The Internal Revenue Service says it made a mistake in valuing Michael Jackson’s estate. Nope, the IRS hasn’t abandoned its much discussed claim for $702 million in extra taxes and penalties—a bill Jackson’s estate is fighting in U.S. Tax Court. Instead, the tax agency is upping its demand by $29 million to nearly $731 million.  In a previously unreported court filing, the government says that IRS auditors originally thought the King of Pop owned only 50% of certain master recordings at his death in June 2009, when he really owned 100% of them. That 100% interest was worth $91 million by the IRS’ figuring, compared to the $11 million reported on the Jackson estate tax return.  The change brings the IRS’ valuation of Jackson’s estate and lifetime taxable gifts up to $1.178 billion, compared to the $7 million the estate reported. The IRS now wants a total of $525.6 million in tax and $205.1 million in gross valuation misstatement and negligence penalties. (Any interest owed will be on top of that.) Of course both the IRS and the estate’s values are best regarded as opening bids in what could be a long negotiation. A trial, if there is one, is far off.  Indeed, in a joint status report filed with the Tax Court last month, lawyers for the government and the estate say that while they’re close to settling four relatively small issues and have dueling appraisers discussing the value of Jackson’s personal tangible property, they don’t expect a speedy resolution of the big dollar issues in the case. Those involve the value of Jackson’s intangible and intellectual property (his name, likeness and his interests in music he wrote or performed) as well as the value of two trusts he apparently set up to borrow against his assets and to transfer assets to his heirs at minimal tax cost during his life.  The two trusts hold Jackson’s music publishing rights as well as his 50% interest in a joint music publishing venture with Sony Sony Corp. Known as Sony/ATV Music Publishing, the venture is the largest music publishing company in the world and owns or administers millions of songs, including Beatles songs Jackson bought back in the 1980s. The estate placed the value of the assets transferred through the two trusts at just $2.2 million, whereas the IRS says the taxable value was $527.5 million.  Forbes senior editor Zack O’Malley Greenburg, who wrote a recent book on the Jackson business empire, estimates the Jackson estate has earned more than $700 million since the singer’s death, as his music has had a resurgence, with new releases, two Cirque du Soleil shows based on his work , the concert film This Is It and even an endorsement deal with PepsiCo PepsiCo. But at the time of his death, the economy was in the dumps and Jackson’s image was considerably less golden, in part due to allegations of child molestation. It’s the value of his image at death that matters for estate taxes.  The estate valued Jackson’s name and likeness at a trifling $2,105, whereas the IRS contends they were worth $434 million. Despite the unique circumstances surrounding Jackson, the resolution could well affect how other celebrity estates are taxed in the future.  The value of a celebrity’s image was also at issue in two recent U.S. Tax Court decisions involving the income taxation of endorsement and appearance fees paid to professional golfers Sergio Garcia and Retief Goosen and is an issue in an ongoing Tax Court case involving best selling crime writer Karin Slaughter. Ironically, in those cases, the IRS has tried to maximize Uncle Sam’s tax take by minimizing the value of such intellectual property, while taxpayers have argued (and Tax Judges have agreed) that a celebrity’s image has substantial value.  Follow Janet Novack on Twitter
The tax agency now wants $29 million more, bringing its total demand to  $731 million.  Meanwhile, negotiations continue.