# UNITED STATES TAX COURT > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A781eac6d58f51e7b ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 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 I. Early Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Served 05/03/21 -2[*2] II. The Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A. Off the Wall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 B. Thriller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 C. Victory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 D. Bad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 E. Dangerous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 III. The Fall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 IV. The Collapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 A. The Bashir Documentary and Criminal Case . . . . . . . . . . . . 22 B. Financial Peril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 C. Jackson Leaves Neverland . . . . . . . . . . . . . . . . . . . . . . . . . . 25 V. The Unconsummated Comeback . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 A. This Is It Tour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 1. The This Is It Tour Is Announced. . . . . . . . . . . . . . . . 32 2. Discussions for a Tour Merchandising Agreement . . 32 B. Jackson Cleans House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 VI. Jackson’s Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 A. The Executors Take Charge . . . . . . . . . . . . . . . . . . . . . . . . . 35 B. The Memorial Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 C. The Motion Picture: Michael Jackson’s This Is It . . . . . . . . 38 D. Cirque du Soleil. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 E. General Merchandising Agreement With Bravado. . . . . . . . 44 F. Miscellaneous Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 46 G. Posthumous Albums and the Hunt for Unreleased Songs . . 46 1. Michael and Xscape . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2. Bad 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 H. 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 X. Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 A. The Estate’s Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 B. The Commissioner’s Expert . . . . . . . . . . . . . . . . . . . . . . . . . 57 1. The Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2. Anson’s Credibility . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 C. Issues Left for Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 I. Estate Tax Valuation Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 II. Expert Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 III. Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 A. Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 B. Discounted Cashflow Method and Its Discount Rate. . . . . . 66 C. Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 IV. Tax Affecting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 A. The Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 B. The Experts’ Positions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 V. Rights in Music Intellectual Property for . . . Tax Lawyers . . . . . . 83 A. Composer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 1. Income Streams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 2. Publishers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 B. Performer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 C. Right of Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 VI. Image and Likeness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 A. The Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 B. Summary of the Parties’ Positions . . . . . . . . . . . . . . . . . . . 100 1. The Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 i. On the Return . . . . . . . . . . . . . . . . . . . . . . . . . 100 ii. At Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 -42. [*4] C. The Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . 120 i. Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . 121 ii. Revenue Projections . . . . . . . . . . . . . . . . . . . . 122 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 1. Commissioner’s Expert . . . . . . . . . . . . . . . . . . . . . . . 133 i. Wrong Assets . . . . . . . . . . . . . . . . . . . . . . . . . 133 ii. Unforeseeable Assets . . . . . . . . . . . . . . . . . . . 137 iii. Faulty Calculations . . . . . . . . . . . . . . . . . . . . . 142 2. The Estate’s Expert . . . . . . . . . . . . . . . . . . . . . . . . . . 145 3. Our Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 VII. New Horizon Trust II and Sony/ATV . . . . . . . . . . . . . . . . . . . . . . 150 A. The Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 B. The Experts’ Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 1. The Commissioner . . . . . . . . . . . . . . . . . . . . . . . . . . 151 i. Market Approach . . . . . . . . . . . . . . . . . . . . . . 151 ii. Income Approach . . . . . . . . . . . . . . . . . . . . . . 156 iii. Discounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 iv. Value of NHT II . . . . . . . . . . . . . . . . . . . . . . . 163 2. The Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 i. Income Approach . . . . . . . . . . . . . . . . . . . . . . 163 ii. Market Approach . . . . . . . . . . . . . . . . . . . . . . 171 iii. Sony/ATV Value . . . . . . . . . . . . . . . . . . . . . . 175 iv. Jackson’s Interest . . . . . . . . . . . . . . . . . . . . . . 176 v. NHT II’s Value . . . . . . . . . . . . . . . . . . . . . . . . 180 C. Our Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 1. Market Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 2. Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 i. Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . 182 ii. Revenue Projections . . . . . . . . . . . . . . . . . . . . 185 iii. Sony/ATV Value . . . . . . . . . . . . . . . . . . . . . . 192 iv. Jackson’s Interest . . . . . . . . . . . . . . . . . . . . . . 193 v. NHT II’s Value . . . . . . . . . . . . . . . . . . . . . . . . 195 VIII. New Horizon Trust III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 A. The Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 B. Mijac’s Value and Writer’s Performance Royalties . . . . . . 199 -51. 2. [*5] D. Unreleased Songs . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Starting Point. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 i. The Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 ii. Mechanical Revenue. . . . . . . . . . . . . . . . . . . . 209 iii. Performance Revenue . . . . . . . . . . . . . . . . . . . 218 iv. Synch Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 3. The Spike/Projected Growth. . . . . . . . . . . . . . . . . . . 227 i. Anson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 ii. Dahl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 iii. Our Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . 235 NHT III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 IX. Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 X. 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 1 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 I. 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. A. 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. B. 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 2 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 3 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. C. 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 4 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[.]”). 5 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. D. 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. E. 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 6 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 7 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 8 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: ! 9 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. C. 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 10 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 11 “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. V. 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 12 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. A. 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] 1. 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. 2. 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. B. 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. A. 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. 13 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.” 14 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.” D. 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 15 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. E. 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. G. 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. 1. 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. 2. 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. H. 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 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 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). 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. 18 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 1. 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 copyright valuations. For more than 25 years, he has valued intangible assets 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] 2. 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. C. 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] I. 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 19 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 A. 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. B. 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 20 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. 21 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). 22 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. C. 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 A. 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 23 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. 24 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 25 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 26 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. B. 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. V. 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. A. 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 27 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 27 (...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 Office, Overview, https://www.copyright.gov/about/ (last visited Mar. 12, 2021). 28 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. 2. 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 t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A781eac6d58f51e7b. Public record. Not legal advice.