NEW YORK — Creditors and heirs of Michael Jackson hoping for a cut of his musical empire will have to line up behind the Internal Revenue Service, which could lay claim to $80 million or more in federal estate taxes.
To settle his tax bill, the 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 percent 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 percent 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 catalog, which holds the rights to songs by the Beatles, Bob Dylan and other artists. 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 IRS also 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.
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