Issues in Valuing Celebrity Estate Publicity Rights

For contractual assets such as recording agreements, a valuation method based on cash flows would typically be the best methodology. But how does an appraiser value the right of publicity? There is little case law on its post-mortem valuation, but Estate of Andrews v. U.S., 850 F. Supp. 1279 (E.D.Va. 1994), dealt with the valuation of the name and likeness of deceased author V.C. Andrews, whose books are today featured in movies being produced as Lifetime network movies.

As in the Jackson case, the Andrews case had a large difference between the estate's and the IRS's valuation. In fact, the Andrews estate initially did not put a value on Virginia C. Andrews' publicity rights at all. The district court stated: “The value of an author's name at date of death is an issue of first impression the resolution of which depends in substantial part on the facts known and reasonably knowable at the date of death.” The court determined this as a hypothetical fair market value transaction.

Ultimately, the court based the valuation of these rights on a literary contract negotiated during Andrews' life. After her death in December 1986, Andrews' agent and publisher hired a ghostwriter. In its value determination, the court believed it was reasonable to assume that Andrew's publishing contract would be fulfilled. As the court saw it, these books were to be written in the same mode as Andrews' successful literary works and the ghostwriter was expected to mimic Andrew's writing style.

Importantly, there were also provisions for future contracts that were predicated on the success of the initial contract. However, the court did not consider these future contracts in its ultimate decision on the ground that these were too speculative.

The Andrews case gives appraisers some guidance on valuing name and likeness assets, and appears to provide a ruling where an appraiser can look past the valuation date, for a short period, in order to establish the fair market value of an asset. In ignoring the future contracts, the court also appeared to limit the “look past” to events that were reasonably certain as of the date of valuation.

But the appraisal of intangible assets is typically based on the facts and circumstances facing each individual situation; there is no “cookie-cutter” approach. An appraiser will need to work closely with representatives of the estate to understand the assets that exist and what income, if any, is expected from these assets in the foreseeable future.

The good news is that there is typically very helpful historic information available to the appraiser to both identify the assets in the estate and to use as a starting point to project future income from these assets. This includes divorce settlement agreements, operating agreements and licensing/royalty agreements with third parties, especially in the case of multiple corporate entities holding various intellectual property in the same estate. These documents define which entity has the rights to each separate intangible asset.

Valuing right of publicly can be much more difficult than valuing an existing contract, as a portion of this asset is most likely already considered in advance payments and other contractual agreements. Some celebrities may have previously licensed out their name/likeness, and this arrangement can be a good place to start. Also, following the Andrews case, the potential for future income from existing sources can be utilized as a “proxy” for valuing this asset.

James T. Ashe is partner-in-charge (advisory services), Stephen D. Lassar is a partner (tax and business services), and Daniel R. Roche is a manager (business valuation group) at the international financial firm Marcum.

The IRS has recognized the right to publicity and the need to appraise this asset for estate tax purposes. But valuing the right of publicity of a deceased celebrity can be difficult, and wrought with assumptions and speculation.

For example, Michael Jackson's executors placed a value of $2,105 on his right of publicity (reportedly due to a diminishment in value from the child molestation allegations against Jackson), while the IRS values it at around $434,264.

(The difference between the overall value of Jackson's estate as calculated by the executors and that calculated by the IRS was so large that the IRS seeks to impose a substantial understatement penalty. In total, the IRS valued Jackson's estate at $1.125 billion, and wants $505 million in taxes and $197 million in penalties, including for the estate's music publishing assets.)

For contractual assets such as recording agreements, a valuation method based on cash flows would typically be the best methodology. But how does an appraiser value the right of publicity? There is little case law on its post-mortem valuation, but Estate of Andrews v. U.S., 850 F. Supp. 1279 (E.D.Va. 1994), dealt with the valuation of the name and likeness of deceased author V.C. Andrews, whose books are today featured in movies being produced as Lifetime network movies.

As in the Jackson case, the Andrews case had a large difference between the estate's and the IRS's valuation. In fact, the Andrews estate initially did not put a value on Virginia C. Andrews' publicity rights at all. The district court stated: “The value of an author's name at date of death is an issue of first impression the resolution of which depends in substantial part on the facts known and reasonably knowable at the date of death.” The court determined this as a hypothetical fair market value transaction.

Ultimately, the court based the valuation of these rights on a literary contract negotiated during Andrews' life. After her death in December 1986, Andrews' agent and publisher hired a ghostwriter. In its value determination, the court believed it was reasonable to assume that Andrew's publishing contract would be fulfilled. As the court saw it, these books were to be written in the same mode as Andrews' successful literary works and the ghostwriter was expected to mimic Andrew's writing style.

Importantly, there were also provisions for future contracts that were predicated on the success of the initial contract. However, the court did not consider these future contracts in its ultimate decision on the ground that these were too speculative.

The Andrews case gives appraisers some guidance on valuing name and likeness assets, and appears to provide a ruling where an appraiser can look past the valuation date, for a short period, in order to establish the fair market value of an asset. In ignoring the future contracts, the court also appeared to limit the “look past” to events that were reasonably certain as of the date of valuation.

But the appraisal of intangible assets is typically based on the facts and circumstances facing each individual situation; there is no “cookie-cutter” approach. An appraiser will need to work closely with representatives of the estate to understand the assets that exist and what income, if any, is expected from these assets in the foreseeable future.

The good news is that there is typically very helpful historic information available to the appraiser to both identify the assets in the estate and to use as a starting point to project future income from these assets. This includes divorce settlement agreements, operating agreements and licensing/royalty agreements with third parties, especially in the case of multiple corporate entities holding various intellectual property in the same estate. These documents define which entity has the rights to each separate intangible asset.

Valuing right of publicly can be much more difficult than valuing an existing contract, as a portion of this asset is most likely already considered in advance payments and other contractual agreements. Some celebrities may have previously licensed out their name/likeness, and this arrangement can be a good place to start. Also, following the Andrews case, the potential for future income from existing sources can be utilized as a “proxy” for valuing this asset.

James T. Ashe is partner-in-charge (advisory services), Stephen D. Lassar is a partner (tax and business services), and Daniel R. Roche is a manager (business valuation group) at the international financial firm Marcum.