Celebrity Brand Value and Estate Planning

Forbes magazine’s publishes an annual list of the Top-Earning Dead Celebrities, or “Delebs”, as they are referred to by industry executives. At the top of the 2012 listing is Elizabeth Taylor at $210 million, followed by Michael Jackson at $145 million, and in third place, Elvis Presley, at $55 million. A celebrity’s image and “persona” can be extremely valuable intellectual property. With today’s technology, images and sounds can be captured and transmitted globally, with a minimum of effort.

Anyone can register their name, nicknames, poses, slogans, and signatures, as trademarks. Even without a registered trademark, celebrities have “publicity rights” to prevent unauthorized use of their name, likeness or other personal attributes. However, the right to publicity is not protected by federal law; rather it is a matter of state law. A range of U.S. states have devised legislation aimed at preventing unauthorized commercial use of an individual's name or likeness, giving that person (or their estate) an exclusive right to license the use of the identity for commercial purposes

Some states treat publicity rights as transferable property that survives a celebrity’s death. Other states treat publicity rights as personal rights that terminate at death. Of the states with post-mortem rights, some only apply to celebrities that pass away after the enactment of such states laws. Other states retroactively apply their laws to any celebrity who passes after a specified date, sometimes decades before the enactment of the law. California law covers a person’s lifespan plus 70 years, Oklahoma has enacted legislation that covers 100 years after death. The comedian Bill Cosby, a resident of Massachusetts, put his support behind a recently proposed law that would protect a celebrity’s publicity rights for 70 years after death.

Until the Estate of Andrews v. United States in 1994, the value of a decedent’s right of publicity was commonly ignored for purposes of calculating federal estate taxes due on death. Virginia C. Andrews was, at the time of her death, an internationally known, best-selling author. The Estate did not list Andrews’ name as among its assets. In 1990, the IRS issued a tax deficiency of $649,201.77 based on their valuation of the intangible asset at $1,244,910.84. Ultimately the court concluded on a value of approximately $700,000.

Estate planners would be well served in determining the value of the right to publicity as a component of the overall estate planning strategy of their celebrity client.

Personal Goodwill and Why It Matters

For many businesses, the value of intangible assets dwarfs the value of their tangible assets. Ocean Tomo, an intellectual property consulting firm, released their 2010 annual study of intangible asset market value, which concluded that the implied intangible asset value of the S&P 500 reached 80% of total market capitalization, which was down slightly from the previous year.(a) Intangible assets represent the excess market value of a business beyond the value of its tangible assets.

Goodwill is an intangible asset that cannot be traced to an identifiable source, such as patents or trademarks. Firms that provide professional services frequently have two categories of goodwill; personal goodwill and enterprise goodwill. Personal goodwill attaches to a particular individual rather than to the operating business. Enterprise goodwill results from characteristics of a particular business, for example a high-traffic location.

Family law courts in many states operate under the principal that personal goodwill is not a marital asset subject to distribution, but represents future earnings potential associated with an individual’s personal characteristics. Hence, the component of personal goodwill may need to be identified and segregated from any enterprise goodwill.

Personal goodwill generally can be traced to two main sources:

1. Contacts and Relationships:

The landmark 1998 Tax Court case of Martin Ice Cream v. Commissioner noted the existence of personal goodwill due to the ice cream distributor’s relationships with customers. (b) Customers continued patronage due to an individual’s personal relationships are a primary source of personal goodwill. Relationships with suppliers and employees can also contribute to personal goodwill, providing a loyal, motivated workforce and a reliable source of inventory at or below market price.

2. Skill, Knowledge, and Reputation:

Skill may be in the form of either intellectual, physical, or both. Surgeons are an example who may have both qualities, gaining customer referrals and patronage due to innovative techniques (intellectual) as well as manual dexterity (physical). A practitioner’s skill level is often the source of the related reputation. For a firm that produces highly technical products or services, an individual’s knowledge and education may be unique to the industry, providing a superior competitive edge.

Segregating the intangible value of a business between personal and enterprise goodwill is challenging and there is no single method that will fit all situations. The quantification of personal goodwill is dependent upon the facts of each case and is often approached by estimating the financial impact the departing employee or owner will have on the business.

Personal and enterprise goodwill are elements of value that are relevant in divorce, tax, bankruptcy and other settings. Segregating the values into their separate components is difficult and a subjective task. Courts and valuation experts have yet to agree on a consistent method of bifurcating goodwill. By using evidence from the existing facts and circumstances, the valuation analysts can estimate the degree of personal and enterprise goodwill to help ensure equitable outcomes in marital dissolution cases.


(a) “Ocean Tomo Announces Results of Annual Intangible Asset Market Value Study”, http://www.oceantomo.com/media/publications. April 4, 2011.

(b) Martin Ice Cream Company v. Commissioner of Internal Revenue, 110 TC 189 (1998).

Groupon, Inc. and Value

In its simplest form, value is a function of cash flows and risk. For any business, its value is dependent on the level and timing of future cash flows and the perceived risks in realizing those future cash flows. Therefore, the valuation process is primarily a forward looking concept although the past can provide clues to the markets’ perception of value. Generally speaking, higher growth rates translate into higher values, although beware if growth doesn’t translate into increased profits.

Groupon, Inc. (Nasdaq GRPN) priced its IPO at $20 share and debuted in November 2011 with an implied value of $13 billion. In May 2012, after a series of financial reporting blunders, its market value was reduced 50% as its stock price fell to just under $10 per share. The company’s stock has been in a free fall since July 2012, falling from $9.51 per share on July 2, 2012 to $4.44 at the close of trading on August 24, 2012. This is despite the fact that year over year revenues and earnings have improved.

The lesson, investors’ perceptions changed dramatically when Groupon’s financial restatements lowered revenues and earnings. In addition, investors are recognizing there are low barriers to entry and rising competition (Living Social). The result, lower stock value as perceived risk moved higher and future cash flows moved lower.

Tax Court Upholds Defined Value Gift Formula Clause in Wandry v. Commissioner, T.C. Memo 2012-88 (March 26, 2012)

Formula clauses are used by taxpayers to avoid unintended gift, estate and generation-skipping transfer (GST) tax consequences when transferring property. There are two general types of formula clauses: A definition clause defines a transfer by reference to the value of a possibly larger, identified property interest; and a savings clause retroactively adjusts the value of a transfer due to a subsequent valuation determination.

The IRS has been successful challenging savings clauses for gift, estate and GST tax purposes, arguing that they are against public policy because they prevent the IRS from properly administering the Code. The definition clause is a relatively new type of clause that has generally been respected by courts for gift, estate and GST tax purposes.

In Wandry, a couple established an FLP and embarked on an annual program of gifting interests to a FLP. Their estate planning attorney advised them that (1) the number of FLP units equal to the desired value of their gifts on any given date could not be known until a later date when a valuation of the FLP's assets could be made; (2) all gifts should be given as specific dollar amounts rather than specific numbers of membership units; and (3) all gifts should be given on Dec. 31 or Jan. 1 of a given year, so that a midyear closing of the books would not be required.

Consistent with the transfer documents, the gift tax returns reported total gifts of $1,099,000, and the schedules supporting the gift tax returns reported net transfers from each spouse of $261,000 and $11,000 to their children and grandchildren, respectively. However, the schedules describe the gifts to the children and grandchildren as percentage interests in the FLP (not specific dollar amounts). The couple's accountant had derived these percentage interests based on an appraisal valuing a 1 percent interest in the FLP. The IRS audited the couple's 2004 gift tax returns and determined a deficiency based on the percentage interests listed in the schedules to each spouse's gift tax returns.

At trial, the IRS alleged the couple was liable for the deficiency amount because (1) the gift descriptions, as part of the gift tax returns, are admissions that petitioners transferred fixed FLP percentage interests to the donees; (2) the FLP's capital accounts control the nature of the gifts, and the FLP's capital accounts were adjusted to reflect the gift descriptions; and (3) the gift documents themselves transferred fixed FLP percentage interests to the donees. The IRS further argued that the formula clause created a condition subsequent to the completed gifts and was void for federal tax purposes as contrary to public policy, citing the 1944 case Commissioner v. Procter (142 F.2d 824).

The Tax Court quickly dispensed with the first two arguments by the IRS. Regarding the descriptions of the gifts on the gift tax returns as percentages of the FLP as opposed to a specific dollar amount, the court noted that the description of the gifts on the gift tax return was consistent with the gift tax documents transferring a specific dollar amount of FLP interests. Regarding capital accounts being adjusted related to specific percentages, the court determined that the adjustments in the capital accounts were "tentative" and subject to change once final values were determined. Therefore, it determined that the capital accounts do not control the nature of the gifts by the couple.

The Tax Court next addressed the validity of the valuation clause. The court first took note that other federal courts have held that formula clauses were valid to limit the value of a completed transfer, citing Estate of Christiansen v. Commissioner (130 T.C. 1, aff'd 586 F.3d 1061); Estate of Petter v. Commissioner (T.C. Memo. 2009-280, aff'd 653 F.3d 1012); and McCord v. Commissioner (461 F.3d 614). The court then noted that a savings clause is void because it creates a scenario in which the taxpayer tries to take property back. On the other hand, a formula clause is valid because it merely transfers a fixed set of rights with uncertain value. It further noted that in Petter, it ruled the formula clauses were valid because the ascertainable dollar value of stock transferred was a fixed set of rights even though the units had an unknown value. It also noted that on appeal the Ninth Circuit agreed with the holding that although the value of each membership unit in the limited liability company (LLC) was unknown on the date of the gift, the value of a membership unit on any given date was constant. Therefore, under terms of the formula clauses at issue, the donees received a fixed number of membership units and no contingencies existed in order to render the transfers otherwise ineffective on the date of transfer.

The Tax Court reasoned that it was inconsequential that the formula clause reallocates membership units among petitioners and the donees rather than a charitable organization because the reallocations do not alter the transfers. As of the date of the transfer, each donee was entitled to a predefined FLP percentage interest expressed through a formula. The court concluded that the transfer documents do not allow the petitioners to take property back. Instead, the documents correct the allocation of FLP membership units among the taxpayers and the donees because the appraisal of the FLP understates the FLP's value. Therefore, the court ruled that the formula clauses were valid.

This case is significant because under the formula clause, the reallocation of FLP units in the event of an understatement or overstatement of the amount transferred occurs between the donors and the donees. The previous cases validating formula clauses (i.e., Petter, Christiansen, and Hendrix v. Commissioner, T.C. Memo. 2011-133) contain formula clauses that reallocated closely held interests among the donees. Once the donors parted with the transfers, the formula clauses did not operate to reallocate any interest back to the donor. Charities were among the donees in these cases, so that any excess transfers over and above the specified dollar amount would be reallocated to the charity, making the excess transfer eligible for the gift tax charitable deduction under Section 2522. Thus, no unintended gift tax consequences were produced. The Tax Court's ruling in Wandry would alleviate the need to use a charity as a donee when using a formula clause.

Estate of Petter v. Commissioner, Ruling Affirms “Charitable Cap Adjustment Clause”

A federal appeals court affirmed a popular technique that sidesteps gift taxes, even if the IRS is successful in challenging the underlying valuation. (Ninth Circuit United States Court of Appeals, Tax Ct. No. 25950-06 Opinion, Estate of Anne Y. Petter v. Commissioner.)

Anne Petter inherited United Parcel Service stock from an uncle who was among the company's first investors. In May 2001, when the top gift and estate tax rate was 55%, she held $22 million of stock which she transferred to a family owned limited liability company (“LLC”). She both gave and sold units of the LLC to two trusts in 2002, and coupled the transfers with simultaneous gifts of LLC units to two charitable foundations.

The transfer documents include both a dollar formula clause, which assigned to the trusts a number of LLC units worth a specified dollar amount and assigned the remainder of the units to the foundations; and a reallocation clause, which obligates the trusts to transfer additional units to the foundations if the value of the units the trusts initially receive is later determined for federal gift tax purposes to exceed the initial specified dollar amount.

The value of the LLC interests transferred reflected valuation discounts of approximately 53% from the net asset value. Upon exam, the IRS countered with a 21% discount and they ultimately split the difference and settled on an aggregate valuation discount of approximately 35%.

From the IRS viewpoint, the higher valuation had two significant gift tax consequences. First, it meant that the taxpayer had underreported the value of the units transferred as gifts to the trusts and, accordingly, the taxpayer’s gifts exceeded the unused portion of her lifetime unified tax exemption. Second, it meant the shares sold to the trusts were sold for “less than full and adequate consideration,” and thus were transferred partly by sale and partly by an additional gift to each trust, computed by deducting the price of the installment notes from the fair market value of the shares transferred. Additionally, the IRS concluded that the dollar formula clauses were void as against public policy and refused to allow the taxpayer to take an additional charitable deduction for the value of the additional units that would pass to the foundations following the upward valuation adjustment. As a result, the IRS issued a notice of tax deficiency for just over $2.1 million and concluded that the defined value clauses were void for public policy reasons and declined to permit the taxpayer to take a charitable deduction for the value of any additional units transferred to the charities as a result of the upward valuation adjustment.

With agreement as to the value of the LLC interests, the Tax Court was left with the issues of whether Anne should be allowed to avoid additional gift tax through the adjustment clauses in the gift and sales documents, and whether Anne should be allowed a charitable contribution deduction for the resulting additional transfer of units to the charities. The Tax Court sided with the taxpayer, rejecting the IRS’s arguments that the dollar formula clauses were void as against public policy. It also found the charities’ receipt of additional units was not dependent on a condition precedent. The IRS appealed to the 9th Circuit.

On appeal the IRS argued that IRC Sec. 2522(a) and related regulations disallowed the charitable transfers because they were dependent on a condition precedent. The IRS claimed that the foundations would not have received the additional units but for its determination of a deficiency. However, the court declared “Adopting the IRS’s “but for” test would revolutionize the meaning of a condition precedent.” The 9th Circuit explained, “We do not think that the dollar formula clauses…contain a condition precedent. Rather, the taxpayer’s transfers became effective immediately upon execution of the transfer documents and delivery of the units. The only possible open question was the value of the units transferred, not the transfers themselves.”

One of the challenges in planning intra-family transfers is determining the value of the assets to be transferred. While taxpayers generally obtain independent appraisals, the IRS is not bound by the appraisal and frequently does challenge them; particularly the amount determined by the appraiser for minority interest and other discounts. Thus, it is difficult for estate planners to assure that they are not making taxable gift. A gift will result where an asset is sold to children or trusts for their benefit, if the value is ultimately determined for federal gift tax purposes to be higher than the purchase price. Under the defined value and formula valuation clauses, a taxpayer is given some protection against the risk of making an unintended gift by providing that a charity will receive any portion of the transfer above a fixed value.

The Discount for Lack Of Marketability (DLOM)

The difference in price an investor will pay for a liquid asset compared to a comparable illiquid asset is often substantial and one of the largest components in a valuation adjustment. The measurement of the DLOM continues to be a controversial topic especially with regard to valuations performed for gift and estate tax, shareholder litigation, buy-sell agreements, and family law purposes.

There are varying degrees of marketability. In the United States public capital markets, a security owner can sell an actively traded security over the telephone or internet and typically receive the proceeds, net of a small transaction cost, within three business days. The other extreme is represented by a hypothetical private business that pays no dividends or distributions, requires periodic capital contributions, has significant risk factors related to management depth and concentrations in customers, and places restrictions on subsequent ownership transfers.

There are other characteristics of a closely held entity that further impair marketability; the population of potential buyers of a closely held entity is much smaller than the population of buyers of a publicly traded entity; a minority shareholder is unable to register closely held shares for public trading, and; banks are typically unwilling to accept closely held stock as collateral as they would accept publicly traded shares.

Empirical evidence indicates that the DLOM for closely held securities is within a range of 25% to 50% compared to publicly traded securities. However, the specific facts and characteristics of each security and the specific company will determine the magnitude of the DLOM.

In Bernard Mandelbaum v. Commissioner (T.C. Memo 1995-255, June 12, 1995) Judge Laro raised 10 key factors to be considered in determining an appropriate DLOM.

These are:

1. Private vs. public sales of the subject company stock or stock sales of similar public companies.

2. An analysis of the subject company's financial statements.

3. The subject company's dividend policy.

4. The nature of the subject company, its history, position in the market, and economic outlook.

5. The subject company's management.

6. Degree of control transferred with the block of stock to be valued.

7. Any restrictions on the transferability of the subject company stock.

8. Period of time an investor mush hold stock to realize a sufficient profit.

9. The subject company’s redemption policy.

10. Costs associated with making a public offering.

A strong valuation report presents a convincing and detailed argument of the actual factors that impact marketability and are unique to each situation.