Tax man in the Mirror: King of Pop's estate could owe tens of millions to IRS

The Associated Press ~ staff The News
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NEW YORK - The tax man is in the mirror for the estate of the late King of Pop.

Creditors and heirs of Michael Jackson hoping for a cut of his musical empire will have to line up with the Internal Revenue Service, which could lay claim to US$80 million or more in federal estate taxes.

To settle his tax bill, executors of his estate may have to sell or borrow against lucrative but hard-to-value assets or ask the IRS for a multi-year extension. That could allow the estate to pay the tab over time with earnings from Jackson's share in rights to songs by the Beatles and his own music - prized properties whose value will likely make the estate's tax bill only bigger.

"The government is not going to take a Beatles record as payment. They want to be paid in cash," said Roy Kozupsky, a veteran estate lawyer in New York who has worked on behalf of several wealthy clients.

Given the convoluted nature of Jackson's finances, coming up with the cash won't be easy. Technically, the tax bill is due nine months after the date of death. In special cases, estates can spread out the payments for a period of up to 14 years. Once paid, the tax bill could dramatically shrink the inheritance passed on to the pop star's heirs - his 79-year-old mother and three children.

"It's going to mean less money going to the beneficiaries," said Lawrence Heller, a partner in the tax and estate practice of the law firm Bryan Cave in Santa Monica, Calif. "They're the ones that are going to suffer."

The estate's tax dilemma highlights the cost and complexity of dying wealthy in America. Ironically, had Jackson died six months later, his estate may have had to pay no estate tax at all.

Under current law, the estate tax is set to be lifted for one year starting Jan. 1, 2010. However, most experts expect Congress to overturn the one-year suspension before the end of 2009, meaning the estate tax would remain in place.

Established in the early 1900s, the so-called "death tax" assesses up to a 45 per cent tax on individual estates worth more than $3.5 million.

As in a bankruptcy case, Jackson's creditors will jockey for first crack at his fortune. But the estate's initial obligation will be to pay the late star's taxes, said Beth Kaufman, a Washington-based attorney specializing in estate tax issues.

"There is no question that the U.S. government has first priority," she said.

To calculate the amount owed, subtract an estate's debts from its assets and set aside 45 per cent of what's left for the IRS. The first $3.5 million is exempt. The IRS also allows unlimited, tax-free transfers of assets to a spouse and charities, as well as deductions for funeral expenses, attorneys' fees and other administrative costs.

The current value of Jackson's estate isn't known, making it impossible to know how much he'll owe in federal estate tax.

According to documents obtained by The Associated Press, he claimed $567.6 million in assets as of March 31, 2007, including Neverland and his share of the Sony/ATV Music Publishing catalogue, which holds the rights to songs by the Beatles, Bob Dylan and other artists. The documents also show that Jackson had $331 million in debt.

That would leave him with a net worth about $236 million at the time. Based on that number, Jackson's federal estate tax bill could exceed $83 million after exemptions. California, where Jackson lived at the time of his death, has no estate tax, but some states do.

Representatives of Jackson's estate declined to comment.

The pop icon died June 25 of what his family said was cardiac arrest. According to his will, all of Jackson's assets will go into a trust. The twice-divorced entertainer left 20 per cent of his estate to charities. That could leave 80 per cent of his net estate subject to "a very sizable" death tax, said Randy Godshall, an estate attorney at Los Angeles-based Sheppard Mullin law firm.

"But there will no doubt be a lot of negotiation with the IRS on that, because his assets are hard to value," Godshall said.

The IRS is not required to accept the estate's appraisal of Jackson's assets, and very likely will conduct its own audit, he said.

"They'll often come back with their own, higher values - I've never heard of them coming back and saying, 'You overvalued this'," he said.

The IRS declined to comment, citing federal rules prohibiting it from discussing individual taxpayers.

If the two sides can't agree, the case would go into litigation. In rare cases, the IRS can seize assets to cover a tax bill, but usually settlements are reached.

Worries over estate tax were a big factor in the lengthy legal battle over the estate of singer James Brown, who died of heart failure on Christmas Day, 2006. A judge in May approved a settlement that gives nearly half of his assets to a charitable trust, about a quarter to his wife and young son, and the rest to Brown's adult children. The IRS won't say how much tax is owed on his estate.

The federal estate tax affects less than 1 per cent of the U.S. population. It will generate an estimated $26 billion this year - only about 1 per cent of federal tax revenue. Still, the estate tax has become the subject of political debate in recent years.

In Washington, some Republican lawmakers want to abolish it. Others have called for exempting estates up to $10 million from the tax. They also want estates larger than that to be taxed at a 35 per cent rate.

As it stands now, the threshold for the estate tax is set to fall back to $1 million in 2011, but the Obama administration is expected to change that so the tax will still kick in at $3.5 million.

None of the proposed changes would impact Jackson's estate, whose tax bill is technically due March, 25, 2010. Experts say it's likely the IRS will grant a multi-year extension. But even then, the estate would still have to begin paying interest in March.

Jackson's estate may have planned for a big estate tax bill. He had an insurance trust in his name as of Aug. 26, 2003, according to a financial document addressed to the singer and obtained by the AP. Insurance trusts are often set up by estates to pay federal estate tax.

One possible wild card: Jackson's estate could claim that his debt exceeds his assets, in which case he'd owe no estate tax.

But "it would be hard to incur that kind of liability," Kozupsky said, noting that creditors would be wary of such debt-ridden borrowers. He noted we may never learn the amount of Jackson's estate tax bill since the IRS isn't required to say.

"It could remain a mystery for quite a while," Kozupsky said.

Organizations: Internal Revenue Service, Beatles, Bryan Cave The Associated Press Sony/ATV Music Publishing Brown's

Geographic location: California, NEW YORK, America Santa Monica, Calif. Washington

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