This just in. In the long-running litigation between the estate of the late megastar Michael Jackson and the Internal Revenue Service, the U.S. Tax Court finally issued its opinion on the value of Jackson’s name and likeness, as well as the value of his interest in two music publishing assets. Overall, this much-anticipated decision is a major win for the Jackson estate.

‘Tattered’ image: Michael Jackson died in 2009. The tax dispute was over the fair market value of three contested assets at Jackson’s death. As the court lays out in detail, although Jackson was once an admired popstar and celebrity, at the time of death, his reputation was “tattered” after various allegations of child sexual abuse and a criminal trial of which he was acquitted. “Acquittal did not rehabilitate his reputation,” the court noted. Financially, Jackson was strapped for cash, and various comeback efforts failed. “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,” the court noted. However, once the executors took charge (“rational profit maximizers,” the court calls them), they managed to undertake a major rebranding of Jackson and produce a sizable income for the estate.

After Jackson died, the estate hired Moss Adams to value Jackson’s image and likeness. Based on the income approach, Moss Adams concluded this asset was worth $2,105, which is the amount the estate reported on Form 706. The IRS issued a notice of deficiency in which it claimed the image and likeness were worth over $434.2 million. Considering value gaps related to other assets, the IRS claimed the estate had underpaid estate tax “by a shade more than $500 million.” Because some of the valuations were “so far off,” the IRS added nearly $200 million in penalties.

The estate petitioned for a review by the U.S. Tax Court. The estate retained four experts, including two to value Jackson’s image and likeness. One expert on international licensing and rights projected 10 years of post-death revenues from the exploitation of Jackson’s image and likeness under California law. The valuation expert used the projections as a basis for his income analysis and arrived at a value of just over $3 million. In contrast, as the court noted, the IRS “faced this chorus of experts with a soloist,” an expert in trademark, patent, and copyright valuations who valued all three big assets using different methods. Regarding Jackson’s image and likeness, this expert looked at “opportunities” a hypothetical buyer could reasonably foresee at Jackson’s death and determined a value of $161 million.

The court said the estate’s initial valuation, $2,105, for Jackson’s image and likeness “might seem absurd when one recalls Jackson’s fame,” but it focused entirely on “the value of the Estate’s opportunity to license merchandise with Jackson’s image and likeness.” It did not value the cash flow from Jackson’s copyrights in his music, as a performer and composer. Before his death, Jackson earned close to nothing from his image and likeness, Moss Adams found. Even the estate was surprised that the image of “the King of Pop” was no more than the price of a “heavily used 20-year-old Honda Civic,” the court noted. But the estate used the valuation. The court found unpersuasive the IRS expert’s valuation, noting credibility problems, the failure to value the “asset that he should have,” and calculation errors.

The court said, while it did not agree with it in all respects, the valuation the estate’s trial appraisers offered was “much closer to reality.” The valuation expert gave “proper weight to the effect that the allegations had on Jackson’s ability to market his image-and-likeness rights during his lifetime up until his death.”

Using the estate experts’ 10-year projected revenue stream and adopting their calculated expenses to administer and rehabilitate Jackson’s image, the court arrived at a valuation of just under $4.2 million for this particular asset.

The court’s decision is exceedingly detailed and long and includes an expansive analysis of the rivaling valuation testimony. It requires digesting, and we will report on it some more here and elsewhere in the next weeks.

Hitchner reveals tough questions you may get on BV standards

You should be aware of the standards all of the business valuation organizations have issued, not just your own, cautions Jim Hitchner (Financial Valuation Advisors) in the April issue of Hardball With Hitchner. To illustrate, he presents a line of questioning you may get in a deposition (we’ve paraphrased a little):

Attorney: Do you belong to X? (X can be the AICPA, ASA, NACVA, RICS, or any of the other BV organizations)

Analyst: No.

Attorney: Do you believe X is a reputable organization, particularly on the business valuation side?

Analyst: Yes.

Attorney: X issues business valuation standards, is that correct?

Analyst: Yes.

Attorney: Does your analysis and report conform with the X business valuation standards?

Analyst: I don’t know. I do not have to comply with the X standards since I do not belong to that organization.

Attorney: Here is a copy of the business valuation standards issued by X, the same organization you just said was reputable. I want you to turn to page 4 of your report. I will start asking you whether various parts of your analysis and report comply with the X standards in your hand. The first one is …

See what he means? To avoid being put on the hot seat, be aware of the other BV standards. In the Hardball issue, Hitchner presents many other common questions expert witnesses may be asked and some strong (and weak) answers to those questions. Hardball With Hitchner is a monthly publication. For subscription information, click here.

Extra: For a refresher on all of the BV standards, tune into an upcoming webinar, Review and Update of BV Standards and Guidance—What You Need to Know, with Jim Alerding (Alerding Consulting LLC) on May 11.

Practitioners discover efficiencies in wake
of lockdowns

The unprecedented events of the past year forced professional service firms to adapt the dynamics of operating an office and meeting with clients. The virus has upended normal office operations, but some firms have emerged more efficient.

One example: Duben & Associates (Encino, Calif.) is a firm that offers tax, accounting, and other services, including business valuation and litigation support. The firm’s professionals had some experience with working from home, so, when the pandemic hit, the firm just had to make some administrative adjustments. Client meetings were rearranged via Zoom or conference calls. Some clients still preferred in-person meetings, which the firm was able to accommodate by midyear, with appropriate safety protocols. As the pandemic played out, well over 50% of the firm’s rented office space went unused.

When the time came to sign another five-year commitment for its current space, the firm reviewed the operations of the past months. Here’s what it discovered:

• Clients adapted to Zoom/conference calls, and there was positive feedback; what used to take potentially a couple of hours (including drive time) could now be achieved in an average of 30 minutes;

• The professional staff preferred working part-time or full-time from home; productivity increased as they were able to better focus on client assignments instead of sitting in traffic; and

• Internal best practices improved: Document intake and storage capacity were enhanced, as was client project triage, follow-up, and review.

Result: The firm realized that it has become more efficient on behalf of clients and staff while occupying a smaller physical footprint. Therefore, the firm will relocate to smaller offices nearby.

TAF seeks advisors to help aspiring appraisers

Would you like to serve as an advisor to individuals considering a career in the appraisal profession? The Appraisal Foundation has created a resource for incoming appraisers to make a connection with current appraisers who would like to offer advice and share their experiences. If you would like to serve in this role, please click here to fill out a brief survey.

Strong agenda announced for the ASA
annual conference

The American Society of Appraisers (ASA) has posted the agenda for this year’s International Appraisers Conference to be held October 24-26. This will be a hybrid event featuring a live in-person event at Planet Hollywood in Las Vegas combined with a simultaneous virtual online option for remote attendees. The conference brings together appraisers of all disciplines, and the agenda features the latest trends presented by top thought leaders in the profession. Early-bird pricing is now available. To see the schedule-at-a-glance, click here.

Extra: Valuations in the energy sector will be covered in a separate event, the ASA Houston chapter’s Energy Valuation Conference on May 12. For more information and to register, click here.

Rare chance to hear about cryptocurrency at NYSSCPA event

There are very few certified cryptocurrency experts in the United States, but the New York Society of CPAs has one speaking at its full-day Business Valuation and Litigation Services Conference on May 17. Nicholas Himonidis (The NGH Group Inc.), a Certified Cryptocurrency Forensic Investigators (CCFI), will conduct a session, Cryptocurrency Basics and Investigating Cryptocurrency Transactions Through Data Forensics and Blockchain Analysis. BVWire will definitely attend this session along with others that will feature updates on cyber security, high-tech investigations, and e-discovery; valuation of distressed and bankrupt companies; cannabis company operations and valuations; exit and estate planning; IRS court testimony; SPACs; and practicing with Zoom. Click the link above to check out the full agenda.

Feedback regarding radical proposals on the reporting of intangibles

In February 2019, the Financial Reporting Council (FRC) published a discussion paper titled Business Reporting of Intangibles: Realistic Proposals that contemplates proposals for a radical change to the accounting and reporting for intangible assets. A total of 24 responses were received from a wide variety of stakeholders, and their comments are summarized in a feedback statement FRC staff prepared. Most respondents acknowledged the limitations of the current reporting framework in capturing and clearly disclosing the nature and value of intangibles. But their main concerns over the proposals in the paper revolve around the inherent uncertainty related to the measurement of intangible assets and that any efforts to increase transparency would lead to disclosures that would be highly subjective and beset with a high degree of management judgement.

BV movers . . .

People: The American Bar Association (ABA) Business Law Section’s Women in Mergers and Acquisitions Subcommittee named Jennifer Muller, managing director at Houlihan Lokey and co-head of the firm’s special committee advisory and fairness opinion practices, the recipient of the inaugural Women in M&A Leadership award; she is experienced in business and securities valuations and corporate governance and specializes in fairness, solvency, and other transaction-based opinions.

Firms: New York-based Grassi & Co. has acquired Gramkow Carnevale Seifert & Co. LLC (Oradell, N.J.); the firm has four partners and a staff of 25 who provide a wide range of tax, estate planning, concierge, and valuation services … Cleveland-based CBIZ has acquired the nonattest assets of Berntson Porter & Co. (Bellevue, Wash.), a firm that provides tax, forensic, valuation, and transaction services to clients in a wide range of industries, including construction, real estate, hospitality, manufacturing, service, wholesale distribution, and technology; the firm has approximately 120 employees … Springfield, Mo.-based BKD LLP has acquired Chicago-based Strategic Sourcing Results LLC (SSR), a supply chain consulting firm specializing in the healthcare industry … Miamisburg, Ohio-based Brixey & Meyer Inc. has formed a joint venture with Cincinnati-based risk management consulting firm RiskVersity; the new venture, CyberSure LLC, is a minority-owned advisory firm that assists clients in identifying, quantifying, and mitigating cyber risks.

CPE events

• Review and Update of BV Standards and Guidance—What You Need to Know. May 11, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: R. James Alerding (Alerding Consulting LLC). CPE Credits: 2.0.

New standards and new areas of discussion and guidance concerning business valuation will be discussed as well as an overview of all the standards.

• Houston’s 2021 ASA Energy Valuation Conference: A BVR Live Webcast. May 12, 6:15 a.m.-4:15 p.m. PT/9:15 a.m.-7:15 p.m. ET. CPE Credits: 8.0.

This full-day event brings together pre-eminent energy valuation professionals and industry thought leaders on topics including the industry’s post-COVID-19 energy outlook as well as perspectives on business valuation, machinery and technical specialties, new accounting developments, appraisal review and management, real property, and more.