Michael Jackson, Prince and Whitney Houston each revolutionized the music industry and impacted popular music for decades. We all appreciate how Michael Jackson moonwalked across the stage, Prince made it (purple) rain and Whitney Houston will always love you. These impactful artists changed, and continue to change, the music landscape. What do Michael Jackson, Whitney Houston and (possibly) Prince have in common? The Internal Revenue Service (“IRS”) is interested in their ability to continue to profit from the music industry through royalties, released music, unreleased music and the use of image. What is the value of the right to use an image, sell music, earn royalties and benefit from intellectual property after death?

Both Whitney Houston’s and Michael Jackson’s estates are engaged in tax litigation with the IRS. The IRS valued Whitney Houston’s assets at around $36 million, whereas the estate valued the assets at $13.9 million. Among other things, the IRS asserts that royalties, publicity rights and intellectual property are worth approximately $22 million more than the estate’s valuation. In Michael Jackson’s case, the numbers are much more substantial, and much farther apart. The IRS valued Michael Jackson’s estate at $1.32 billion, while the estate asserted that the value was only around $7 million. For the posthumous image and likeness, the IRS valued those rights at $434 million, and the estate valued Michael Jackson’s publicity rights at $2,105. The Michael Jackson case is docketed for trial in February 2017.

With the massive discrepancies arising in Michael Jackson’s and Whitney Houston’s estates, the question arises: How does one value the right to use an image and receive royalties? During life, this issue appeared in a Tax Court case for Sergio Garcia, which centered on an endorsement deal and the bifurcation between personal service income and royalty income. Royalties are a defined income stream, whereas the right to use an image, especially after-death use, is not a defined income stream. The right to use an image also appeared in a federal court case for collegiate athletes in sports video games. Athletes were depicted in video games, using the same jersey number and identifying features, but they were not compensated for the use of the image (the class action lawsuits have since been resolved). Superstars, athletes and artists can significantly benefit from the use of image during life, but how is an after-death image valued?

From an estate tax perspective, valuation occurs either on the date of death or six months afterward by election, and based on a fair market value standard. Fair market value is 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 sell and both having reasonable knowledge of relevant facts. How does one determine the fair market value? The most prudent thing would be to obtain an appraisal (at least one) to rely upon in support of the position. Reasonable minds could still differ, though, as evidenced by the Michael Jackson and Whitney Houston cases. The resolution of those cases will likely hinge upon how “valuable” the Tax Court deems the use of the image and likeness at death.