’s share of performance

royalties from Broadcast Music, Inc. (BMI)--after BMI’s recoupment

of any advances paid to Jackson--and redirected them through the

trust to HSBC to pay the interest on this loan.

Plainfield Asset Management lent $40 million, secured by a second

lien on Mijac Music through New Horizon Trust III. This loan did

not require current payments of either principal or interest, but

interest accrued at 16.5% annually.10 This interest was added to

principal that would be due on the maturity date, December 31, 2011.

These deals were, under the circumstances, an achievement. But Branca

was on his way out. Since 2002 his relationship with Jackson had deteriorated,

though Branca had continued to represent Jackson through the 2005 criminal trial.

Jackson’s eccentricity by now extended to his choice of advisers, and Branca felt

that this new team was filled with incompetent people who did not have Jackson’s

“best interests at heart.” Branca formally resigned as Jackson’s attorney by 2006.

Jackson Leaves Neverland

Jackson also had left the country. After his acquittal, he and his children

moved to Bahrain to stay as guests of Sheikh Abdullah, son of the Bahraini king.

From 2006 to 2008 Jackson and his family shuffled among various countries. He

The prime interest rate at the time was 7.25%. See, e.g., Historical Prime

Rate, JP Morgan Chase & Co., https://institute.jpmorganchase.com/about/

our-business/historical-prime-rate (last visited Mar. 12, 2021).

-26[*26] returned to the United States in 2008 and lived in a rented house in Las

Vegas. By the fall of 2008 he moved once again, this time to a rented house in

Los Angeles.

Jackson had come home to yet more financial trouble. By early 2008,

Fortress was edging towards foreclosure on Neverland. Since Jackson did not

want to lose Neverland, his brother Jermaine approached a man named Dr. Tohme

Tohme,11 who represented Colony Capital, a private equity firm headed by Tom

Barrack. Tohme received from Colony Capital $20,000 per month and a part of

any deals he arranged for that company. He agreed to help Jackson avoid

foreclosure.

Colony Capital did eventually agree to buy the Neverland mortgage from

Fortress. This avoided foreclosure, but Jackson was forced to contribute the

Neverland Ranch to Sycamore Valley Ranch Company, LLC, and remove all of

his personal property.

This was a difficult deal for Jackson to accept, but there was at least one

sign of relief. In February 2008 Thriller 25 was released to commemorate the

twenty-fifth anniversary of the original album’s release. Thriller 25 was

“Dr.” Tohme is not a doctor. He has not received a medical degree or a

Ph.D. of any kind.

-27[*27] particularly successful and led to a substantial, but temporary, increase in

Mijac royalties. That increase, however, didn’t materialize until the first half of

2009 as a result of the usual delay in the reporting and payment of music royalties.

The Unconsummated Comeback

After this crisis faded, Jackson hired Tohme as his manager. It was an

expensive arrangement, as he signed a contract in July 2008 in which he promised

to pay Tohme a fixed monthly fee of $35,000 plus 15% of all gross compensation

that he received as a result of Tohme’s services.12

Tohme immediately set out to find endorsement, licensing, and

personal-services opportunities for Jackson. There was a discernible lack of

professionalism in some of his efforts. He spoke, for example, with Jack Wishna,

the CEO of an entertainment consulting firm named CPAmerica, about creating a

Jackson-themed Cirque du Soleil show. Wishna told Tohme that he worked for

Cirque du Soleil, but Tohme did not do even a simple background check. It turned

out that Wishna had nothing to do with Cirque du Soleil, but had called Daniel

Lamarre, its CEO, and claimed to have the rights to do a show based on Jackson’s

Tohme later sued the Estate for its failure to pay him under his deal with

Jackson. It was later reported that the parties settled for an undisclosed amount in

2019. Andrew Dalton, “Michael Jackson’s Estate and Former Manager Settle

Lawsuit,” AP News (May 29, 2019), https://apnews.com/article/

b90ade45fcaa4c298dda96946187f6e3 (last visited Mar. 12, 2021).

-28[*28] music, which he did not. No deal ever came from these discussions, and

Tohme never spoke to any actual Cirque representative.

Tohme also contacted Andy Heyward about creating an animated children’s

show around the “Thriller” song and video. Heyward is a writer and director who

has spent his career producing children’s entertainment, including Inspector

Gadget, Dennis the Menace, and Ghostbusters. The contemplated “Thriller” series

would have incorporated “several signatures from the [Thriller music] video,”

including ghouls, zombies, and other creatures. Heyward, however, wanted

nothing to do with making Jackson a character or even using Jackson’s image and

likeness.

In the end, there was no series. An email from June 2009 from Heyward to

Tohme states the obvious reason: “[A]s sweet as [Jackson] is, the parade of

‘unusual’ personalities in his life, leaves me very nervous. I have spent 25 years in

kids entertainment, building a reputation, and there is no amount of money or

riches that I would jeopardize that for.” Heyward reiterated this sentiment in his

altogether credible testimony, where he described Jackson’s image and likeness in

children’s entertainment as “candidly toxic.” He and his company “didn’t want to

have any signature which would associate [Jackson] with this brand.”

-29[*29] Tohme wasn’t the only person looking to find potential marketing

opportunities for Jackson. Jackson also charged Peter Lopez, one of Branca’s

successors, with finding endorsement deals. Lopez reached out to Nederlander

Presentations, the famous Broadway production company, about doing a

Jackson-themed show. These discussions even led to a deal memorandum in

October 2008 that would have given Nederlander the exclusive right to create a

musical based on compositions performed by Jackson in the Off the Wall and

Thriller albums. The deal was never consummated while he was alive.

This Is It Tour

By 2008 Jackson was sufficiently strapped for cash that he was willing to

tour again. Barrack (the businessman who had helped Jackson avoid losing

Neverland) called Phil Anschutz, the owner of Anschutz Entertainment Group

(AEG), to tell him that Jackson wanted to work again and asked whether Randy

Phillips--the CEO of AEG Live, a concert promoter and subsidiary of

AEG--would be interested in organizing a concert tour. Negotiations began soon

after.

Phillips ultimately decided it was best to start a tour in London. AEG had

recently built the O2 Arena there, and Phillips also felt that the best way to

rehabilitate Jackson’s image was to start the tour abroad. He believed that people

-30[*30] overseas were less judgmental and more forgiving--or, perhaps, less sunk in

the flood of sensational news reports from American media. If all went well, he

thought, the tour might end with dates back in the United States.

These negotiations were prolonged, but Jackson and his advisers stuck with

them because his cashflow problems were severe and obvious. The deal was made

in January 2009 and comprised two agreements. In one Jackson promised to

perform services for a concert series to be called “This Is It” and in the other to

develop up to three feature films. The concert agreement gave AEG Live the

exclusive right to:

promote the shows;

manufacture and sell, or arrange for others to manufacture and sell,

Jackson merchandise at the shows; and

solicit sponsors.

It also granted AEG Live the nonexclusive right to use Jackson’s image and

likeness in connection with the exercise of its contract rights. Jackson was in turn

to receive several advances including an initial one of $5 million, and a

$100,000-per-month advance to pay the rent on a home in the Holmby Hills area

of Los Angeles for 12 months. Each of these advances was to be recouped from

tour proceeds.

-31[*31] Jackson secured AEG Live’s promise to film rehearsals to help him prepare,

plan, and develop his concert performances. The company bought two handheld

cameras and hired two cameramen to record Jackson’s rehearsals. This was not

unusual--Jackson often had videos shot of his rehearsals to perfect his public

performances. But these videos were not intended for public consumption as

Jackson never sang full out during his rehearsals, in an effort to not harm his

voice. The record contains no indication that this footage was ever intended for

release by anyone or even that anyone other than Jackson himself ever expected to

look at it.

AEG Live also had the right to film Jackson in concert, and it intended to

release a professionally shot two-disc concert DVD, with one disc that captured

Jackson’s concert performances and another that showed behind-the-scenes

activity and interviews. AEG Live got this more polished production underway

even while Jackson was still putting the show together--there was professionally

shot footage of dancers as they auditioned for the tour. But the production’s other

costs started to rise sharply, and AEG Live soon realized that the $20,000 daily

cost of shooting this footage was not sustainable.

-32[*32]

The This Is It Tour Is Announced

Jackson publicly announced the This Is It concert tour at a press conference

in London in March 2009, and the tour was set to begin in July. When tickets for

10 concerts all sold out rapidly, AEG Live scheduled an additional 40 concerts.

These too sold out. Yet even in London, one can see the pattern that had long

since marked Jackson back home--a great appreciation for his music and

performance, but little for his personal reputation. Despite the near instant sellout

of dozens of performances, AEG Live was utterly unable to find a tour sponsor.

Potential sponsors did not want to tie their own reputations to Jackson’s, and there

was also a fear that Jackson’s troubling behavior would again flare up and cause

the tour to be canceled or cut short.

Discussions for a Tour Merchandising Agreement

Though unable to get a sponsor for the tour, AEG Live still thought it likely

that it could find a deal for tour-related merchandise. Those familiar with the

industry believe that people who buy tour “merch” do so as a souvenir of their

attending a concert; those who buy branded merchandise in stores do so out of

admiration for identification with the person whose brand they are buying. AEG

began discussions with Bravado International Merchandising Services, Inc. to

become the exclusive merchandiser for the This Is It concert tour. Music

-33[*33] merchandising consists of signing the rights for an artist’s image and

likeness, which the merchandiser will then use on different types of merchandise.

As of 2009 Bravado was one of the leading worldwide merchandisers and had

worked with a large number of well-known acts including the Rolling Stones,

Metallica, Guns N’ Roses, Rihanna, and Justin Bieber.

Bravado met with Jackson twice and showed him about 300 designs for tour

merchandise. Jackson approved 295. Even with all this preliminary work and

Jackson’s cooperative attitude, Bravado refused to enter into a tour-merchandising

agreement until the tour began for fear that Jackson wouldn’t perform.

No deal was ever reached.

Jackson Cleans House

As the tour’s debut neared, Jackson became more focused on his craft and

more sensible in his choice of advisers. In the spring of 2009, he ousted Tohme

and rehired Frank DiLeo, who had been his personal manager during the height of

his career in the 1980s. Jackson also hired Michael Kane as his business manager.

This reboot became complete when DiLeo set up a meeting with Branca who met

with Jackson on June 17. They discussed ways to commercialize Jackson’s image

and likeness.

-34[*34] It seemed as if the chaos that was Jackson’s financial life was perhaps

beginning to drain away. There had been no further charges of abuse, and his

engagement in choreographing and arranging the concert series seemed to have

brought a much needed discipline to his personal life.

Eight days later he was dead.

VI.

Jackson’s Death

On June 25, less than three weeks before the tour was to begin, Jackson was

killed by an injection of propofol and benzodiazepine administered by his personal

physician, Dr. Conrad Murray. His death was ruled a homicide.

At the time of his death, each of the three assets that we have to value was

distressed. His image and likeness was not producing any noticeable income, and

he had not even been able to contract for tour merchandise. His interest in

Sony/ATV secured $303 million in loans, with maturity dates less than 18 months

away. Although Jackson was guaranteed $11 million in annual distributions under

the Sony/ATV agreement through September 2011--after which distributions were

at Sony’s discretion--the average annual interest payments on the loans were well

over $17 million. Jackson’s interest in Mijac secured over $72 million in debt.

And he had incurred substantial new debts--remember that the advances from

AEG Live were recoupable. Without the possibility of a tour, those debts

-35[*35] somehow had to be paid. AEG Live claimed the debt amounted to

approximately $36 million, and it wanted its money immediately. Various other

creditors began circling around Jackson’s assets. Business manager Kane added it

all up and identified $450 million in “easily identifiable debt” secured by

Sony/ATV, Mijac, the Neverland Ranch, and the Jackson family’s Hayvenhurst

home in Encino, California.

The Executors Take Charge

Jackson had put together a new and much more competent team of advisers

just in time. They did not know precisely how much debt there was or what assets

might be available. But in a remarkable and somewhat coldblooded way, the team

put out an APB. Soon the hospital where Jackson’s body lay surrounded by much

of his family had another room filled with a haphazard team of intellectualproperty lawyers and advisers--so many they might have outnumbered Jackson’s

family. Once there, they immediately began to discuss the administration of the

Estate and how to protect his image and likeness. But it was unclear who would

administer the Estate--Jackson was only 50, his death was unexpected, and nobody

even knew if there was a will. Then Tohme added to the confusion when he

claimed he held something he called a postdeath power-of-attorney and tried to

reenter the inner circle.

-36[*36] A search was made, and a will was found.13 This will was from 2002,

before the dispersion of Jackson’s original team of advisers, and it named Branca

as a coexecutor with John McClain, Jackson’s childhood friend and a music

producer. McClain, though still coexecutor at the time of trial, was himself

suffering from some reverses to his health, and Branca took on most of the work.

His first goal was to avoid foreclosure on Jackson’s assets. He met with Phillips

upstairs at Mr. Chow Restaurant to discuss how to “make as much money from

whatever [assets the Estate] had.” This meeting did not feature discussions about

making a Cirque du Soleil show or a movie based on Jackson’s rehearsal footage,

which Branca didn’t know existed. It was not until a week after the dinner at Mr.

Chow that--during a lunch between Jim Gianopulos (chairman of Fox Film

Studios) and Phillips--the idea of making a film based on the This Is It rehearsal

footage first popped up. Gianopulos said he was interested, but no one had yet

seen the rehearsal footage.

For a man whose public image was so unusual, Jackson wrote an utterly

conventional will: He left a very large portion of his estate to a collection of

charities, with the rest almost all divided between his beloved mother and his

children (with his mother’s share in trust for her lifetime with the remainder to his

children).

-37[*37] B.

The Memorial Service

What Jackson had created during his lifetime was now fixed, and it was to

the considerable benefit of the Estate that he was no longer able to get in the way

of the rational profit maximizers who were now in control. And nearly everyone

involved in these early days after Jackson’s death turned out to be accomplished in

the business side of the entertainment business. As crass as it might have seemed

to Jackson’s more sentimental fans, the business began almost immediately. A

popular star of Jackson’s stature from a family as large as his would

understandably receive a memorial service. Jackson’s was produced by AEG and

was held in the Staples Center in Los Angeles on July 7, almost two weeks after

his death. It was an extraordinary production that featured numerous celebrity

appearances and singing performances. Jackson was eulogized by both his

daughter Paris and Berry Gordy. Paris endearingly described Jackson as one of

the world’s greatest dads, and Gordy called Jackson the “greatest entertainer that

ever lived.” Gordy’s statement became the centerpiece of the Estate’s rebranding

of Jackson. Video of the service was quickly copyrighted, and it produces income

for the Estate to this day.

-38[*38] C.

The Motion Picture: Michael Jackson’s This Is It

The same week as the memorial service, AEG filed to register This Is It tour

rehearsal footage with the U.S. Copyright Office. AEG did not have any concrete

plans on what to do with the footage because no one had ever seen it and so no

one knew its quality or content. But after Phillips met with Gianopulos, AEG

employees began to review the footage with an eye toward making it into a movie.

They did not start with much hope: The raw material looked as if it might be too

crude to ever be useful. As Phillips credibly testified: “We kind of realized that

we might have enough to make a movie, with some kind of narrative.”

Notwithstanding this uncertainty, AEG put together a 90-second “sizzle

reel”14 of footage to show to movie studios. The sizzle reel was shown to several

of them, including Paramount, Columbia Pictures, Fox, Warner, and Universal.

AEG’s corporate instincts were correct--the sizzle reel ignited a bidding war.

Columbia (a subsidiary of Sony) won the war, “not because it was necessarily the

best bid, but [because] they also controlled the music rights, the underlying music

rights and stuff like that.”

A sizzle reel features highlights to give studios a sense of what a final

film might look like.

-39[*39] But who owned the footage? AEG had paid for it, but it was for Jackson’s

own use; and it was his image and his embryonic performance that it captured and

that made it valuable. Branca suggested to AEG, with some vigor, that he thought

that meant the footage belonged to the Estate. Both sides realized that time was of

the essence, and both stood to lose if they started a fight over who owned what and

when. Contentious negotiations ensued with each side expressing significant

doubt over whether a deal could be reached. On July 27, 2009, however, AEG,

Columbia, and the Estate negotiated a term sheet that set out their basic agreement

about the use of the rehearsal footage to develop what became the film Michael

Jackson’s This Is It.

Branca petitioned the probate court to approve the agreement, lest it be void

ab initio. In early August, progress again ground to a halt when Jackson’s mother

filed a response to Branca’s petition in which she reiterated the argument that

AEG did not own the footage, and she added that her son never would have

wanted such unfiltered footage released. The court set a hearing for later that

month, and everyone knew that if the Estate lost, the film wouldn’t be produced.

The probate court granted the petition in its entirety. With this approval,

production could proceed, but it remained unclear whether the quantity and quality

of the footage would be sufficient to make a full-length film. As Phillips testified,

-40[*40] the footage was “[b]arely, just barely” enough. Poor lighting and audio were

just part of the problem. The Estate also needed licenses from the music

publishers who held copyrights to Jackson’s songs. This was particularly true of

the song “Thriller”, the rights to which were held by its composer, Temperton.

This team did its work well. On August 21, 2009, Sony Pictures and Sony

Music Entertainment announced the release of Michael Jackson’s This Is It. The

Estate promoted the film with a poster of Jackson’s silhouette filled with a collage

of scenes from the movie. The only trademark of the Estate used on the poster

was Jackson’s dancing feet logo in the lower left-hand corner.

The movie was released in October 2009. It was accompanied by a

soundtrack released the same day. The album, also titled This Is It, contained 16

songs. The only previously unreleased song on the album--titled “This Is It”--was

based on a demo of a song recorded in the 1980s that Jackson had cowritten with

Paul Anka. The demo was badly distorted and required significant effort and

expense to put into releasable form.

It all paid off. The success of the film was unprecedented. As of July 2011

the movie had generated cumulative gross receipts of over $240 million, and it

became the highest worldwide grossing concert documentary ever made. It was

also, at the time of its release, the only concert documentary to consist entirely of

-41[*41] rehearsal footage. The Estate had negotiated from a relatively weak position

and had to rely on Columbia to put in money up front to get the movie done. The

distribution deal allowed Columbia to recoup this advance first. But the movie

was so profitable that by April 2010 the Estate began to receive a little money.

Then it began to receive a lot of money--$45 million by the end of July.15

Michael Jackson’s This Is It showed fans a side of Jackson previously

unseen and it turned out to be an important part of the Estate’s rebranding-shifting the public’s attention to his music and away from his personal life. It

“focuse[d] on [Jackson], the artist, and his genius and his talent as an artist and

* * * as a human being in the way he dealt with the members of the band and the

dancers.”

Cirque du Soleil

Despite Tohme’s testimony, which we do not credit, Cirque du Soleil had

not considered doing a Jackson-themed show while Jackson was alive. The Estate

itself hadn’t considered the possibility of such a show until Rene Angelil--Celine

Dion’s late husband and manager--called Branca a couple months after Jackson’s

The Estate objects to the exhibit in the record supporting this fact as not

relevant. That objection is overruled.

-42[*42] death and said “that Cirque would be interested in talking about the

possibility of creating some kind of show based on [Jackson’s] music.”

“[E]ncouraged and emboldened” by the success of Michael Jackson’s This

Is It, Branca began talks with Cirque du Soleil to develop a Jackson-themed show

in September 2009. Cirque’s chairman, Guy Laliberté, told Branca that he wanted

to create a worldwide traveling show, while Branca told Laliberté he wanted a

resident show in Las Vegas where Cirque had created other shows like The

Beatles Love show. Both got what they wanted, and Cirque ended up planning

two Jackson-inspired shows, IMMORTAL and ONE.

Despite Jackson’s tarnished personal image, “Cirque believed that

[Jackson’s] music had not been affected by the litigations in which [Jackson] had

been involved” and that “[Jackson’s] music was still very popular in people’s

minds.” And so, in February 2010, the Estate returned to probate court with a

petition to approve “an agreement * * * with Créations Méandres Inc. for the

presentation of a live show based on [Jackson’s] music and songs.”

In the ensuing agreement for the Las Vegas resident show, the Estate got

“the right to approve the use of all Michael Jackson’s images, likenesses, manner

in which Michael Jackson is depicted, and other portrayal[s] to be included in the

[s]how.” It also set forth the basic financial terms. Cirque agreed to fund up to

-43[*43] $46 million in development and operating costs for which it would be

reimbursed in amounts that were the same as or less than it had received for

previous shows based on the Beatles and Elvis Presley. The Estate and Cirque

each owned 50% of the rights in the show, with 80% of profits being used to repay

Cirque its investment (with interest), and the remaining 20% to be split equally

between them. After Cirque was reimbursed for its costs, the profits were to be

shared equally between the Estate and Cirque.

In October 2011 the touring show, Michael Jackson: THE IMMORTAL

World Tour premiered. It cost about $50 million to produce and was funded

exclusively by Cirque. Cirque at first agreed to license Jackson’s image and

likeness in THE IMMORTAL at 3.5% of the gross. But, as described by Branca,

the license was a “land grab” by the Estate, which Cirque ultimately reduced and

then terminated “because the cost of the show [w]as so prohibitive that [Cirque]

couldn’t continue to pay it.” Branca thought THE IMMORTAL earned the Estate

$20 to $25 million, which included the income streams from image and likeness,

profits, masters, and publishing.

In June 2013, the Las Vegas show, Michael Jackson: ONE, premiered. It

combined acrobatics, dance, and visuals--immersing the audience in the world of

Jackson’s music. The cast included four Cirque performers each of whom was

-44[*44] given one of Jackson’s iconic items--his white glove, penny loafers, fedora

hat, and shades--and they appeared as “misfits” who set out on a journey into

Jackson’s music. Despite the license to use, among other rights, Jackson’s image

and likeness, we find that Cirque refused to pay anything specifically for their use.

General Merchandising Agreement With Bravado

Bravado’s CEO, Tom Bennett, credibly testified that Bravado would not

have done a nontour, general merchandising deal for Jackson’s image and likeness

before he died for “any meaningful money” because there was simply “no

demand.” But Bennett felt that Jackson’s death presented new opportunities. In

his experience “when any big celebrity dies, there’s an immediate desire in the

marketplace for memorabilia merchandise, and you never know how long that’s

going to last.” To project the profitability of a merchandising deal, Bravado

contacted retailers to gauge their interest. Walmart had none, and it believed “that

the Michael Jackson brand was not something that * * * was consistent with their

consumer base, because of the alleged allegations of child molestation.” Bravado

received a “lukewarm response” from smaller retailers.

Bravado then decided to move forward with a merchandising agreement

with AEG Live, which held the rights to the 295 images and products that Jackson

approved before he died. They reached an agreement in early July 2009 that gave

-45[*45] Bravado the exclusive right to use Jackson’s “names or sobriquets, symbols,

emblems, logos, designs, likenesses, visual representations, service marks, and/or

trademarks * * * in connection with the manufacture, advertisement,

merchandising, promotion, distribution, and sale of mutually approved

merchandise.” Bravado paid AEG Live a $5 million recoupable advance for this

right, and then immediately began manufacturing the merchandise.

Sometime after that, Bravado entered into an agreement with the Estate

itself. Compared to its agreement with AEG, the agreement with the Estate

granted Bravado “a broader body of rights” including “licensing out [Jackson’s]

name and image.” But the Estate reserved a number of rights to specific

categories of Jackson’s image and likeness, including, but not limited to,

music-based products, licensing of music compositions, video games, and

audiovisual works. For these rights, Bravado paid the Estate $10 million in a

recoupable advance.

As it turned out, selling Jackson-themed merchandise “was not the bonanza

that [Bravado] thought it may have been” as licensees proved much harder to sell

than expected. It was only after five years, and a nontraditional merchandising

arrangement with a slot-machine company, that Bravado recouped its advances.

This was far longer than the company had expected.

-46[*46] F.

Miscellaneous Agreements

The Estate built upon its success by entering into a number of other, smaller

deals. One was an agreement at the end of 2009 to create an online platform for

Michael Jackson’s Official Virtual World Massively Multiplayer Online Game.

The agreement provided for a 15% royalty and recoupable advances of $4 million

within the first year, $3.5 million in the second year, and $2.5 million in the third

year.

In March 2010 the Estate made a second video-game licensing deal. Under

this agreement, the Estate was to be paid four $1-million installments, which were

fully recoupable against royalties.

Posthumous Albums and the Hunt for Unreleased Songs

After Jackson’s death, Sony engaged in an extensive search for unreleased

songs to evaluate for possible future release. Jackson was not working on any

album when he died and had not released any album containing new material since

2001. He was, however, known to over-record songs on his albums. He kept

these unreleased recordings in his personal vaults.

Sony’s corporate spelunkers crawled through these vaults and found 7,000

to 10,000 pieces of tape. These were mostly tailings and very little pay dirt. There

were only 2 completed and unreleased recordings and approximately 25-30 full

-47[*47] vocals with some music. The Estate has confirmed a total of 83 songs-fragments of lyrics, tunes, and vocals--that were unreleased at the time of

Jackson’s death.

They also found that there was often a reason for an unreleased song to

remain unreleased, or a “full vocal” not to be a “song”. Sony executive John

Doelp credibly testified that once a vocal was identified, Sony had “to take a step

back” and ask whether it was commercially viable. Doelp described the process as

follows: “[I]f it’s a demo vocal, it’s very possible that it’s just a bad performance.

There could be notes that are flat * * * [or] not well recorded. * * * [I]t could just

not sound good, and then the song itself just might not be good or just not up to

Michael’s standards[.]”

There was some refined gold beneath the dross, so in November 2009, the

Estate and Sony Music Entertainment contracted for the Estate to deliver 10

posthumous albums between October 2009 and December 2016. Of those 10

albums, however, only 2 required delivery of master recordings of previously

unreleased compositions. These 2 albums required 10 to 13 songs. There was no

requirement that Jackson composed these songs, only that he performed them. An

additional three anniversary albums were to “contain previously unreleased

[r]ecordings derived from” the songs on the original albums. (Emphasis added.)

-48[*48] These derivations could, for example, include “outtakes, demos, [and]

alternate versions.” The anniversary albums neither contemplated nor required the

delivery of previously unreleased compositions.

Michael and Xscape

In December 2010 Sony released Michael. It had 10 previously unreleased

songs, 5 of which Jackson had written or cowritten. In May 2014 Sony released

Xscape. Xscape was the second posthumous album with entirely previously

unreleased recordings. But while the agreement required at least 10 new songs,

Xscape contained only 8, only 5 of which Jackson wrote or cowrote.

Bad 25

In September 2012, Sony released Bad 25, a twenty-fifth anniversary

edition of the album Bad. Bad 25 was a two-disc set. Disc 1 contained the songs

on the original Bad album, and disc 2 contained remixes of several old songs, as

well as six previously unreleased songs.

Estate Sells Jackson’s Interest in Sony/ATV to Sony

In 2011, Sony/ATV acquired EMI Music Publishing. With this acquisition,

Sony/ATV went from the fourth largest music-publishing business to number one.

Five years later, and seven years after Jackson’s death, Sony and the Estate signed

-49[*49] a deal for Sony to acquire the Estate’s interest in Sony/ATV and become the

100% owner of Sony/ATV. Sony paid $750 million.

The Estate was very, very far away from the condition its executors and

managers thought it was in at that first dinner in 2009 in the upper room at Mr.

Chow.

VII. The Estate Prepares Its Return

After Jackson died the Estate hired the accounting firm Crowe Horwath to

prepare its return. Their work began with a long list of labor-intensive chores, as

Jackson’s various assets needed to be inventoried, photographed, valued, and

insured. The chores became more arduous when they discovered that Jackson’s

Tohme-led team of advisers had kept no contemporaneous books and records in

the last three years of his life. Kane, Jackson’s last business manager, worked as a

liaison between the Estate and the Crowe Horwath team to prepare the return, and

recommended appraisers to value Jackson’s interests in Sony/ATV and Mijac, as

well as his image and likeness.

The Estate retained Moss Adams, a large accounting and consulting firm, to

value Jackson’s image and likeness and his interest in Mijac. Relying entirely on

the income approach to valuation, Moss Adams valued Jackson’s image and

likeness at $2,105 and Mijac at $70,860,000.

-50[*50] To value Jackson’s ownership interest in Sony/ATV, the Estate selected the

Salter Group, an independent financial and strategic advisory firm that specializes

in valuations. The Salter Group also chose to use only the income method, which

led it to value Jackson’s ownership interest in Sony/ATV at $0.

Using these valuations, the Estate, on its 2009 Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return, reported the value of:

Jackson’s image and likeness at $2,105;

NHT II, which held Sony/ATV, at $0; and

NHT III, which held Mijac, at $2,207,351.

The Estate also reported Jackson’s various other assets--the most significant

among them including his Hayvenhurst home; MJJ Productions, Inc.; MJJ

Ventures, Inc.; and his master recordings. Jackson was, when he died, the sole

shareholder of MJJ Productions and MJJ Ventures. MJJ Productions collected

Jackson’s mechanical royalties as a recording artist under an agreement with Sony

Music, Inc., while MJJ Ventures collected Jackson’s share of joint venture income

under an agreement with Sony for the exploitation of Jackson’s master

recordings.16

The joint venture enabled Jackson to distribute his master recordings and

videos through Sony Software, Inc. See supra p. 15.

-51[*51] VIII. The Audit

The Commissioner audited the Estate’s tax return and in May 2013 issued a

notice of deficiency that adjusted the Estate’s reported values. We summarize it

here:

Item

Adjustment

Hayvenhurst real estate

$1,425,000

MJJ Ventures, Inc.

67,393,780

Share of artist mechanical rights

under Jackson 5 master recordings,

and master recordings

34,299,095

Miscellaneous property

48,603,827

Image and likeness

434,261,895

New Horizon Trust II

469,005,086

New Horizon Trust III

58,478,593

Debts

12,252,591

Limitations to Schs. J & K

Total

(713,436)

1,125,006,431

This adjusted valuation led the Commissioner to conclude that the Estate had

underpaid Jackson’s estate tax by a shade more than $500 million. The

Commissioner also determined that some of the valuations were so far off that he

tacked on penalties of nearly $200 million. The Estate timely petitioned. During

trial, neither the Commissioner nor the Estate entered any evidence into the record

-52[*52] to show that the initial determination of these penalties was personally

approved in writing by the immediate supervisor of the individual making the

determination. The Commissioner moved after trial to reopen the record with new

evidence to try to show that the initial determination of penalties was personally

approved in writing by the immediate supervisor of the individual making the

determination. We denied that motion.

IX.

Pretrial Preparation and Stipulation

This is a very large case, and the parties reasonably asked for a lengthy

pretrial phase in which they were able to settle a great many of their disputes. But

they got stuck in their negotiations on the value of three of Jackson’s assets:

his image and likeness;

NHT II, which held his 50% ownership interest in Sony/ATV; and

NHT III, which held his ownership interest in Mijac Music.17

The parties deferred some issues: (1) the amount of the Estate’s

charitable-contribution deduction; (2) the amount of claims and administrative

expenses; and (3) the amount of losses allowable under sections 2053, 2054, and

2055. (All section references are to the Internal Revenue Code in effect for the

date of Jackson’s death, and all Rule references are to the Tax Court Rules of

Practice and Procedure, unless we say otherwise.)

-53[*53] X.

Trial

We tried this case in Los Angeles. Jackson was domiciled in California at

the time of his death, and both executors were residents of the state when they

filed the petition. Any appeal would presumptively go to the Ninth Circuit. See

sec. 7482(b)(1)(A).

The Estate’s Experts

The Estate retained four experts for trial:

Mark Roesler and Jay Fishman to value Jackson’s image and likeness,

Alan Wallis to value Jackson’s interest in Sony/ATV, and

Owen Dahl to value Jackson’s interest in Mijac Music.

Roesler is the founder and CEO of CMG Worldwide, Inc., an international

licensing and rights-management company that specializes in representing

celebrities both dead and alive, including Marilyn Monroe, James Dean, Buddy

Holly, Chuck Berry, Princess Diana, and Jackie Robinson. Fishman has been a

professional appraiser since 1974 and is a managing director of Financial Research

Associates, a firm that provides business-valuation, forensic-accounting, and

litigation-consulting services.

To do his job, Roesler projected 10 years of postdeath revenues from the

exploitation of Jackson’s image and likeness under California law, see Cal. Civ.

-54[*54] Code sec. 3344.1 (West 2012), and from some associated trademarks.

Fishman then used Roesler’s revenue projections as the starting point for his own

use of the income method to value Jackson’s image and likeness. After he figured

out future cashflows, Fishman discounted the stream to present value and came up

with a higher value for this asset than the Estate had on its return--about $3

million instead of $2,105.

Wallis has valued businesses for over thirty years and leads the Media and

Entertainment team in Ernst & Young’s UK valuation practice. In that role, he

values media-related intellectual property (including copyrights), and content and

character licenses. Over the course of his career, he has valued approximately 100

music-publishing and master-recording catalogs.

The value of NHT II depends on the value of Jackson’s interest in

Sony/ATV. Wallis valued Sony/ATV using two different valuation methods--the

market approach and the income approach. The first required him to compare

Sony/ATV to comparable companies and comparable transactions. Wallis viewed

Sony/ATV as an operating music-publishing company. This required him to

calculate Sony/ATV’s earnings before interest, tax, depreciation, and amortization

-55[*55] (EBITDA)18 as a key figure in his calculations. The second method required

him to project Sony/ATV’s future cashflows. His basis for these projections was

Sony/ATV’s own internal projections as of 2009. He concluded that Sony/ATV’s

enterprise value was $1.1 billion. He then reduced that value by Sony/ATV’s net

debt to arrive at the company’s equity value. Because Jackson was a 50% owner,

he halved the equity value, which equaled $254 million. But remember that

Jackson owed debt secured by his interest, and he had further encumbered that

interest with restrictions on his power to control the joint venture or sell his stake

in it. After Wallis analyzed these facts, he concluded that NHT II was worth

nothing when Jackson died.

Dahl is the president and founder of the Dahl Consulting Group, a

full-service valuation-consulting firm. From 1999 to 2012 Dahl was a principal at

Moss Adams, where he specialized in the appraisal of intellectual property.

During his career he has valued various high-profile music catalogs, including

Cherry Lane Music Publishing and Holland-Dozier-Holland.

EBITDA is helpful when determining the value of a business because it

shows income without financing or taxes. See Net 2 Press, Inc. v. 58 Dix Ave.

Corp., 266 F. Supp. 2d 146, 163 (D. Me. 2003); 1B Harold S. Bloomenthal &

Samuel Wolff, Going Public and the Public Corporation, sec. 11.18 (2020).

-56[*56] Dahl valued Jackson’s interest in Mijac, and he also used the income

approach. He identified five sources of income:

Jackson’s compositions which he also performed that were released

before his death,

Jackson’s compositions which he didn’t perform that were released

before his death,

major works by other songwriters,

minor works by other songwriters,

Jackson’s unreleased compositions that he performed.

He then analyzed how much income each of these sources would produce. He

calculated Mijac’s value to be about $71 million. After he added cash on hand and

subtracted the debt that Mijac secured, Dahl concluded that the fair market value

of NHT III was about $2.7 million.

Each of the Estate’s experts reduced the cashflows produced by the assets to

reflect the tax implications to a hypothetical buyer--a process known as tax

affecting. Nancy Fannon testified for the Estate about the current state of

academic research on the topic and on the empirical evidence that she said proved

the prospect of taxes would affect the price a prospective buyer would be willing

to pay.

-57[*57] B.

The Commissioner’s Expert

The Valuations

The Commissioner faced this chorus of experts with a soloist. Weston

Anson is the chairman of CONSOR Intellectual Asset Management, an

intellectual-property consulting firm that specializes in trademark, patent, and

including those of Dr. Seuss, Andy Warhol, Tupac Shakur, Audrey Hepburn,

Marlon Brando, and Woody Allen.

Anson used different methods to value the three big assets that were at

stake. To value Jackson’s image and likeness, Anson considered five

“opportunities” that he believed a hypothetical buyer could reasonably foresee at

Jackson’s death:

themed attractions and products,

branded merchandise,

a Cirque du Soleil show,

a film, and

a Broadway musical.

According to Anson, image and likeness encompasses a broad bundle of allied

rights, including U.S. trademarks, state or common-law trademarks, copyrights,

-58[*58] licensing rights, endorsement rights, franchising rights, and international

trademarks. Employing the income approach, Anson determined the value of

Jackson’s image and likeness to be $161 million.

Anson valued Jackson’s interest in Sony/ATV through both the income and

market approaches. In his market approach he viewed Sony/ATV as a music

catalog rather than an operating music-publishing company. This meant that he

calculated the venture’s enterprise value by its net publishers share (NPS) and not

EBITDA. Anson’s income approach also differed from the Estate’s in using

Sony/ATV’s historical financial data to predict future cashflows. Anson made no

discounts based on lack of control or marketability, but did make a discount based

on Sony’s option to buy half of Jackson’s interest in Sony/ATV. He valued NHT

II at $206 million.

Anson valued Jackson’s interest in Mijac using only the income approach.

His major disagreement with Dahl was about the size and duration of a postdeath

boom in demand for Jackson’s music, as well as the number of unreleased

compositions that he thought Jackson had left behind. In the end Anson valued

Jackson’s interest in Mijac at $114 million.

-59[*59]

Anson’s Credibility

As the Commissioner’s only expert witness, Anson’s credibility was an

especially important part of the case. And it suffered greatly at trial. His problems

began when he was asked about the effect on himself and his firm if the

Commissioner prevailed in the case. He responded: “I have no idea. I’ve never

worked for the Internal Revenue Service before.” Later when asked whether he or

his firm had previously been retained by the Commissioner to write an

intellectual-property valuation report in Whitney Houston’s estate-tax case, Anson

replied: “No. Absolutely not.” That was a lie. Approximately two years before

he testified, the Commissioner had retained Anson to write a valuation report

titled, “Analysis of the Fair Market Value of the Intangible Property Rights Held

by the Estate of Whitney E. Houston as of February 11, 2012 For Estate Tax

Purposes.” It was only after a recess and advice from the Commissioner’s counsel

that Anson admitted to this.

Anson also testified that neither he nor his firm ever advertised to promote

business. This was also a lie. In the midst of trial, Anson’s firm touted his

testimony in the following email blast:

What has been described as the “tax trial of the century” by the

Hollywood Reporter, the case between the Internal Revenue Service

and the Estate of Michael Jackson began in Tax Court this week.

-60[*60] CONSOR Chairman Weston Anson is the expert of the century and

will be testifying on behalf of the IRS.

The big discrepancy in the value of the Jackson estate will be sure to

bring testimony tailor made for a Hollywood blockbuster. While

CONSOR valued the intellectual property assets of the Jackson estate

at a total close to $1 billion, the estate initially valued the assets at

time of death at a mere $2,105.

And in a lecture given before trial Anson referred to his valuation in this case,

stating, “I’m sitting today * * * in a deposition in what’s known as the ‘Billion

Dollar Tax Case.’ * * * [W]e’ve just spent the last year valuing the estate of

Michael Jackson.” When asked at trial whether he had in fact referred to this case

as a billion-dollar case, Anson replied with his own question: “Would you like to

be called the lawyer of the century?”

The Estate moved to strike all of Anson’s testimony, including his expert

reports, as tainted by perjury. We denied the Estate’s motion finding it “too

severe.” We instead stated that “[a] more proportionate remedy would be to

discount the credibility and weight we give to [Anson’s] opinions.” There is

nothing wrong about marketing one’s services or taking on another case for the

IRS while working on this one. But Anson did undermine his own credibility in

being so parsimonious with the truth about these things he didn’t even benefit

-61[*61] from being untruthful about, as well as in not answering questions directly

throughout his testimony.

This affects our factfinding throughout.

Issues Left for Decision

We are left to wade through these facts to decide the fair market value at

Jackson’s death of the three contested assets. Depending on what we find, we

must also decide whether the Estate is liable for a substantial-understatement

penalty under section 6662(b)(2) or a gross-valuation misstatement penalty under

section 6662(h)(2)(C).

We summarize the parties’ positions:

Reported on

estate return

Notice of

deficiency

Estate on

brief

Commissioner

on brief

Image and

likeness

$2,105

$434,264,000 $3,078,000

$161,307,045

New Horizon

Trust II

(Sony/ATV)

-0-

469,005,086

-0-

206,295,934

New Horizon

Trust III

(Mijac Music)

2,207,351

60,685,944

2,267,316

114,263,615

-62OPINION

[*62]

Estate Tax Valuation Principles

The Code imposes a tax on “the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States,” sec. 2001(a), and it

defines the taxable estate as “the value of the gross estate” less applicable

deductions, sec. 2051. The value of the gross estate of a decedent is “the value at

the time of his death of all property, real or personal, tangible or intangible,

wherever situated,” to the extent provided in sections 2033 through 2045. Sec.

2031(a). Section 2033 includes in the gross estate the value of “all property to the

extent of the interest therein of the decedent at the time of his death.” And the

regulations tell us to value a decedent’s property at its fair market value. Sec.

20.2031-1(b), Estate Tax Regs.

Fair market value is the “the price at which the property would change

hands between a willing buyer and a willing seller, neither being under any

compulsion to buy or to sell and both having reasonable knowledge of relevant

facts.” Id. Under this standard, the hypothetical willing buyer’s knowledge

extends beyond just those facts publicly known, as he is “presumed to be

‘reasonably informed’ and ‘prudent’ and to have asked the hypothetical willing

seller for information that is not publicly available.” Estate of Kollsman v.

-63[*63] Commissioner, 113 T.C.M. (CCH) 1172, 1178 (2017), aff’d, 777 F. App’x

870 (9th. Cir. 2019). We must also be mindful that these hypothetical buyers and

sellers are, after all, purely hypothetical, meaning we mustn’t “construct[]

particular possible purchasers” based upon “imaginary scenarios” about who they

might be or how they might act. Estate of Simplot v. Commissioner, 249 F.3d

1191, 1195 (9th Cir. 2001), rev’g and remanding 112 T.C. 130 (1999); see also

Morrissey v. Commissioner, 243 F.3d 1145, 1148 (9th Cir. 2001), rev’g Kaufman

v. Commissioner, 77 T.C.M. (CCH) 1179 (1999); Cave Buttes, L.L.C. v.

Commissioner, 147 T.C. 338, 357-58 (2016).

It is also fundamental to this approach that property is valued as if “in the

decedent’s hands at the time of its transfer by death.” Estate of Simplot, 249 F.3d

at 1194-95 (citing sec. 2033). Because property is valued precisely at the moment

of death,19 it is inappropriate, as a general matter, to ascribe value based upon

postdeath evidence. The temptation to use hindsight is usually too great. See

Estate of Gilford v. Commissioner, 88 T.C. 38, 52 (1987); Estate of Gallagher v.

Commissioner, 101 T.C.M. (CCH) 1702, 1706 (2011). The prohibition is not

absolute, however, so a court may for instance consider subsequent events “to the

Or on the Code’s alternative valuation date within six months after the

date of death. Sec. 2032(a).

-64[*64] extent that they were reasonably foreseeable” at the decedent’s death. Trust

Servs. of Am., Inc. v. United States, 885 F.2d 561, 569 (9th Cir. 1989) (citing

Estate of Gilford, 88 T.C. at 52). Whether a subsequent event was reasonably

foreseeable is a question of relevance: Evidence of the actual price for a sale after

death can be relevant “so long as the sale occurred within a reasonable time after

death and no intervening events drastically changed the value of the property.”

First Nat’1 Bank of Kenosha v. United States, 763 F.2d 891, 894 (7th Cir. 1985).

II.

Expert Opinions

Estate-tax cases are very often disputes about valuation. And valuation

disputes are questions of fact, see Estate of Gallagher, 101 T.C.M. (CCH) at 1705,

that are very often battles of the experts. This is especially true here since all three

assets at issue are unique and possibly of great value.

While experts are helpful, we are not bound by any particular expert

opinion. Hunt & Sons, Inc. v. Commissioner, 83 T.C.M. (CCH) 1345, 1352

(2002); see also Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938). We

are free to accept or reject an expert’s opinion based on our sound judgment.

Estate of Hall v. Commissioner, 92 T.C. 312, 338 (1989). We are also free to

accept only a portion of an expert’s opinion. Parker v. Commissioner, 86 T.C.

547, 562 (1986); Ames v. Commissioner, 58 T.C.M. (CCH) 1470, 1488

-65[*65] (1990), aff’d sub nom. Hildebrand v. Commissioner, 967 F.2d 350 (9th. Cir.

1992).

III.

Valuation

Basics

The difficulty with valuing the assets at issue here is that they are not like

shares of publicly traded stock. Each of the three assets is unique, making it

difficult to determine its value. There are three approaches that courts and

appraisers use to value unique assets: income, market, and cost. See, e.g., Cave

Buttes, 147 T.C. at 358; David Laro & Shannon P. Pratt, Business Valuation and

Federal Taxes: Procedure, Law, and Perspective 162 (2d ed. 2011).

The income approach values an asset by calculating how much revenue it

will produce in the future and discounting that revenue back to its present value,

because a dollar today is worth more than a dollar in the future. Laro & Pratt,

supra, at 163. The market approach values an asset by comparing it to the prices

at which similar assets have changed hands in arm’s-length transactions close in

time to the date of death. Id. at 196. The cost approach values an asset by

computing the cost of recreating it. See United States v. Eden Mem’l Park Ass’n,

350 F.2d 933, 935 (9th Cir. 1965); Marine v. Commissioner, 92 T.C. 958, 983

(1989), aff’d without published opinion, 921 F.2d 280 (9th Cir. 1991).

-66[*66] All the experts here use the income approach to value the three assets at

issue, although the market approach pops up in conjunction with the income

approach for one of the assets. None of the experts used the cost approach for any

of the assets.

Discounted Cashflow Method and Its Discount Rate

The income approach has two variations: discounted cashflow (DCF) and

capitalization. See Cave Buttes, 147 T.C. at 358; Laro & Pratt, supra, at 162.

Both parties here use only the DCF method. The DCF method has two main

variables: the projected future cashflow stream and the discount rate. The parties

here largely disagree about each of the three assets’ future cashflow projections,

and we will address those differences below.

Projections of cashflow are distinct from the selection of an appropriate

discount rate--a variable that can have a large effect on the outcome of a DCF

analysis. Laro & Pratt, supra, at 164. The discount rate accounts for the time

value of money in computing the present value of future cashflows an asset is

projected to produce. See Shepherd v. Commissioner, 115 T.C. 376, 392 (2000),

aff’d, 283 F.3d 1258 (11th Cir. 2002); Laro & Pratt, supra, at 168. The experts

here largely agree on the formula, but not the inputs, that we should use to

calculate the discount rate.

-67[*67] This formula computes a discount rate in the form of a weighted average

cost of capital (WACC). The formula is:

E=market value of equity;

D=market value of debt;

re=cost of equity; and

rd=cost of debt.

The variables in this formula are relatively straightforward--only the cost of

equity is itself derived from a formula with more variables in it. To determine the

cost of equity, each expert used the capital-asset pricing model.20 The formula to

calculate the cost of equity using the capital-asset pricing model is:21

The Estate’s expert, Fishman, uses both the capital-asset-pricing model

and a different one called the buildup method to derive a cost of equity in his

valuation of Jackson’s image and likeness. Since Fishman is the only expert in the

case to use this method, we’ll discuss it in more detail when we review his

analysis.

We noted in Estate of Heck v. Commissioner, 83 T.C.M. (CCH) 1181,

1190 n.11 (2002), that we have at times criticized the capital-asset pricing model,

but all four experts in the case used it to determine the cost of equity. There is no

fight on this issue for us to referee.

-68re=rf +â * (rm - rf)

[*68]

re=cost of equity;

rf=risk-free rate;

â=beta; and

rm=expected return of the market.

The risk-free rate takes into account a riskless security--typically a U.S.

government security such as a Treasury bond. AEP Tex. N. Co. v. Surface Transp.

Bd., 609 F.3d 432, 436 (D.C. Cir. 2010). The beta measures the covariance

between the rate of return on a company’s stock and the overall market return--i.e.,

systematic risk.22 See Furman v. Commissioner, 75 T.C.M. (CCH) 2206, 2214-15

(1998). The market-risk premium is the difference between the expected market

return over the risk-free rate. See Hoffman v. Commissioner, 81 T.C.M. (CCH)

1588, 1598-99 (2001).

Systematic risk is the general risk in the market, while unsystematic risk is

the risk specific to a certain asset or company. See Furman, 75 T.C.M. (CCH)

2206, 2214 n.10 (1998); Laro & Pratt, supra, at 175, 181. Beta tries to capture the

difference between excess returns on a specific asset or company with the excess

returns on the market as a whole. Laro & Pratt, supra, at 175. “The average beta

for the market is, by definition, 1.0. Thus, for a company with a beta of 1.2, the

company’s excess returns can be expected to fluctuate by 120 percent above the

market; a company with a beta of 0.8 can be expected to fluctuate by 80 percent of

the market as a whole.” Id.

-69[*69] While the parties agree that we should use the DCF method, they disagree

as to what the discount rate should be because they disagree on the values of

several of the variables in both of these formulas.

Synergy

Another important difference between the parties is what at trial was called

synergy. This argument lurked in the background throughout the trial--Anson

kept trying, especially when he discussed the value of Jackson’s image and

likeness, to include the value of other assets, such as Jackson’s copyrights in his

musical compositions and performances, in the value of the assets at issue. His

justification is that these assets all belonged to the Estate and would be more

valuable in some circumstances if they could be bundled and exploited together.

One can’t help but notice how often Anson’s valuations--both in how he

chose to describe the assets that he valued and in how he valued them--seemed to

keep arriving at places that the Estate did in fact come to, albeit after the assets

were no longer under Jackson’s control and when they had been managed with

stunningly greater competence than they had been in Jackson’s own hands.

From the Estate’s perspective, this kind of valuation is just hindsight, not

even 20/20 hindsight but more like that of an eagle or a spy satellite. But there’s

something more to this--a pair of problems and not just one. The first problem is

-70[*70] how to value any asset that requires active management, because it is so

difficult to distinguish between the value of that asset and the value of its

management. As a purely theoretical exercise, one might imagine that the right

way to value an estate with such assets is to imagine an auction at the side of the

decedent’s deathbed, with the auctioneer seeking a single price for all his assets.

This would make it easy to determine--especially in an extreme case like

Jackson’s, with its very difficult-to-value assets that turned out to be quite

lucrative--the total value of those assets as of the date of death. One would just

run a hypothetical auction and take as the date-of-death value the second highest

bid. See generally Whitehouse Hotel Ltd. P’ship. v. Commissioner, 139 T.C 304,

332-37 (2012), aff’d in part, vacated in part and remanded, 755 F.3d 236 (5th Cir.

2014). The difference between this bid and the winning one would then be the

expected marginal contribution of the winning bidder in managing the estate. This

would allow a hypothetical judge to easily distinguish the value of a decedent’s

assets from the value added by the management of those assets.

A second and distinct problem is how to measure the effect that separate

assets can have on each other’s value. It would be entirely reasonable to think that

a collection of related intellectual-property rights, such as copyrights in music,

recordings and images, might be more valuable if they could be packaged and sold

-71[*71] together. Anson called these synergies, but they are really a problem of

transaction costs. For example, when valuing 100 shares of stock in a company

with only 150 shares outstanding, does one value each share separately, or does

one value all 100 shares together? We have acknowledged in the past that a

premium may be appropriate when valuing large blocks of stock. See Estate of

Mitchell v. Commissioner, 83 T.C.M. (CCH) 1524, 1528 (2002); Estate of

Salsbury v. Commissioner, 34 T.C.M. (CCH) 1441, 1451-52 (1975). And the

regulations tells us that the degree of control is relevant to valuation. See sec.

20.2031-2(e), Estate Tax Regs.; sec. 25.2512-2(e) and (f), Gift Tax Regs. As

stated in Revenue Ruling 59-60, sec. 4.02(g), 1959-1 C.B. 237, 242, “[t]he size of

the block of stock itself is a relevant factor to be considered * * * [and] may justify

a higher value for a specific block of stock.”

When a court values a block of 100 shares as worth more than 100

individual shares, it nods towards life in the real world. In a world without

transaction costs, the 100 holders of 1 share each could get together and do with

the corporation anything that one holder of 100 shares could do. But there is some

real-world caselaw here. It focuses on the value of the nature of the estate tax as a

“tax on the privilege of passing on property, not a tax on the privilege of receiving

property.” Ahmanson Found. v. United States, 674 F.2d 761, 768 (9th Cir. 1981).

-72[*72] A decedent who owns a controlling block of shares in a corporation may in

his will leave them to 100 legatees, none of whom would have a controlling share.

But the cases that discuss this question hold that the taxable value of such an

estate includes the value of the controlling block: “There is nothing in the statutes

or in the caselaw that suggests that valuation of the gross estate should take into

account that the assets will come to rest in several hands rather than one.” Id.; see

also Estate of Curry v. United States, 706 F.2d 1424, 1427-28 (7th Cir. 1983).

This is the unarticulated point that Anson and the Commissioner make here:

Jackson’s will didn’t divide his valuable intellectual property; it kept it together.

Because keeping it together made dealmaking much easier--all those valuable

rights could be bundled, as they in fact were by Branca in the years after Jackson’s

death--shouldn’t they be valued together, like a controlling block of stock?

Both these problems are reasonable in their statement (or maybe our

restatement) of them. But we aren’t in a position to conduct theoretical deathbed

auctions, see Estate of Simplot, 249 F.3d at 1195, and we don’t let parties out of

their stipulations easily, see Stamm Int’l Corp. v. Commissioner, 90 T.C. 315,

321-22 (1988). Instead, to address these two problems, we will stick to the

solutions that precedent dictates.

-73[*73] How do we disaggregate the value that Branca added to the Estate from the

value of those assets themselves? What we will do is what we’ve always

done--separate facts known or knowable at the date of death from those remoter in

time or unforeseeable, and then ask what a hypothetical buyer in possession of

these facts would offer for them in an arm’s-length deal with a similarly

knowledgeable hypothetical seller. And, we reiterate, we do not hypothesize a

particular buyer or a particular seller with any particular skills or use for those

assets. See Estate of Giustina v. Commissioner, 586 F. App’x 417, 418-19 (9th

Cir. 2014), rev’g and remanding T.C. Memo. 2011-141; Estate of Simplot, 249

F.3d at 1195.

How do we figure out whether to value several assets individually or as a

block? We look to how the parties prepared the case. Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return, tells executors to list

miscellaneous assets in an estate (and that’s what intellectual-property assets are).

See 2009 Form 706, at 3; Instructions for Form 706, at 26. That’s what the Estate

did here--listing several intangible assets in Schedule F, Other Miscellaneous

Property--including:

image and likeness;

MJJ Productions, Inc.; and

-74[*74] !

master recordings.

The Estate separately reported Jackson’s interests in NHT II and NHT III on

Schedule G, Transfers During Decedent’s Life. And it reported his interest in MJJ

Ventures, Inc., on Schedule B, Stocks and Bonds.

The Commissioner in his notice of deficiency described his disagreements

with the values that the Estate reported, but he did not object to this list of what

those assets were. The parties spent years in discovery and other pretrial

preparation, at the end of which they reached stipulations about some of these

assets (such as master recordings, MJJ Productions, and MJJ Ventures). The

Commissioner could have chosen to object to the description of the assets to be

valued, or he could have refused to stipulate the values of all these assets rather

than agree to some and not agree to others. But what he’s not allowed to do is

renege on his stipulation to cram the value of assets whose value he stipulated into

the value of assets whose value he did not stipulate. That would undermine the

stipulation, which we don’t allow the parties to do absent mutual mistake or proof

that a party was misled, or if justice requires it. See Rule 91(e); Stamm Int’l

Corp., 90 T.C. at 321-22; Buchsbaum v. Commissioner, 83 T.C.M. (CCH) 1777,

1779 (2002).

-75[*75] The result of the way this case came to trial means that we will value only

those three assets whose values the parties couldn’t agree about. In making

findings on those values we must be clear on what we consider. We will assume

that the Estate’s assets can be used together to generate value. But we will not add

the value of other assets to the value of the assets at issue.

IV.

Tax Affecting23

The Basics

A second consideration that affects our valuation of all three assets here is

tax affecting. Each of the Estate’s experts takes tax affecting into account in his

valuations. To understand tax affecting and why its proponents claim it is

necessary, we begin with a short tax-vocabulary lesson.

Each asset in dispute in this case is held by a pass-through entity, which

means the Code imposes no tax on the income that these assets produce.24 Such

entities are not at all exotic--they include common forms of private business

Both “tax affecting” and “tax effecting” are used in the literature. See

Daniel Tinkelman, P.V. Viswanath, & Glen M. Vogel, “Sub S Valuation: To Tax

Effect, or Not to Tax Effect, Is Not Really the Question,” 65 Tax Law. 555, 556

n.8 (2012). For the sake of consistency we will use tax affecting. In quotations

we follow the author’s spelling.

Such entities file information returns that report how much income and

the amounts of any deductions it had during the tax year. Secs. 701, 6031(a);

Chef’s Choice Produce, Ltd. v. Commissioner, 95 T.C. 388, 392-93 (1990).

-76[*76] ownership such as partnerships, S corporations, and LLCs. When one of

these entities earns income, it passes right through to its partners, shareholders, or

members who themselves have to pay tax on the income at their individual rates.

This is in contrast to income from C corporations.25 C corporations don’t pass

income through to their shareholders; they get taxed on it themselves. And then

the Code taxes any income that trickles through to their shareholders as dividends

at their individual rates. This two-layer tax on C corporation income is known as

“double taxation.” See, e.g., Pierre v. Commissioner, 133 T.C. 24, 30 (2009),

supplemented by T.C. Memo. 2010-106. Because of this, valuation experts refer

to the entity-level income of pass-throughs as pretax, and C corporations’ income

as after-tax. Investor-level income--the income that ultimately ends up in an

investor’s pocket--will always be after-tax.

The choice of entity can have big effects on the tax consequences that a

business faces. For example, in 2009 the top marginal tax rate on C corporation

income was 35%, sec. 11(b); dividends were typically taxed at 15%; sec. 1(h)(1),

(11); and the top marginal rate for individuals was 39.6%, sec. 1(a). If the sole

C corporations are just corporations taxed under subchapter C of the

Code. Markell Co. v. Commissioner, 107 T.C.M. (CCH) 1447, 1448 n.1 (2014).

S corporations are taxed under subchapter S. See Block Developers, LLC v.

Commissioner, 114 T.C.M. (CCH) 68, 69 n.3 (2017).

-77[*77] asset of a pass-through entity and the sole asset of a C corporation each

produce $100 in income, entity-level income of the pass-through and the C

corporation will be $100 (= $100 ( (1&0.0)) and $65 (= $100 ( (1&0.35)),

respectively. The pass-through and C corporation’s investor-level income,

however, will be $60.40 (= $100 ( (1&0.396)) and $55 (= $65 ( (1&0.15)).26

Other things being equal, an income-producing asset would thus be worth

more to a pass-through than to a C corporation. But the complications of the real

world intrude. Even with this tax disadvantage, C corporations dominate the

financial markets and are by far the largest share of the largest business

organizations in America. See generally James D. Cox & Thomas Lee Hazen,

Business Organizations Law secs. 1.5-.6 (4th ed. 2016) (describing the advantages

and disadvantages of corporations). And that creates a problem for a DCF

analysis. Because pass-throughs do not pay tax at the entity level, their projected

cashflows will not account for any tax consequences. But almost always--and, in

fact, in this case--the rate used to discount projected cashflows to present value is

derived from after-tax, publicly available C-corporation information. Proponents

of tax affecting argue that this mismatch between pretax cashflows and after-tax

To keep the example simple, we assume all effective tax rates are equal to

their top marginal rates and that a C corporation distributes 100% of its income to

shareholders.

-78[*78] discount rates must be corrected, or tax affected. We have acknowledged as

much in our cases, stating: “[I]f, in determining the present value of any future

payment, the discount rate is assumed to be an after-shareholder-tax rate of return,

then the cash-flow should be reduced (‘tax affected’) to an after-shareholder-tax

amount. If, on the other hand, a preshareholder-tax discount rate is applied, no

adjustment for taxes should be made to the cash-flow.” Gross v. Commissioner,

78 T.C.M. (CCH) 201, 209 (1999), aff’d, 272 F.3d 333 (6th Cir. 2001). Whether,

and precisely how, to tax affect a pass-through’s earnings, however, is the subject

of significant dispute in this case.

The Experts’ Positions

Fishman, Wallis, and Dahl in their respective DCF analyses concluded that

the appropriate hypothetical buyer for each asset would be a C corporation, and

therefore, each of them reduced cashflows by the income-tax liability that would

be paid by a hypothetical C corporation buyer. To make things even more

complicated, each also computed a discount rate that included the effects of a C

corporation’s tax rate. They all stated that this was appropriate because it used

both after-tax cashflows and after-tax discount rates. Each of the Estate’s experts,

however, used a different tax rate to do his computation:

Fishman applied a 35% rate based on the federal rate,

-79[*79] !

Wallis applied a 39.615% rate based on a combined federal and New

York State rate, and

Dahl applied a 39.8% rate based on a combined federal and

undisclosed state rate.

When we’ve faced this issue in the past, we’ve shied away from tax

affecting because of these difficult practical problems. See Estate of Gallagher,

101 T.C.M. (CCH) at 1710; Estate of Giustina, 101 T.C.M. (CCH) at 1679; Dallas

v. Commissioner, 92 T.C.M. (CCH) 313, 317-18 (2006) (tax affecting not

appropriate when the taxpayer presumed that an S corporation would lose its S

corporation status after a sale); Gross, 78 T.C.M. (CCH) at 207. For example, in

Wall v. Commissioner, 81 T.C.M. (CCH) 1425, 1432-33 n.19 (2001), we noted

that

[t]he argument in favor of tax-effecting stresses that many potential

buyers of S corporations are C corporations. Because a C corporation

would be unable to maintain a target company’s S corporation status

following an acquisition, the C corporation would tax-effect the S

corporation’s income (at C corporation rates) in deciding how much it

would pay for the S corporation. See Trugman, Understanding

Business Valuation: A Practical Guide to Valuing Small to MediumSized Businesses, at 198-199 (1998). By contrast, the argument

against tax-effecting stresses that although an S corporation’s

stockholders are subject to tax on the corporation’s income, they are

generally not subject to a second level of tax when that income is

distributed to them. This could make an S corporation at least

somewhat more valuable than an equivalent C corporation. However,

tax-effecting an S corporation’s income, and then determining the

-80[*80] value of that income by reference to the rates of return on taxable

investments, means that an appraisal will give no value to S

corporation status.

There has, it seems, been only one case where we allowed tax affecting in a

valuation. See Estate of Jones v. Commissioner, T.C. Memo. 2019-101, at

*41-*42. In Estate of Jones, both experts agreed that a hypothetical buyer and

seller would take into account the form of business entity in determining the fair

market value of a limited-partnership interest. Id. at *39. The parties just

disagreed on how to account for this effect. Id. The Commissioner’s expert

argued against tax affecting because the company at issue was a natural-resource

holding company--not because it would pay no entity-level tax. Id.

The experts here strongly disagree on the appropriateness of tax affecting.

We view this disagreement just as we have in the past, as one that is a dispute

about fact. And we find, as we have done consistently in the past apart from

Estate of Jones, that by a preponderance of the evidence tax affecting is not

appropriate here because the Estate has failed to persuade us that a C corporation

would be the hypothetical buyer of any of the three contested assets. The Estate’s

experts did not even discuss in a persuasive way their reasons for assuming that a

C corporation would be the only or even likely buyer for these assets. Fishman,

for example, reasonably points out that any buyer of Jackson’s likeness and image

-81[*81] would have to spend significant amounts of money to rehabilitate and

defend its value. He claims a C corporation would be the hypothetical buyer of

Jackson’s image and likeness because history shows us that C corporations have

bought the image and likeness and associated trademarks of other celebrities.

It is possible that rehabilitating an image as tattered as Jackson’s had

become would require capital outlays more typical of public corporations. But we

don’t think that’s more likely than not to be true. Fishman valued Jackson’s image

and likeness, which if the Estate is to be believed is the most valuable of the three

contested assets, at just over $3 million. That is not a sum so large as to make it

likely that only a C corporation would be able to buy it. There has also been a

boom in different types of pass-through entities--such as limited liability

companies--that give organizations the many benefits of C corporations in raising

capital from large numbers of shareholders or members while avoiding double

taxation. Cox & Hazen, supra, secs. 1.1, .7(6), .9, .11. Many of our precedents

arose from S corporations, which have sharp restrictions on who and what can

own them. With the advent and popularity of other, less restrictive, forms of

pass-through ownership we cannot but find that the gap between C corporations

and other entities has narrowed over time. The Estate’s experts did not consider

-82[*82] such distinctions and did not consider both the tax detriments and benefits of

pass-through status.

Our finding reflects these facts: The Estate’s own experts used inconsistent

tax rates. They failed to explain persuasively the assumption that a C corporation

would be the buyer of the assets at issue. They failed to persuasively explain why

many of the new pass-through entities that have arisen recently wouldn’t be

suitable purchasers. And they were met with expert testimony from the

Commissioner’s side that was, at least on this very particular point, persuasive in

light of our precedent. This all leads us to find that tax affecting is inappropriate

on the specific facts of this case. We distinguish Estate of Jones as an instance

where the experts agreed to take into account the form of the business entity and

agreed on the entity type. The Commissioner argued there, as he does here, that

we shouldn’t tax affect, but his own experts didn’t seem to be on board. As we

observed, “[t]hey do not offer any defense of respondent’s proposed zero tax rate.

Thus, we do not have a fight between valuation experts but a fight between

lawyers.” Estate of Jones, at *39.

We do not hold that tax affecting is never called for. But our cases show

how difficult a factual issue it is to demonstrate even a reasonable approximation

-83[*83] of what that effect would be. In Estate of Jones, there was expert evidence

on only one side of the question, and that made a difference.

That was not the case here.

Rights in Music Intellectual Property for . . . Tax Lawyers

Jackson’s most valuable assets were intellectual property in his image, in his

own music, in others’ music that he bought when he was at the peak of his

popularity, or rights indirectly dependent on those rights. This is a specialized

area of law whose terms we’ve already used in our factfinding. Before we plow

into the complex valuation analysis that lies ahead, any tax specialists reading this

might benefit from a primer on three key concepts: composer, performer, and

right of publicity.

Composer

In copyright law, a composer is someone who writes compositions. A

composition is the combination of words and music that is performed. Music,

however, is often a collaborative trade, and a composition’s lyricist and composer

are often two different people. This is no surprise to fans of musical theater who

are familiar with Gilbert & Sullivan, Lerner & Loewe, Rodgers & Hammerstein,

and Sondheim and himself. But in popular music there seems to be less

specialization. There are singer-songwriters, singers of original compositions, and

-84[*84] cover artists--those singers who perform songs already sung by others. A

concrete example that is relevant here is Temperton, who is the composer of

“Thriller”--he didn’t actually perform the song, but he wrote the lyrics and created

the tune.

A composer gets rights to his composition under copyright law.

“[C]opyright ownership in the musical composition initially vests in its creators.”

6 Melville B. Nimmer & David Nimmer, Nimmer on Copyright, sec. 30.02

(Mathew Bender 2020). Songwriters of the two elements of a composition--music

and lyrics--each acquire by law an equal right to the copyright in that musical

composition. See Greene v. Ablon, 794 F.3d 133, 151 (1st Cir. 2015); Garcia v.

Google, Inc., 786 F.3d 733, 751 n.1 (9th Cir. 2015) (Kozinski, J., dissenting from

en banc ruling); Richlin v. Metro-Goldwyn-Mayer Pictures, Inc., 531 F.3d 962,

968 (9th Cir. 2008); Nimmer, supra, sec. 30.02[A]. See generally Maurel v.

Smith, 271 F. 211, 215-16 (2d Cir. 1921); Cal. Civ. Code sec. 981(a) (West 1982)

(common-law copyright). A composer’s copyright attaches to his work

automatically, though songwriters will often submit it to the U.S. Copyright

Office27 to ensure protection.28

The Copyright Office is a separate federal department within the Library

of Congress that is “responsible for administering a complex and dynamic set of

(continued...)

-851.

[*85]

Income Streams

A major factor in the complexity of the competing valuations in this case is

that composition copyrights in music are the fount of several income streams and

not one big river. There are four that are important here:

mechanical royalties,

performance royalties,

synchronization fees, and

other miscellaneous income.

Mechanical royalties were originally income from sales of a physical object

such as a vinyl record or a CD. Even as the disintermediation of albums into

infinitely reproducible digital downloads of individual songs began, the royalties

collected by composers for each of their downloaded compositions continued to be

called mechanical royalties. Mechanical royalties are the income to composers

(...continued)

laws. The Copyright Office examines hundreds of thousands of copyright claims

per year * * * Congress has also delegated authority to the Copyright Office to

develop regulations concerning many areas of copyright law.” U.S. Copyright

A major benefit of registering with the Copyright Office is the right to sue

for infringement. See 17 U.S.C. sec. 411 (2008); Alaska Stock, LLC v. Houghton

Mifflin Harcourt Publ’g Co., 747 F.3d 673, 678 (9th Cir. 2014); Buchanan v. Sony

Music Entm’t, No. 18-cv-3028 (KBJ), 2020 WL 2735592, at *4 (D.D.C. May 26,

2020).

-86[*86] from the sales of those physical or digital embodiments of a recorded

performance.

Performance royalties are the income composers get when their

compositions are performed live, on the radio, or on television. This income flows

from live concerts where the song is performed, from radio or television broadcast

where a recorded song is played, or from a restaurant or club when a song is

performed or a recorded version is played.

One’s thoughts should naturally turn again to transaction costs. The right of

a composer to performance royalties may extend to hundreds of millions or

billions of televisions and radios, and it’d be impossible to monitor all the

individual performances. As recognition of copyright in music spread, the

solution was to create performing-rights organizations. Composers contract with

an organization like BMI or ASCAP (the American Society of Composers,

Authors, and Publishers). These organizations create and sell blanket licenses to

those who want to play copyrighted compositions, and the resulting royalties are

divided among the copyright holders. The organization makes this division by

extensive sampling on what’s being played on the radio or television or as

background in bars and restaurants.

-87[*87] Synchronization income--better known as a “sync fees”--is “paid whenever

a piece of music, in whole or part, is synchronized in a timed relation to the visual

image.” This stream generally comes from advertising, film, television, and video

games. Think of a movie’s soundtrack or an advertising tune that one hears on

TV.

Other miscellaneous income is minor. There is still a small market, for

example, for sheet music or song folios.

Publishers

A composer who wants upfront money for these usually uncertain income

streams, or one who wants someone else to manage the negotiations for use of his

music, or the young and naive talent who signs away his songs for a song, all have

to deal with the music-publishing industry. Publishing has an industry-specific

meaning here. Publishers, e.g., Mijac, are buyers or assignees of the copyrights to

compositions. Publishers gain “[t]he power to control the exploitation of a

musical composition, and an interest in the income generated from such

exploitation.” Nimmer, supra, sec. 30.02. In exchange, they usually agree to

provide composers services such as copyright registration, promotion, and a

mechanism to collect income throughout the world; and to pay an advance. A

publisher typically has better access to the industries that want to buy the right to

-88[*88] use a composition. Movie studios, advertising companies, and the like find

it more efficient to browse through a large publisher’s catalog rather than deal

with often numerous composers of a single song. Though the publisher usually

owns the copyright to a composer’s work, the royalties earned are split between

the publisher and the composer.

How are the royalties split? Bringing a familiar tax concept into the world

of music--it depends. The contracts between composers and publishing companies

vary. The split can be a percentage of revenue generated or a fixed fee. The

publisher may ask for rights that equal the life of the copyright (which is typical)

but the time may be shorter. Sometimes composers will simply pay the publisher

to administer the songs. Such an administration contract limits the publisher’s role

to the collection of income and some promotional work, and usually generates less

income for the publisher.

But a publisher can’t collect this revenue forever. Songs written before

1978 are subject to the Copyright Act of 1909. See Penguin Grp. (USA) Inc. v.

Steinbeck, 537 F.3d 193, 197 (2d Cir. 2008); Self-Realization Fellowship Church

v. Ananda Church, 206 F.3d 1322, 1325 (9th Cir. 2000). Under that Act, the

duration of a copyright was 28 years and it could be renewed for another 28 years

by the composer--not the publisher. Penguin Grp., 537 F.3d at 197. However,

-89[*89] because of several amendments, these works can again be renewed for 19

years, and then again for 20 years. See Nimmer, supra, sec. 9.11[B][1]. See

generally Penguin Grp., 537 F.3d at 197.

The structure is a bit different for songs written during or after 1978. Under

the current Copyright Act, the duration of a copyright is the life of the author plus

70 years. 17 U.S.C. sec. 302 (1998); see also Nimmer, supra, sec. 9.10[A][1]. The

author has recapture rights that allow the termination of a license to a third party

beginning 35 years after the date of grant.29 17 U.S.C. sec. 203(a)(3) (2002); see

also TD Bank N.A. v. Hill, 928 F.3d 259, 273 (3d Cir. 2019).

Performer

Jackson was even more famous as a performer than he was as a composer.

its most basic sense, it’s the person (or group) who performs a composition that is

recorded on a tangible medium. Think of Jackson performing “Thriller”. The

tangible medium for a performer is the “master recording”--“the actual recorded

performance of a particular musical composition.” Allen Bargfrede, Music Law in

We note that this “recapturing” of a composition affects only domestic

royalties, not any international royalties.

-90[*90] the Digital Age 15 (2d ed. 2017). The recording artist gets rights in this

master recording.

A real-world example--albeit one with tweaked facts to make it simple-might help clarify who gets what rights. In 1973 Bob Dylan recorded a song that

fans called “Rock Me, Mama”--a “song” that really was just a chorus made up of

lyrics he wrote and a tune he created. Shortly after, Ketch Secor, a member of Old

Crow Medicine Show, used the chorus created by Dylan and wrote the verses for a

song that eventually became “Wagon Wheel.” About forty years later, Darius

Rucker released his own performance of that song. Darius Rucker was performing

Bob Dylan’s and Ketch Secor’s composition. So what rights does everyone have?

Bob Dylan gets composition rights for both versions of “Wagon Wheel,” as

his composition--the lyrics and music--are the ones being performed. Ketch Secor

also gets composition rights to both versions of the song “Wagon Wheel,” as he

wrote verses to the song. Old Crow Medicine Show--as recording artist--gets

performance rights in its master recording of “Wagon Wheel.” Darius Rucker--as

a recording artist--gets performance rights in his master recording of “Wagon

Wheel.”

Performers, like composers, can use their copyrights to produce different

types of income. The first and obvious source of revenue is concert tickets from

-91[*91] live performances. A superstar artist can be paid a guaranteed amount or a

percentage of ticket sales. His additional rights, however, are quite similar to a

composer’s. Performers can get mechanical royalties--a piece of the sale from

every record, CD, or digital download. They can also get synch fees if their

performance ends up in a commercial or soundtrack.

But one major difference is that a performer has no rights to royalties for

public performance. See, e.g., Bonneville Int’l Corp. v. Peters, 347 F.3d 485, 487

(3d Cir. 2003). This means that a performer is not paid when his song is played on

the radio. See 17 U.S.C. sec. 114(d)(1)(B)(iii); Bonneville, 347 F.3d at 487;

Bargfrede, supra, at 19. An exception to this rule is the public performance for

sound recordings in digital transmission. Digital Performance Right in Sound

Recordings Act of 1995, Pub. L. No. 104-39, sec. 3, 109 Stat. at 336-44; see also

Bonneville, 347 F.3d at 488-89; Bargfrede, supra, at 21. This allows a performer

to collect royalties for his work if it is played through digital means such as

satellite radio or a streaming service. See Digital Performance Right in Sound

Recordings Act of 1995, sec. 3; Bonneville, 347 F.3d at 488-89; Bargfrede, supra,

at 21.

-92[*92] C.

Right of Publicity

The third right in music IP, and one that is very important in this case, is the

right of publicity (ROP). It’s a right that’s not peculiar to musicians, but to

celebrities generally. ROP is the right to control the commercial use of one’s

identity. 1 J. Thomas McCarthy & Roger E. Schechter, The Rights of Publicity

and Privacy, sec. 1:3 (2d ed. 2020). It is a creation of state law.30 C.B.C. Distrib.

& Mktg., Inc. v. Major League Baseball Advanced Media, L.P., 505 F.3d 818, 822

(8th Cir. 2007) (citing Zacchini v. Scripps-Howard Broad. Co., 433 U.S. 562, 566

(1977)); McCarthy & Schechter, supra, sec. 1:3. ROP generally consists of two

separate components: ROP and associated trademarks. One’s ROP is a distinct

legal category, “not just a ‘kind of’ trademark, copyright, false advertising or right

of privacy.” McCarthy & Schechter, supra, sec 1:3. ROP protects someone’s

name, likeness, voice, signature, or photograph. The other component--associated

trademarks--are trademarks with respect to the ROP.

ROP originated in a right sometimes recognized at common law as the right

of privacy. But the right of privacy was specifically a “right to be left alone.”

Id. sec. 1:25. Some celebrities don’t want to be left alone, but do want to have a

There has been a recent push for a federal right of publicity for student

athletes. See H.R. 1804, 116th Cong. (2019).

-93[*93] say in how their image is used and who uses it. When celebrities began to

bring these kinds of cases under privacy statutes or the common law, courts

struggled with the “right of privacy” label. Id. sec. 1:7. These celebrities didn’t

really want privacy in the traditional sense of being left alone, and many of these

cases were therefore dismissed. Id. But if this was just a problem of

nomenclature, it went away in Judge Jerome Frank’s Haelan Labs., Inc. v. Topps

Chewing Gum, Inc., 202 F.2d 866 (2d Cir. 1953), where he coined the phrase

“right of publicity.” Id. at 868; see also McCarthy & Schechter, supra, sec. 1:26.

This is the label that has stuck.

Because Jackson was domiciled in California at the time of his death, his

legal interest and rights in property are determined under California law.31 See

There’s a scuffle between the parties here about what state we should look

to. The Commissioner suggests that we look to several states--indeed every state

in which Jackson’s image and likeness could be exploited. We disagree. Almost

every court looks to the decedent’s domicile at the time of death to determine

whether he has any posthumous ROP, and what its contours are. See, e.g., Cairns

v. Franklin Mint Co., 292 F.3d 1139, 1146-47 (9th Cir. 2002) (Princess Diana

domiciled in Great Britain); Rogers v. Grimaldi, 875 F.2d 994, 1002 (2d Cir.

1989) (Ginger Rogers domiciled in Oregon); Acme Circus Operating Co. v.

Kuperstock, 711 F.2d 1538, 1543 (11th Cir. 1983) (Clyde Beatty domiciled in

California); Groucho Marx Prods., Inc. v. Day & Night Co., 689 F.2d 317, 320 (2d

Cir. 1982) (Marx Brothers all domiciled in California); Factors Etc., Inc. v. Pro

Arts, Inc., 652 F.2d 278, 281 (2d Cir. 1981) (Elvis Presley domiciled in

Tennessee); Shaw Family Archives, Ltd. v. CMG Worldwide, Inc., 434 F. Supp.

2d 203, 211 (S.D.N.Y. 2006) (Shaw Family Archives domiciled in New York);

(continued...)

-94[*94] Morgan v. Commissioner, 309 U.S. 78, 79-80 (1940) (law of decedent’s

domicile creates legal interests and rights for estate tax); Milton H. Greene

Archives, Inc. v. Marilyn Monroe LLC, 692 F.3d 983, 986 (9th Cir. 2012)

(decedent’s domicile defines ROP); Cairns v. Franklin Mint Co., 292 F.3d 1139,

1149 (9th Cir. 2002) (same). By 1972, California began to codify the ROP.

McCarthy & Schechter, supra, sec. 1:4. In 1979, California supplemented this

statutory right with a common-law ROP in the landmark case Lugosi v. Universal

Pictures, 603 P.2d 425, 428 n.6 (Cal. 1979).32 The case was brought by the

surviving spouse and the son of Bela Lugosi, the original American Dracula. See

id. at 427. The court recognized a common-law ROP; but then held that it did not

survive death. Id. at 428-30. The California legislature stepped in and created a

(...continued)

Prima v. Darden Rests., Inc., 78 F. Supp. 2d 337, 348 (D.N.J. 2000) (Louis Prima

resident of Nevada); Joplin Enters. v. Allen, 795 F. Supp. 349, 350 (W.D. Wash.

1992) (Janis Joplin domiciled in California); Se. Bank, N.A. v. Lawrence, 489

N.E.2d 744, 745 (N.Y. 1985) (Tennessee Williams domiciled in Florida); 2 J.

Thomas McCarthy & Roger E. Schechter, The Rights of Publicity and Privacy sec.

11:15 (2d ed. 2020).

Some believe that the origins of a common-law right began in 1931 in

Melvin v. Reid, 297 P. 91, 93-94 (Cal. Dist. Ct. App. 1931). See Gionfriddo v.

Major League Baseball, 114 Cal. Rptr. 2d 307, 312 (Ct. App. 2001).

-95[*95] statutory ROP that was descendible to heirs and assignees.33 Comedy III

Prods., Inc. v. Gary Saderup, Inc., 21 P.3d 797, 799-800 (Cal. 2001). It is now

codified in California Civil Code section 3344.1.34 Since the common-law right

still doesn’t survive death, see Comedy III Prods., 21 P.3d at 799; 6A Romualdo P.

Eclavea et al., California Jurisprudence 3d, Assault and Other Willful Torts, sec.

165 (West 2021), it has little effect on this case.

The dispute between the Estate and the Commissioner about the value of

Jackson’s ROP is in part a dispute about the value of the Estate’s rights under this

California statute. We need to give it a closer look: Section 3344.1(a)(1) of the

California Civil Code states that

[a]ny person who uses a deceased personality’s name, voice,

signature, photograph, or likeness, in any manner, on or in products,

merchandise, or goods, or for purposes of advertising or selling, or

soliciting purchases of, products, merchandise, goods, or services,

without prior consent from the person or persons [who have been

given the right of consent], shall be liable for any damages sustained

by the person or persons injured as a result thereof.

The statutory right complements, and does not supplant, the common-law

right. See Miller v. Collectors Universe, Inc., 72 Cal. Rptr. 3d 194, 204-05 (Ct.

App. 2008); 6A Romualdo P. Eclavea et al., California Jurisprudence 3d, Assault

and Other Willful Torts, sec. 164 (West 2021). Both the common law-right and

the statutory right are still around today. See Eclavea et al., supra, secs. 162-65.

The original code section was 990. See Cal. Civ. Code sec. 990; Comedy

III Prods., Inc. v. Gary Saderup, Inc., 21 P.3d 797, 799-800 (Cal. 2001) (stating

that the right of publicity that was descendible was codified at 990).

-96[*96] The boundaries of what is protected are at times fuzzy, and the situation is

complicated by the survival of California’s evolving common-law ROP. Caselaw

helps. We’ll begin with what “likeness” means. In Midler v. Ford Motor Co., 849

F.2d 460, 463 (9th Cir. 1988), the Court held “likeness” means only visual images

under the statute. This might seem clear, but then someone came up with the idea

of a robot version of Vanna White, the celebrity tile turner. The Ninth Circuit held

in White v. Samsung Elecs. Am., Inc., 971 F.2d 1395, 1397 (9th Cir. 1992), that a

robot that resembled White was not her “likeness” under the statute but left open

the possibility that a sufficiently detailed manikin might be. On the other hand, in

Int-Elect Eng’g, Inc. v. Clinton Harley Corp., No. C-92-20718 JW, 1993 WL

557639, at *4 (N.D. Cal. June 24, 1993), the court held that “likeness” can mean

any unique and readily identifiable artistic creation.

“Voice” under the statute only covers the use of the claimant’s actual voice.

See White, 971 F.2d at 1397; Midler, 849 F.2d at 463. “Photograph” is better

defined. California Civil Code section 3344.1(i) states that a photograph is any

still or moving film where a person is readily identifiable. That same subsection

defines “readily identifiable” as whether someone viewing the photograph with the

naked eye “can reasonably determine who the person depicted in the photograph

is.” Id.

-97[*97] While it is important to clarify what is protected, it is just as important--and

maybe more important to this case--to point out what is not protected. “[A] play,

book, magazine, newspaper, musical composition, audiovisual work, radio or

television program, single and original work of art, work of political or

newsworthy value, or an advertisement or commercial announcements for any of

these works” is not protected under section 3344.1(a)(1). Id. sec. 3344.1(a)(2); see

also Comedy III Prods., Inc., 21 P.3d at 800. By its plain language, musical

compositions--of particular interest here--are not protected. See Cal. Civ. Code

sec. 3344.1(a)(2). And Laws v. Sony Music Entm’t, Inc., 448 F.3d 1134, 1139-43

(9th Cir. 2006), established that master recordings are not protected because they

are governed by the federal Copyright Act.

As Laws suggests, there is friction when this state-created right rubs up

against federal law. A person’s name, for example, can be trademarked. Though a

name is also protected under ROP, these two rights are not identical. McCarthy &

Schechter, supra, sec. 6:141. And federal law can preempt state law. Laws, 448

F.3d at 1141. In short, federal law--though at times it may overlap with ROP--is a

distinct source of separate rights. The fuzziness about the boundaries of

California’s ROP is an important part of the disagreement between the parties that

we will analyze at some length below. See infra pp. 133-48.

-98[*98] One last matter of housekeeping is needed here. Throughout the trial, the

parties and their experts referred to this intangible asset primarily as “image and

likeness,” but also as “name and likeness,” and ROP. All the parties do seem to be

valuing the same thing--Jackson’s ROP rights under the California statute that we

just limned. We will somewhat arbitrarily choose to call this asset “image and

likeness” for the remainder of the opinion--following the lead of the parties and

their experts.

We can now turn to the core of this opinion--the valuation of the three

assets at issue.

VI.

Image and Likeness

The Code

The first asset that we’ll analyze is Jackson’s image and likeness as defined

under California Civil Code section 3344.1. And the first question we have to ask

about this asset is whether it should be included in his gross estate at all. That

might seem trivial here in a case where both parties spent a goodly sum on expert

witnesses to appraise just how valuable a right it is. But it is a nontrivial question

--remember that this right’s origin is in a common-law right of privacy. McCarthy

& Schechter, supra, sec. 1:4. One might ponder that if image and likeness is

included in a person’s gross estate, would it not practically require those heirs to

-99[*99] exploit the image and likeness of the dead--whether or not that was the

decedent’s wish. Might this--again as a practical matter--compel the invasion of

privacy? This is something of a novel issue for us as we haven’t had a case

directly addressing the taxability of the image and likeness. (And we have found

only one case on point anywhere else, Estate of Andrews v. United States, 850 F.

Supp. 1279 (E.D. Va. 1994).)

But we don’t need to look to caselaw to answer this question. The plain

language of the Code is enough. Section 2051 defines the taxable value of an

estate as the value of the gross estate less deductions. The value of the gross

estate includes “the value at the time of * * * death of all property, real or

personal, tangible or intangible, wherever situated.” Sec. 2031(a). Since

Jackson’s image and likeness is an intangible right that transfers after death, see

Cal. Civ. Code sec. 3344.1; Comedy III Prods., Inc., 21 P.3d at 800, it must be

included in his gross estate.

The default rule is that the value of a right is its fair market value. Sec.

20.2031-1(b), Estate Tax Regs.; Elkins v. Commissioner, 140 T.C. 86, 114-15

(2013), aff’d in part, rev’d in part, 767 F.3d 443 (5th Cir. 2014). The fair market

value is generally its value in its highest and best use on the valuation date. See

Estate of Kahn v. Commissioner, 125 T.C. 227, 240 (2005); Estate of Mitchell v.

-100[*100] Commissioner, 101 T.C.M. (CCH) 1435, 1438-39 (2011). The Code

provides some exceptions. See, e.g., sec. 2032A (exception for family farms); Van

Alen v. Commissioner, 106 T.C.M. (CCH) 427, 430 (2013). But it makes these

exceptions explicit. And here, there are none that apply. We must include the

value of Jackson’s image and likeness at its highest and best use.35

Summary of the Parties’ Positions

The Estate

On the Return

The novelty of valuing image and likeness led to a very large difference of

opinion between the parties. The Estate reported Jackson’s image and likeness on

its return as worth only $2,105. This might seem absurd when one recalls

Jackson’s fame, but the Estate’s position was based on an appraisal from Moss

At least one celebrity who did not wish his image to be exploited after his

death and did not want his heirs to be taxed on its value is reported to have

donated his right to exploit his image and likeness to charity. See Hannah

Ellis-Petersen, “Robin Williams Went Above and Beyond to Stop His Image

Being Used”, The Guardian (Mar. 31, 2015) (describing how Robin Williams

allegedly barred his image and likeness from being used for 25 years and donated

the remaining interest to a charitable foundation), https://www.theguardian.com/

film/2015/mar/31/robin-williams-restricted-use-image-despite-existing-us-laws#:~

:text=Robin%20Williams%20went%20above%20and%20beyond%20to%20stop

%20his%20image%20being%20used,-This%20article%20is&text=New%20docu

ments%20from%20the%20estate,25%20years%20after%20his%20death (last

visited Mar. 12, 2021).

-101[*101] Adams, a large and reputable accounting firm. And Moss Adams did focus

entirely on the value of the Estate’s opportunity to license merchandise with

Jackson’s image and likeness. It consciously abstained from valuing the cashflow

from Jackson’s copyrights in his music, as both a performer and a composer.

This appraisal was based on royalty statements, contracts, financial

statements, and business plans. What Moss Adams discovered was that in the

years before Jackson died and when he was in dire need of income, he had earned

close to nothing from his image and likeness. This cannot be a surprise-allegations that a celebrity molested little boys might reasonably be thought to

repel potential licensees in any society that has not become completely decadent.

Those allegations had a dramatic effect on Jackson’s ability to win sponsorships

and merchandising deals once they became public. The fact that he earned not a

penny from his image and likeness in 2006, 2007, or 2008 shows the effect those

allegations had, and continued to have, until his death.

Moss Adams did not rely only on this historical financial data. It also

looked at Jackson’s scores on the Davie-Brown index--a quantitative measure of a

celebrity’s reputation derived from public surveys. Jackson’s Davie-Brown scores

showed just what one might expect--that he was one of the most recognized

celebrities in the world but one who ranked among the lowest in trustworthiness as

-102[*102] well as other important characteristics that corporations consider when

looking to use someone’s image and likeness to promote their products. Taking

all this information into account, Moss Adams--using a DCF analysis--determined

the value of Jackson’s image and likeness was $2,105.

With this valuation in hand, Moss Adams went to the Estate. The Estate

was surprised. Moss Adams was, after all, valuing the image and likeness of one

of the best known celebrities in the world--the King of Pop--at the price of a

heavily used 20-year-old Honda Civic.36 Moss Adams nevertheless gave this

valuation to the Estate to rely on for the estate-tax return.

When asked if he stood by his opinion at trial--over seven years after the

report--Dahl (a former principal of Moss Adams) responded that he “absolutely

does.” He emphasized that though Jackson’s image and likeness may have

increased in value after he died, all information available at the time of his death

showed that there was “a deeply flawed person with serious significant issues

when it came to the issue of licensing image and likeness in a non-music setting.”

In the end, the Estate deemed this valuation credible and relied on it while

filling out its return.

See 1999 Honda Civic CX Prices and Values, NADA Guides,

https://www.nadaguides.com/Cars/1999/Honda/Civic-CX/3-Door-Hatchback/

Values (last visited Nov. 24, 2020).

-103[*103]

ii.

At Trial

The value of a person’s image and likeness may not depend entirely on his

reputation for the few years before his death. It is a right that his heirs will have

for decades to come, and there is some nonzero chance that Antony was speaking

antiphrastically when he said “the evil that men do lives after them; the good is oft

interred with their bones.” William Shakespeare, The Tragedy of Julius Caesar act

3, sc. 2, ll. 83-84 (Alvin Kernan ed., Yale Univ. Press rev. ed. 1959). The Estate

seems to have thought so--in the course of preparing for trial the Estate brought in

two more experts to value Jackson’s image and likeness. The main expert was Jay

Fishman--managing director of Financial Research Associates. Fishman valued

Jackson’s image and likeness at just over $3 million.

Fishman began by estimating the revenue that Jackson’s image and likeness

would generate over its legal life of 70 years. Fishman credibly testified that his

starting point in valuing an asset like this is usually management projections of

revenue, but that Jackson’s management had no such projections.

Without those, Fishman had to rely instead on historical data. His problem,

as we’ve already found, was that Jackson had no material earnings from his image

and likeness for several years before his death. This caused Fishman to be hesitant

in relying solely on recent historical data because it led to a nominal value.

-104[*104] He instead sought help from Mark Roesler--chairman and CEO of

Celebrity Valuations, LLC & CMG Worldwide, Inc. Roesler’s expert report

provided image-and-likeness revenue projections for 10 years following Jackson’s

death, as well as other background information.

Roesler considered three main factors in determining a 10-year projection of

revenue:

predeath revenue,

postdeath rights, and

growth and decline rates using predeath marketability and a potential

postdeath boom.

Predeath Revenues. Roesler’s projections took into account Jackson’s

image and likeness as well as associated trademarks. These were his rights under

California law, any common-law and federal trademarks Jackson registered before

he died, and common-law trademarks that survived his death. These trademarks

included 35 foreign trademark registrations of his name and 7 of his signature and

2 U.S. federally registered marks: “MICHAEL JACKSON” and a design that

depicts his famous ability to dance on his toes.

But first Roesler had to figure out whether there would be a source of future

income. A celebrity is generally able to exploit his popularity in two ways:

-105[*105] personal service and the licensing of his image and likeness. Personalservice income--such as Jackson’s agreements to appear in Pepsi commercials-ends with death. Roesler therefore was left to appraise only whatever image-andlikeness revenue the Estate could anticipate.

He couldn’t rely only on Jackson’s historical image-and-likeness revenue.

Deals to exploit a living celebrity’s image and likeness are very often hitched to

promises to perform personal services. Roesler came up with ten factors to divide

revenue from a deal attributable to personal service from revenue attributable to

image and likeness. His factors are:

the licensee’s history,

the budget for prospective use,

type/nature of use,

role of celebrity in the campaign,

geographical scope (thereby population exposure),

type of media used,

length of campaign,

exclusivity,

other intellectual-property rights held by third parties or entities, and

synergy with the company/product.

-106[*106] Roesler focused on the use of Jackson’s image-and-likeness rights to

promote a specific product, entity, brand, or tour. He didn’t consider any one-off

film, TV, or personal appearances or performances; magazine shoots or

interviews; autobiography authorships; residuals; or live concert performances that

lacked an associated merchandising deal. He discovered that nearly all Jackson’s

agreements for use of his image and likeness during his life were inextricably

entwined with personal services, most of them with a very significant amount of

personal service required.

Roesler looked through 30 years of data to compute Jackson’s historical

image-and-likeness revenue.37 Over the course of those 30 years, Jackson

produced average annual image-and-likeness revenue of more than $2.7

million--but a significant portion of this was connected in some way to his concert

tours. Roesler decided to calculate a weighted average--with more weight on

deals that Jackson struck later in his career.38 His weighted average annual

revenue came to about $1.6 million. He then looked at other celebrities’

Roesler started by looking at only the last 10 years, which he believed was

typical. But because Jackson had made so little money in this time, Roesler

decided to expand his dataset to 30 years.

He gave August 10, 1979 - December 31, 1983 a 10% weight; January 1,

1984 - August 24, 1993 a 20% weight; August 25, 1993 - November 18, 2003 a

30% weight; and November 19, 2003 - June 25, 2009 a 40% weight.

-107[*107] comparable postdeath data to supplement what he’d found. He chose

Marilyn Monroe, James Dean, Bettie Page, Jackie Robinson, Princess Diana, and

Elvis Presley as comparable celebrities. These celebrities’ adjusted image-andlikeness revenue ranged from $52,000 (Princess Diana) to $3.1 million (Marilyn

Monroe). This placed his estimate of Jackson’s earnings in the middle of the

range. He did not believe Jackson could realistically command anything more due

to his poor personal reputation.

Postdeath Image-and-Likeness Rights. Roesler was also careful to exclude

Jackson’s musical works from his analysis of the value of Jackson’s

image-and-likeness rights--although he assumed that there would be full

cooperation from the various music rights holders for licenses at reasonable rates

so that all music rights on the date of Jackson’s death would be available for

licensing.

Growth and Decline Rates. Roesler next estimated how this revenue stream

would surge and ebb as time passed. He began with Jackson’s marketability over

the same 30-year period that he analyzed for image-and-likeness revenue. He

looked at five “marketability factors:”

reputation/appeal,

Q scores,

-108[*108]!

other intellectual-property rights holders/market limitations,

past comparable deals and agreements, and

synergy with a company’s product.

Of these five factors, Roesler believed the first factor--a celebrity’s

reputation and general appeal--was the most important. Revenue is greatest when

a celebrity is associated with positive qualities or has a good reputation. Bad

conduct doesn’t disable a celebrity from exploiting his image and likeness, but it

does mean some money will have to be spent rehabilitating it. Roesler listed more

factors that he looked at to see whether rehabilitation would even be possible:

nature of the bad conduct,

extent of public media exposure to the bad conduct,

the celebrity’s prescandal image and reputation,

the celebrity’s behavior after a scandal surfaces, especially acts of

atonement,

the outcome of the scandal over time, and

whether the celebrity had died.

Though we won’t go into detail for each factor, a few are worth mentioning.

While there is a range of bad conduct, Roesler concluded--and we specifically find

him entirely reasonable on this point--that conduct exhibiting alleged moral

-109[*109] turpitude can have long-term effects and may well lead to public rejection.

Rehabilitation will largely depend on whether the bad conduct shocks the public’s

moral conscience. He reasoned that heavier media exposure of bad conduct makes

it harder to rehabilitate an image and that how a scandal was resolved makes a

difference as well. Appearing on a late-night talk show to be asked “What the hell

were you thinking?” and answering “I did a bad thing” may work for a low-grade

one-time offense. Time and the public’s apparent willingness to forgive and

forget may soothe a scandal’s effect. Even death may help by making the public

more willing to forgive--or at least shift its focus to a celebrity’s positives. And

Roesler thought that the public never speaks unanimously--there will almost

always be people who recognize a celebrity for his professional talent and skill,

despite squalid personal behavior.

A witness as numerate as Roesler wanted data, and he found it in the form

of Q scores--the second factor. Q scores serve as the industry standard for

measuring the consumer appeal of personalities and licensed properties--or, more

simply put, how likely the celebrity can be a corporate spokesman. A positive Q

score is the ratio of the number of people surveyed who chose the individual as

“one of their favorites” to the number who state they are familiar with the

individual. A negative Q score is the ratio of the number of people who rate an

-110[*110] individual as “fair/poor” to the number of people familiar with the

individual.

The third factor--other intellectual-property rights holders/market

limitations--looks at whether third parties have a proprietary interest in such rights

that may affect the celebrity’s ability to engage in endorsement campaigns. For

example, Billie Holiday’s music rights are controlled separately from her

image-and-likeness rights. The ability to market a celebrity like Holiday is thus

more contingent on the licensee’s securing the necessary clearance to her music.

These kinds of transaction costs can impair the value of image-and-likeness rights.

Roesler’s fourth factor--past comparable deals--simply looks at past offers

or solicitations for the celebrity to engage in an advertising or marketing

campaign. A celebrity who indiscriminately pitches himself to companies is

generally a celebrity for whose image and likeness there is little demand.

The fifth and final factor (not including the six “rehab” factors) looks at

synergy with a company or product. This factor looks at the overlap between the

celebrity and the audience to which he appeals. For example, Jim Kelly’s image

and likeness would have benefits to marketing Charlie the Butcher’s beef on weck

to Buffalo Bills fans, but might not be nearly as valuable in plugging Dunkin’

Donuts to Patriots fans in Boston.

-111[*111] With all of these factors in mind Roesler went to work to determine

Jackson’s posthumous marketability. This meant he had to balance Jackson’s

undoubted gifts as an entertainer against the stigma he bore as an accused child

molester. Roesler concluded that the effect of the abuse allegations outweighed

reputational rehabilitation during Jackson’s life. Sensationalist media coverage

heightened and prolonged this damage to his marketability. And this stigma is

reflected in his lack of endorsements or merchandise agreements unrelated to a

musical tour or album from 1993 until his death.

Looking at Jackson’s Q score adds some social-science weight to this

obvious conclusion. Before 1993 Jackson was at least as popular as other

performers in similar categories. By 1995 his positive Q scores started to decline.

And after 2000, Jackson had an overall lack of likeability that continued through

2006. There was not even a recorded Q score for Jackson from 2007 and 2008-which is itself a bit of contemporaneous proof that Jackson’s image was so bad

that companies felt it unnecessary or undesirable even to ask that it be studied.

Image-and-likeness rights of a musical celebrity are very closely tied to the

ability to license his music. Jackson’s compositions and master recordings are

protected under federal copyright law. A marketer who wanted to combine

Jackson’s image and likeness with his music would presumably have to pay more

-112[*112] if songs associated with Jackson, such as “Thriller”, were owned even in

part by others.

Roesler viewed Jackson’s inability to consummate marketing deals as

evidence of his weak marketability after the scandals. In the 1980s Jackson

regularly received third-party inquiries for licensing. But after 1993 they

dwindled and then virtually disappeared even as Jackson remained a popular

musical artist. Though the HIStory World Tour was a success, Sony couldn’t

recoup a $6 million refundable payment that it made to Jackson for merchandise

royalties. And even more recently, the This Is It tour--despite an almost instant

sale of 360,000 tickets--did not enable the tour promoter to make a merchandise

agreement before Jackson died.

Roesler nevertheless considered the possibility of a foreseeable postdeath

boom. This is a well-known phenomenon in the industry; the death of even a

faded celebrity can generate extraordinary media attention and a corresponding

spike in revenue for his products. Such spikes are routine but temporary, and we

agree with the witnesses who said they would fade away after three to five years.

Roesler thought Jackson’s potential postdeath boom would last five years.

When calculating this amount, Roesler could not ignore Jackson’s inability to

rehabilitate his image. Jackson’s image was so bad that despite many sold-out

-113[*113] shows from the This Is It tour, Jackson generated only $24 worth of imageand-likeness revenue during the last six months of his life. Roesler concluded that

Jackson’s image-and-likeness rights in the first year after his death should not be

more than $2.5 million.

Roesler used this $2.5 million base to estimate the growth and decline of

Jackson’s postdeath image-and-likeness revenues. Roesler did not believe that

consistent growth over five years was reasonable, but did conclude that some

growth would occur in years 2 and 3 after death--with the highest revenue

occurring in year 3--and then begin to decrease. Roesler estimated that Jackson’s

projected image-and-likeness rights revenue in the 10 years following his death

would total $22.25 million, an amount far in excess of the image-and-likeness

rights revenue Jackson generated in the decade before he died. The following

table summarizes Roesler’s 10-year revenue projection:

-114[*114]

Year after death

Estimated projection

Year 1

$2,500,000

Year 2

2,750,000

Year 3

3,000,000

Year 4

2,750,000

Year 5

2,500,000

Year 6

2,250,000

Year 7

2,000,000

Year 8

1,750,000

Year 9

1,500,000

Year 10

1,250,000

Expenses. Image and likeness is no exception to the rule that “you gotta

spend money to make money.” Once Fishman, with Roesler’s help, had a 10-year

projection of revenue, he could estimate expenses and derive a final value. These

expenses were for commissions and costs such as accounting, legal, and other

common business-administration fees. Fishman estimated that due to an unusually

high number of poachers of Jackson’s image and likeness, there would likely be

additional legal expenses.

Fishman estimated these expenses as follows:

Commissions: 35% of revenue based on Roesler, discussions with

others, and his expertise.

-115Public relations: $20,000 monthly ($240,000 annually) to rehabilitate

Jackson’s image.

[*115]!

Business-administration expenses: 5% of revenue which would

include accounting, management, general/routine legal, and other

general overhead.

Infringement-related legal fees: 20% of revenue which would include

legal fees for the protection of the legal rights associated with

Jackson’s image-and-likeness rights, as well as his ongoing cost to

combat infringements of those rights.

This led to total estimated expenses over the next 10 years of $15.75 million. The

following chart summarizes both revenue and expenses:

Year

Revenue

Expenses

Projected pretax

income

$2,500,000

$1,740,000

$760,000

2,750,000

1,890,000

860,000

3,000,000

2,040,000

960,000

2,750,000

1,890,000

860,000

2,500,000

1,740,000

760,000

2,250,000

1,590,000

660,000

2,000,000

1,440,000

560,000

1,750,000

1,290,000

460,000

1,500,000

1,140,000

360,000

1,250,000

990,000

260,000

-116[*116] He projected the resulting pretax profit for Jackson’s image-and-likeness

rights at $6.5 million.

Tax Affecting. The next step in Fishman’s analysis was to tax affect this

income stream. Fishman believed that the buyer would be a C corporation because

C corporations have bought other celebrity image-and-likeness rights, and C

corporations would have the capital for all the expenses associated with exploiting

Jackson’s image-and-likeness rights. Fishman used a 35% tax rate in his analysis.

The following table shows after-tax income:

Year

Pretax income

Tax rate

Postax income

$760,000

35%

$494,000

860,000

35%

559,000

960,000

35%

624,000

860,000

35%

559,000

760,000

35%

494,000

660,000

35%

429,000

560,000

35%

364,000

460,000

35%

299,000

360,000

35%

234,000

260,000

35%

169,000

Present Value. Fishman then discounted these projections to present value

using the WACC. First, Fishman determined his cost of debt. After reviewing

-117[*117] market interest rates for public companies, Fishman used 7.5%. Taking

into account a 35% tax rate, the cost of debt was 4.88%.

Fishman next needed to determine the cost of equity. Unlike the other

experts, Fishman used two methods to calculate the cost of equity: the build-up

method and the capital-asset pricing model (which we described supra p. 68). The

build-up method calculates the cost of equity as the sum of the risk-free rate of

return, the equity-risk premium on small publicly traded common stocks, and the

specific company-risk premium.

Fishman first determined the cost of equity under the build-up method. He

started with a risk-free rate of 4% based on U.S. Government bond rates for 10,

20, and 30 years. He then added the equity-risk premium on small publicly traded

stocks and specific company-risk premium. The studies he used showed tha

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