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Business appraisals are needed for many situations, some for tax, business, divorce or legal purposes. These reports can be anywhere from 30 to over 100 pages long and contain many so-called scientific calculations and supporting data.
I have recently noticed an uptick in valuation requests and want to provide a documented illustration of the wide range of values that can be provided for the same situation. All of these values are contained in a tax court case regarding Michael Jackson’s estate. There are many reasons and rationales for each valuation, but I only want to discuss the range of amounts to show that determining business valuations is more of an art than a “science”, regardless of the appearance of the final report that is used to justifying an assessment.
Pop legend Michael Jackson died in 2009 at the age of 50. On his estate tax return, his executors valued his image and likeness at $2,105. This valuation process is similar to business valuation, which is determining the value at a certain date of tangible assets and quantifying intangible assets that are typically used to generate sustainable cash flow. This amount was later increased by the contractors to $3 million. There were two other assets valued by the estate: Jackson’s partial ownership of Sony/ATV Music Publishing, a catalog that included the rights to 175 Beatles songs, and the Mijac Music Catalog, which owned the rights to music written by Jackson. They were valued at $2.2 million.
The IRS, after an audit, valued Jackson’s image and likeness at $161.3 million and the interests in the catalog at $320.6 million. Note the “exact” amounts not rounded to the nearest hundred thousand.
The Tax Court ruled that Jackson’s name and likeness should be valued at $4.15 million and the interests in the catalog at $107.35 million. More “exact” unrounded amounts.
While the estate understated the assets based on the Tax Court ruling by about $106 million, the IRS overstated the assets by $370.4. Those are big differences. There were at least seven separate assessments; three from the estate, two from the IRS, and two from the Tax Court. There was some reasonableness between the executor’s value of Jackson’s image and likeness and that of the court. There was no reasonableness between the IRS’s estimates and those of the court. It is likely that each appraiser was an expert in these types of appraisals. If I were more interested, I could access the references and valuation reports from the Tax Court, but at this stage there is no need to add to the time I have already spent on this.
If you want to read the opinion, here is the quote Estate of Michael Jackson v. Commissioner, TC Memo 2021-48. You can’t make these things up.
Many customers consider the product evaluation report to be looking for the lowest price supplier. The wide range of ratings in this case (and in many other situations) should indicate that the ratings are the result of a personalized and personalized consideration of the circumstances and the skills of the appraiser, together with their ability to apply their experience appropriately, rather than an arithmetic calculation of a bunch of numbers. When clients treat appraisals and many other services as commodities, I blame the accountant for not communicating the true value of their services, which is significant. Use this as an example the next time you’re told to beat a lower fee.
I hope the above provides some insight into a process that many outside the valuation practice – and accounting services in general – do not understand.
Feel free to contact me at [email protected] with your practice management questions or about commitments you may not be able to meet.