DON'T FORGET TO VALUE NIL
From Luther Vandross to Tina Turner, not only have artist sold their music catalogues, but they have also sold their name, image and likeness (“NIL”). This practice raises serious questions concerning NIL valuation because not much is publicly known about the practice. Further, news headlines tend to focus on a discussion of multiples and gloss over NIL. However, Michael Jackson’s recent battle with the IRS may shed some light on the proper way to value this critical asset. This blog will explore how the court defined NIL and how it was valued, with a focus on cash flow projections and analysis. But first, let’s talk about how this case ended up in court to begin with.
At the time of Jackson’s death, his estate went to work to get a proper accounting of his assets to file his tax returns. Among the assets that needed to be accounted and valued was his image-and-likeness. Jackson’s team initially hired Moss Adams to value this asset, and using the income approach, Moss Adams valued Jackson’s image-and-likeness at $2,105.
However, the IRS audited Jackson’s tax return, and in May 2013, the IRS issued a notice of deficiency that adjusted the Estate’s reported values. And among these adjustments, the IRS valued Jackson’s image-and-likeness at $434,261,895. Based upon this deficiency, a lawsuit ensued. And at the onset of litigation, the court was tasked with defining image-and-likeness.
To accomplish this, the court relied on California Civil Code section 3344.1. The code stated the following:
any person who uses a deceased personality’s name, voice, signature, photograph, or likeness, in any manner, on or in products, merchandise, or goods, or for purposes of advertising or selling, or soliciting purchases of, products, merchandise, goods, or services, without prior consent from the person or persons [who have been given the right of consent], shall be liable for any damages sustained by the person or persons injured as a result thereof.
Further, the court laid out what was not protected under the code which was the following: plays, books, magazines, newspapers, musical compositions, master recordings, audiovisual works, radio or television programs, single and original works of art, works of political or newsworthy value, or advertisements or commercial announcements for any of these works. However, the court noted the complexities of separating these interconnected assets from NIL. In response, the court advised “we will assume that the Estate’s assets can be used together to generate value. But we will not add the value of other assets to the value of the assets at issue.” Armed with this framework, the court turned its attention to the valuation of NIL.
The court sought to determine the fair market value of Jackson’s image-and-likeness utilizing the weighted average cost of capital (“WACC”) as the discount rate. And critical to all valuations, the court examined the cash flow projections of the competing experts, which is the focus of this piece.
One of the crucial variables in projecting cash flows for a deceased celebrity is separating personal service income (i.e., a celebrity personally appearing in a commercial) from income related to the licensing of a celebrities’ image-and-likeness. This separation is needed because personal service income ends at the time of a celebrities’ death. To accomplish this, the Estate’s experts came up with ten factors to divide revenue from a deal attributable to personal service from revenue attributable to image-and-likeness. These factors were the following:
The Licensee’s History
The Budget for Prospective Use
Type/Nature of Use
Role of Celebrity in the Campaign
Geographical Scope (Thereby Population Exposure)
Type of Media Used
Length of Campaign
Other Intellectual-Property Rights Held by Third Parties or Entities
Synergy with the Company/Product.
Next, the Estate’s experts examined 30 years of data to compute Jackson’s historical image-and-likeness revenue. The Estate looked this far back because Jackson did not produce a significant source of income from his image-and-likeness in his later years because of the scandals associated with his name.
Additionally, the Estate estimated how this revenue stream would fluctuate over time. To do this, the Estate examined five “marketability factors” that impact revenue generation. These factors were the following:
Other Intellectual-Property Rights Holders/Market Limitations
Past Comparable Deals and Agreements
Synergy with a Company’s Product.
Further, the Estate predicted, and the court agreed that “revenues would peak in year 3, then decline at a rate of 10%-17% from years 4 to 10, and then decrease 5% every year for the remaining life of Jackson’s statutory image-and-likeness right.” Lastly, the Estate recognized that significant expenses would be incurred to not only rehabilitate Jackson’s image, but also to manage these rights.
In all, the court accepted much of the Estate’s valuation methodologies because the Estate’s experts took a “holistic” approach to valuing this asset. Lastly, what can be gleaned from this case is that (1) NIL is an asset to be valued; (2) to properly value this asset its fair market value needs to be determined; (3) in examining and projecting revenues one may need to distinguish personal service revenue from licensing revenue; and (4) valuing an asset such as this requires a holistic, well-reasoned approach. Below is a summary of the values reached by each party:
References:  Source: In Estate of Michael Jackson, et al. v. Commissioner, T.C. Memo. 2021-48 (May 3, 2021
 Moss Adams is a large public accounting firm.
 Moss Adams arrived at this value because Jackson did not earn anything from his image-and-likeness in 2006, 2007, or 2008. And Moss Adams correctly excluded valuing the cashflow from Jackson’s copyrights in his music, as both a performer and a composer.
 The Estate’s expert used the build-up method and CAPM to calculate a cost of equity. The Estate’s experts were Mark Roesler and Jay Fishman.
 The court favored the methodologies of the Estate’s experts, so this piece will focus on their underlining assumptions.
 The amount the court reached (the value labeled "Court's Valuation") because it did not agree with the Estate’s view of tax affecting, and the court discounted back to Jackson’s date of death.