Message from the Chair Andrew Strelka

The Section is pleased to pres-ent this special edition of Inside Basis which includes one of our winning sub-missions to the 2014 Donald C. Alexander Tax Law Writing Competition. In the attached article, Christopher Weeg, a rising 3L at the University of Florida Levin College of Law, explores the inclusion and valuation issues concerning postmortem public-ity rights. Additionally, this edition includes a timely article by Christine Lane and Gene Magidenko on the taxation of Bitcoins. Along those lines, I am sorry to inform everyone that FBA dues cannot be paid in Bitcoins at this time.

As always, this is your section, so please let any of the officers know if you would like to become more involved or if there is any way we can serve you better. z

Inside BasisPublished by the Federal Bar Association Section on Taxation Summer 2014

Sectionon

Taxation

Section on Taxation Holds Successful 26th Insurance Tax Seminar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The U .S . Federal Taxation of Bitcoins and Other

Convertible Virtual Currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Starting with the [Tax] Man in the Mirror: Asking the IRS to Change its Ways of Valuing Postmortem Publicity Rights. . . . . . . . . . . . . 6

IN THIS ISSUE

Women in Tax Law Hold Successful Panel and Networking Reception

The FBA's Section on Taxation hosted a panel program and networking reception on April 17, 2014, as part of its Women in Tax Law series, entitled "Having it All." The panel was held at Baker & McKenzie's D.C. office. The panel focused on strategies for balancing work, social obligations, hobbies, and family obligations. Panelists included Tracy Gostyla (US Department of Justice, Tax Division), Alexis MacIvor (IRS Office of Chief Counsel), Dianna Miosi (PricewaterhouseCoopers LLP), and Angela Walitt (Baker & McKenzie). z

Inside Basis is published semiannually by the Section on Taxation of the Federal Bar Association, 1220 North Fillmore Street, Suite 444, Arlington, VA 22201, ISSN No. 1069-1553. © 2014 Federal Bar Association. All rights reserved. The views expressed

herein are not necessarily those of the Federal Bar Association. Editors: Graham Green and Alan Williams. Managing Editor: Yanissa Pérez de León.

2 Inside Basis

The Section on Taxation and IRS Office of Chief Counsel recently sponsored the 26th Insurance Tax Seminar at the JW Marriott in Washington, DC. The Seminar is directed towards tax professionals in the insurance indus-try. Participation was slightly higher than last year’s and hovered around 500 registrants in total. Traditional pan-els provided updates on recent tax guidance issued by the IRS in the insurance area, updates on possible legislative proposals and common audit issues, and updates on tax litigation in the insurance industry. Highlights included a discussion of the OECD/BEPS project and its potential impact on the insurance industry, updates on guidance under the ACA, and an overview of common issues facing

insurers under FATCA. Several panels focused on the financial issues arising in the insurance industry while oth-ers focused on international tax aspects. The Seminar also included a panel explaining the best practices when deal-ing with IRS appeals and a primer on the role of the Joint Committee on Taxation in legislation and refunds. An outstanding luncheon speech was provided by Kenneth Kies of the Federal Policy Group. Before lunch, Nancy Vozar Knapp, former Co-Coordinator of the Seminar from 1998-2013, was presented with a plaque for her outstand-ing efforts on its behalf. Next year’s Seminar will be held at the JW Marriott on May 28-29, 2015. z

Section on Taxation Holds Successful 26th Insurance Tax SeminarBy Lori Jones, Scribner, Hall & Thompson LLP

www.fedbar.org/womeninthelaw

Section on taxation LeaderShip

CHAIRAndrew C. Strelka

U.S. Department of Justice, Tax Division

IMMEDIATE PAST CHAIRFred F. Murray

Grant Thornton LLP

CHAIR ELECTTodd B. Reinstein

Pepper Hamilton LLP

TREASURERLori J. Jones

Scribner, Hall & Thompson LLP

SECRETARYS. Starling Marshall

U.S. Department of Justice, Tax Division

Inside Basis EDITORSGraham R. Green

IRS Office of Chief Counsel

Alan WilliamsIRS Office of Chief Counsel

2014 TAX LAW CONFERENCE CHAIRSWilliam D. Alexander

IRS Office of Chief Counsel

Ryan J. KellyIRS Office of Chief Counsel

Summer 2014 3

Bitcoins burst into the public eye seemingly from nowhere, like Athena emerging from Zeus’s brow,1 and changed the vir-tual currency paradigm. In 2010 and 2011, Bitcoins traded for well under one dollar each. By the beginning of 2013, the virtual currency was trading at $13 per Bitcoin. At their peak in late November and early December 2013, when Bitcoin transactions exceeded 90,000 daily, Bitcoins reached in excess of $1200 per coin, before dropping to their current value of approximately $500.2 Notwithstanding investors’ ebullience, some countries such as China and Russia have taken more or less hostile stands to this virtual currency.3 In the United States, the reaction among financial luminaries has ranged from caution (former Fed chairman Alan Greenspan: “It’s a bubble. . . . You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is.”),4 to warnings (Berk-shire Hathaway chairman Warren Buffett: “Stay away from it. It’s a mirage basically.”),5 to outright rancor (Berkshire Hatha-way vice chairman Charlie Munger: “I think it’s rat poison.”).6 Simultaneously, the United States government has taken steps to, if not endorse, then at least acknowledge Bitcoins, as for example in the recent decision by the Federal Election Com-mission to allow political contributions in Bitcoins up to $100 per donor per election cycle.7 Yet the dominant sentiment for some time was confusion about how Bitcoins were going to be taxed.8 Recently the IRS released guidance, Notice 2014-21 (“Notice”), describing its treatment of Bitcoins for United States federal income tax purposes with respect to some tax-payers and several specific scenarios.9 This article provides a brief background on Bitcoins, discusses the IRS guidance pro-vided in the Notice, and offers observations on the complexi-ties of taxing virtual currencies.

What is Bitcoin?Bitcoin is a virtual payment system that utilizes a digital

currency as a method of exchange allowing the holder to pur-chase goods and services as if they were using cash. New Bit-coins are generated by open source software where users offer their own computing power to verify and record payments into a public ledger by solving complex mathematical problems. Newly minted Bitcoins are rewards created by the Bitcoin sys-tem’s algorithms for users who process blocks of Bitcoin trans-actions—this is called “mining.” Approximately 4000 new Bitcoins are generated daily, and the current supply is close to 13 million.10 With time, the number of Bitcoins generated each year will decrease, until the total volume reaches 21 mil-lion, which is expected to occur sometime around or before the year 2140. In addition to mining, participants in the Bitcoin network are compensated via transaction fees paid by end user payors for verifying Bitcoin transactions (similar to transaction fees received by third party companies that administer credit

card payments on behalf of merchants). These transaction fees are optional but usually increase the speed with which a trans-action is processed.

Generally, Bitcoins are linked to a virtual wallet, which requires two encryption keys to unlock and use. Bitcoins are relatively anonymous, as virtual wallets are not easily linked to particular individuals. However, all Bitcoin transactions are recorded in and cleared through a public ledger, resulting in a permanent and publicly viewable record tracking every single transaction.

Bitcoins have not been recognized by any G20 country as a “real” currency but are traded on a few online exchanges. There are several websites that purport to track Bitcoin ex-change rates, basing them on the going rates at online Bitcoin exchanges. Despite the presence and activities of these ex-changes, there are no established standards for determining the proper conversion rate. Different exchanges often show dif-ferent rates, depending on the volume of Bitcoins traded and other such factors.

In this article, we use “Bitcoin” and “virtual currency” in-terchangeably, but it should be noted that the Notice applies broadly to any convertible virtual currency.

Notice 2014-21The IRS Notice treats “convertible virtual currencies” as

property for US federal income tax purposes, not currency. The Notice defines virtual currency as a digital representa-tion of value that functions as a medium of exchange, a unit of account, or a store of value. The IRS acknowledges that virtual currency operates as “real” currency with “actual buy-ing power,” even though no jurisdiction has granted it legal tender status. Bitcoins are referred to as “convertible virtual currency,” which is a currency that has an equivalent value in real currency, including that which is legal tender.

On receipt of Bitcoin, a taxpayer must include the cur-rency’s fair market value in gross income, measured in US dollars (“USD”) as of the date that the virtual currency was received. The amount included in gross income is the tax-payer’s basis. On a subsequent disposition of the currency, the taxpayer typically will realize a gain or loss, potentially subject to favorable capital gain rates. If a virtual currency is listed on an exchange where the rate is determined by market forces, i.e., by supply and demand, the currency’s fair market value may be determined by using the value of the Bitcoin listed on that exchange.

An individual who successfully “mines” Bitcoins must in-clude in gross income the fair market value of the virtual cur-rency as of the date of its receipt. The “miner” is subject to self-employment tax if the mining activity is considered a trade or business. Virtual currency received by an independent con-

The U.S. Federal Taxation of Bitcoins and Other Convertible Virtual Currencies

Christine Lane & Gene Magidenko, Hogan Lovells US LLP

4 Inside Basis

tractor in exchange for services performed is likewise treated as income from self-employment. Accordingly, a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more in any taxable year to an inde-pendent contractor must report that payment on a Form 1099. Similarly, an employer using Bitcoin to compensate employees is subject to employment taxes, as such payment is treated as wage income to the employees.

A payment made using virtual currency is subject to in-formation reporting to the same extent as any other payment made in property.11 A person who settles virtual currency pay-ments on behalf of merchants is subject to IRS information reporting under the usual reporting rules.12

Observations and Unanswered QuestionsPenalties. According to the Notice, taxpayers taking posi-

tions inconsistent with the guidance may be subject to penal-ties. Such penalties could include, among others: accuracy-re-lated, underpayment of tax, and gross valuation misstatement penalties. The IRS has provided no transitional relief on tax penalties with respect to Bitcoins, so mischaracterizing or tak-ing an inconsistent position on a prior year’s tax return may subject a taxpayer to penalties for those prior tax years subject to any statute of limitation rules. In many instances, it may be difficult for taxpayers to take corrective action for prior year tax reporting inconsistencies, as doing so may require apprais-als and valuations to determine the fair market value on the date of receipt of Bitcoins for transactions already concluded.

Accounting Method. The Notice assumes that the taxpayer is on a cash basis accrual method and that the functional cur-rency is denominated in USD. It is unclear how the guidance impacts taxpayers using an accrual method of accounting or a functional currency other than the USD. If Bitcoins are used more frequently in the global marketplace, especially by in-dustry taxpayers on accrual methods of accounting, presum-ably the IRS will need to issue further guidance addressing how such taxpayers properly account for transactions concluded in Bitcoin.

Bitcoins as Compensation. Bitcoins are also problematic from an employer-employee compensation perspective. Bit-coin payments to employees are treated as wages and subject to employment and income tax withholding. Accordingly, em-ployers must establish a process to impose withholding on Bit-coin payments, which likely will not be too burdensome given that most employers have payroll systems in place. More prob-lematic, however, is that paying wages in property requires the employer to make a cash outlay to the IRS equal to the amount needed for withholding out of the employer’s own funds (as the IRS will not accept Bitcoin in lieu of cash to meet employ-ment tax withholding obligations). On a non-tax point, due to the virtual currency’s volatility, employers paying employees in Bitcoins arguably are subjecting them to significant risk, as a Bitcoin paid today in compensation may not be worth nearly as much tomorrow or next year. This drop in value arguably un-fairly penalizes the unwary employee. While an employee may benefit on a later disposition from the appreciation in value of

Bitcoins received as payment for compensation, the employee will be required to pay the tax due in cash on the gain from the disposition.

Sourcing Rules. Similarly to many other taxing jurisdic-tions, the U.S. tax system contains a complex set of rules de-signed to identify items of income as either derived from U.S. or non-U.S. sources. It is not uncommon for a person engaged in mining activity to utilize computer equipment (servers, net-works, etc.) physically located in jurisdictions outside of the United States. An issue arises in this context about whether the income from mining activity is properly sourced where the miner resides or where the computer equipment is physically located. The issue appears unresolved under current IRS guid-ance.

Information Reporting on Non-U.S. Accounts. U.S. persons with financial interests in, or signature authority over, a “for-eign financial account,” including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, are generally required to comply with annual information reporting requirements by filing with the IRS a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114 superseded TD F 90-22.1). Moreover, similar information reporting is required with respect to “specified foreign financial assets,” provided that the total value of all specified foreign financial assets ex-ceeds certain reporting thresholds. “Specified foreign financial assets” include “financial accounts” maintained by a foreign financial institution and—provided assets are held for invest-ment and not held in an account maintained by a financial institution—stock or securities issued by a non-U.S. issuer, any interest in a foreign entity, and financial instruments or con-tracts the issuer of, or counterparty to, which is a non-U.S. person. On the one hand, one might argue that because Bit-coins are treated as non-currency, they should not be subject to FBAR and specified foreign financial asset reporting. On the other hand, “specified foreign financial assets” include property other than currency, and treating virtual wallets as non-foreign financial accounts may trigger abuses. Recently, an IRS official speaking publicly questioned whether Bitcoins held in foreign accounts must be reported to the IRS with respect to the 2014 tax year, but did indicate that such accounts may be reportable in the future.13 Further, according to a recent IRS announce-ment, the agency is studying the use of virtual currencies and focusing on potential abuses, which suggests further guidance on information reporting may well be forthcoming.14

FATCA. Along similar lines to the points on FBAR and specified foreign financial asset information reporting, the treatment of Bitcoins under the Foreign Account Tax Com-pliance Act (FATCA) also remains unclear. A key issue is whether virtual wallet providers should be treated as “foreign financial institutions” or “FFIs,” which would be the case if Bitcoins were included in the definition of “financial assets” and virtual wallets in the definition of “financial accounts.” If Bitcoins are excluded from these definitions, presumably US taxpayers could convert cash into Bitcoins and stash Bitcoins

5Summer 2014 5

overseas in non-U.S. accounts without any concern that the virtual wallet account would be reported to the U.S. tax au-thorities and traced back to the U.S. taxpayer. This capabil-ity would appear to be directly the type of situation that the FATCA rules are designed to expose.

* * * *

Under applicable U.S. Treasury Regulations, we are re-quired to inform you that any advice contained in this article is not intended or written to be used, and cannot be used, ei-ther to avoid penalties imposed under the Internal Revenue Code or for promoting, marketing, or recommending to an-other party any tax-related matter addressed herein under U.S. tax laws. z

Christine Lane is a senior associate in the Washington, D.C. office of Hogan Lovells US LLP, where she advises clients on a variety of domestic and cross border tax matters, with a particular focus on the taxation of corporations and financial institutions and products. She can be reached at christine.lane@hoganlovells.com. Gene Magidenko is an associate in the Washington, D.C. office of Hogan Lovells US LLP, where he advises clients on a variety of tax matters, with a par-ticular focus on corporate and international tax and legislative develop-ments. He can be reached at gene.magidenko@hoganlovells.com.

Endnotes1According to legend, the Greek goddess of wisdom and

justice Athena emerged from Zeus’s head already grown and fully armed.

2See bitcoincharts.com/charts/.3However, not all countries are ill-disposed. See Stephanie

Soong Johnston, News Analysis: The Tax Implications of Bitcoin, 73 Tax NoTes INT’l 971 (Mar. 17, 2014); see also Marcelo Natale, Brazilian Tax Authorities Issue Guidance on Treatment of Bitcoins, Tax aNalysTs, 2014 WTD 82-9 (Apr. 29, 2014); Erki Uustalu, Estonian Tax Board Clarifies Tax Treatment of Bitcoin Transactions, Tax aNalysTs, 2014 WTD 64-6 (Apr. 03, 2014). And some

have exempted private Bitcoin transactions from tax entirely. Stephanie Soong Johnston, Private Bitcoin Transactions Are Tax Free, Danish Tax Board Rules, Tax aNalysTs, 2014 WTD 69-3 (Apr. 10, 2014).

4Jeff Kearns, Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value, BloomBerg (Dec. 04, 2013), at www.bloomberg.com/news/2013-12-04/greenspan-says-bitcoin-a-bubble-without-intrinsic-currency-value.html.

5Paul Vigna, Buffett: ‘Stay Away’ From Bitcoin, The Wall sTreeT JourNal moNey BeaT (Mar. 14, 2014), at blogs.wsj.com/moneybeat/2014/03/14/buffett-stay-away-from-bitcoin/.

6Charlie Munger Compares Bitcoin to Rat Poison, ValueWalk (May 06, 2013), at www.valuewalk.com/2013/05/charlie-munger-bitcoin-rat-poison/10/.

7Jennifer Liberto, Bitcoin OK for Politics, With $100 Limit, CNNmoNey (May 08, 2014), at money.cnn.com/2014/05/08/technology/bitcoin-politics/.

8At least as early as 2012 there was already serious discussion about the tax consequences of Bitcoins. See David D. Stewart & Stephanie Soong Johnston, Digital Currency: A New Worry for Tax Administrators?, 68 Tax NoTes INT’l 423 (Oct. 29, 2012).

9This followed repeated requests for tax guidance from com-mentators and other government agencies. See, e.g., Eric Kroh, Taxpayer Advocate Urges IRS Guidance on Virtual Currencies, Tax aNalysTs, 2014 WTD 7-3 (Jan. 10, 2014); United States Government Accountability Office, Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks, GAO-13-516 (May 2013), at www.gao.gov/assets/660/654620.pdf.

10See blockchain.info/charts/total-bitcoins.11See I.R.C. §§ 6031-6060.12See I.R.C. § 6050W.13Jaime Arora, Virtual Currency May Be Reportable on FBAR

in Future, Tax aNalysTs, 2014 TNT 108-2 (June 05, 2014).14See Alison Bennett, IRS Official: Criminal Investigation

Division Scrutinizing Use of Virtual Currency, BloomBerg BNa Tax & aCCouNTINg CeNTer, 92 DTR G-2 (May 12, 2014).

Federal Bar Association2014 Annual Meeting & ConventionJoin the FBA at the Omni Providence Hotel for informative continuing legal education sessions. • Network with your colleagues• Gain insight into some of the legal community’s hottest topics• 8 hours of CLE over 2 days

www.fedbar.org/2014Convention

6 Inside Basis

INTRODUCTIONLegal issues often arise at the intersection between a new le-

gal right and an existing legal framework. In the estate tax world, the relatively new right of publicity clashed with the well-settled statutory language defining the value of a gross estate.1 In 1994, the court in Estate of Andrews v. United States, addressed the “is-sue of first impression” of the value of an author’s name as part of her estate for federal tax purposes.2 Andrews’ ruling demonstrated that publicity rights are (1) includible in a decedent’s gross estate3 and (2) valued based on a hypothetical sales transaction between a buyer and a seller.4

Even after Andrews, the inclusion and valuation of these de-scendible rights for federal estate tax, as well as the liquidity issues they pose to cash-strapped estates, have continued to be debated by highly regarded scholars and practitioners. Mitchell M. Gans, Bridget J. Crawford, and Jonathan G. Blattmachr advocated for a legislative solution to this problem.5 They proposed a modifica-tion to state law, whereby a decedent’s publicity rights automati-cally pass to a designated statutory heir and, thus, are excluded from the gross estate.6 In response to the proposal, Joshua C. Tate argued that the publicity rights, through the supposed restriction on testamentary control by automatic vesting in the statutory heir, are nonetheless includible in a decedent’s estate because the celebrity enjoyed a property interest in them at the date of death.7 Following Tate’s article, Gans, Crawford, and Blattmachr defended their position that post-death control is a requirement for estate tax inclusion.8 Tate replied that, in effect, their proposal was an estate tax free lunch for celebrities and, thus, did not serve the broader policy justifications and normative goals of the federal estate tax.9

The debate has been recharged by the valuation issues cur-rently facing the estate of Michael Jackson.10 Among several val-uation discrepancies between the estate and the IRS,11 one of the most glaring is the valuation of his publicity rights; namely, the estate’s calculation of $2,105 compared to the IRS’s of $430 mil-lion.12 Furthermore, with the recent death of renowned military and spy thriller author, Tom Clancy,13 Andrews literary valuation issues will likely resurface.

In Part I of this article, background information on the estate tax and publicity rights will be provided. Part II of the article will discuss the common valuation methods of postmortem publicity rights. Part III will cover the current scholarly debate on the in-clusion and valuation issues of these rights for federal estate tax purposes. Finally, in Part IV, a proposal for solving the problems

discussed in Part III will be advanced.I: BACKGROUNDA. The Estate Tax

The federal estate tax has a long history dating back to 1797, where it was sparingly imposed on an emergency basis to fund mil-itary conflict.14 In 1932, Congress responded to the economic tur-bulence caused by the Great Depression with the Revenue Act of 1932.15 The Act’s “dual mission of raising revenue and curtailing concentration of wealth” increased estate tax rates and reduced the lifetime exemption from estate tax, resulting in more tax im-posed on smaller estates.16

The current estate tax regime for the 2013 taxable year in-cludes a $5.25 million lifetime exclusion,17 meaning only the value of the taxable estate that exceeds this “unified credit” of $5.25 million is subject to the estate tax.18 The value of the tax-able estate in excess of this exclusion is subject to a 40 percent tax.19 Since the unification of the estate and gift tax in 1976, the maximum rate peaked at 70 percent between 1977 and 1981 and reached a low of 35 percent between 2010 and 2012.20

The federal estate tax is “[a] tax imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.”21 A taxable estate is equal to the decedent’s gross estate less allowable deductions.22 A gross estate is the value at the time of the decedent’s death of “all property, real or per-sonal, tangible or intangible, wherever situated.”23 Allowable de-ductions from the gross estate include funeral and administration expenses and claims against the estate,24 charitable transfers,25 and state death taxes.26

Pursuant to § 2033 of the Internal Revenue Code (IRC), the value of a gross estate includes “all property to the extent of the interest therein of the decedent at the time of his death.”27 Be-cause of its broad language, § 2033 is often times referred to as a “catch all provision,”28 and, thus, unusual, difficult to value assets are nonetheless includible in a decedent’s estate.29 An interest for estate tax purposes is generally created by state law.30 The federal tax collector would be a “fish out of water” without the decla-rations by state law of a taxpayer’s rights and liabilities.31 This federal tax concept affects the descendibility of publicity rights de-pending on the domicile of the decedent, which will be discussed later in the article.

B. The Right of Publicity Whereas the federal estate tax dates back to 1797,32 public-

ity rights are a creation of the twentieth century.33 In 1953, the

Starting with the [Tax] Man in the Mirror: Asking the IRS to Change its Ways of Valuing Postmortem Publicity Rights

Christopher Weeg,University of Florida Levin College of LawJ.D. Candidate, Class of 2015

Federal Bar Association Section On Taxation2014 Donald C. Alexander Tax Law Writing Competition

7Summer 2014 7

court in Haelan Laboratories, Inc. v. Topps Chewing Gum, Inc. first recognized the right of publicity as separate and distinct from the right of privacy.34 In Haelan, a baseball player granted an exclu-sive right to the plaintiff, a chewing-gum manufacture, to use his photograph.35 The baseball player later granted the defendant, a rival chewing-gum manufacture, similar rights to use his photo-graph during the plaintiff’s exclusive grant period.36 The defen-dant argued the plaintiff’s contract was merely a release of liability for invasion of the right of privacy and, thus, “vested in plaintiff no ‘property’ right or other legal interest which defendant's con-duct invaded.”37

The court found “in addition to and independent of that right of privacy . . . , a man has a right in the publicity value of his photograph, i.e., the right to grant the exclusive privilege of pub-lishing his picture, and that such a grant may validly be made ‘in gross.’”38 The court coined the term “right of publicity” in ruling that a person enjoyed an assignable and exclusive property inter-est in his or her likenesses.39 This new property right had to be both assignable to generate money from endorsements and exclu-sive to protect others from exploiting it.40

Since its foundation in 1953, the right of publicity has gained traction in many jurisdictions, with recognition in over 31 states by statute or under common law.41 Twenty one states recognize a right of publicity under common law, and of those states, eight expressly provide for a right of publicity by statute.42 The remain-ing ten states have “privacy” statutes that incorporate most of the aspects of the right of publicity.43 Notably, New York state courts have expressly denied a common law right of publicity, instead finding the right is embodied by New York’s right of privacy stat-ute.44 Currently, there is no federal right of publicity.45

Although the privacy and publicity statutes do not differ sig-nificantly in their rights and remedies,46 the legal distinction lies in the survivability of these rights.47 Whereas the right of privacy ends at death,48 the right of publicity rights generally extend post-mortem.49

C. Descendibility of Publicity RightsBecause state law determines a property interest in the gross

estate,50 the history of the descendibility of publicity rights is re-plete with conflicting jurisdictional decisions. Today, of the 31 states that acknowledge publicity rights,51 20 recognize them as descendible either by statute or under common law.52 The dura-tion of these postmortem rights, however, differs among the state statutes, ranging from 20 to 100 years, as well as no stated dura-tion or as long as continuously used.53 This section will cover the development of the postmortem publicity rights in three major jurisdictions: California, Tennessee, and New York.

Early California court decisions did not find the right of pub-licity descendible where the decedent failed to exercise them during his or her lifetime.54 In situations involving unexercised publicity rights, these rights simply passed into the public domain at death.55 These rulings were legislatively overruled in 1985 by California statute recognizing postmortem publicity rights for 50 years after death.56

The death of Elvis Presley helped shape Tennessee common law on the descendibility of publicity rights.57 After protracted

litigation at both the state and federal levels, the Sixth Circuit Court of Appeals in 1987 followed Tennessee state law in finding publicity rights descendible.58 Tennessee statute provides public-ity rights survive a period of ten years after death and extend in-definitely thereafter if commercially exploited.59 Following the ten year period, the exclusive rights are terminated if unused for a period of two years.60

Early New York law held that the right of publicity survives death and is further assignable.61 However, in 1986, both a New York Supreme Court and the Appellate Division held publicity rights do not survive death.62 Soon after, in 1990, the federal Sec-ond Circuit Court of Appeals similarly ruled no postmortem pub-licity rights existed under New York law.63 In 1997, a federal New York district court solidified New York’s stance against postmor-tem publicity rights in the litigation involving Marilyn Monroe’s publicity rights.64

D. Taxation of Publicity RightsEstate of Andrews: A Novel Issue of Valuing Postmortem

Book ContractsWhereas a myriad of cases discuss whether a right of publicity

exists65 and if that right is descendible,66 there is a dearth of case law addressing the estate tax consequences posed by these rights. In 1994, a decedent’s publicity rights finally clashed with the es-tate tax in Estate of Andrews v. United States,67 sending a “shock wave through the estate planning profession.”68 Andrews was the first and still is the only case to apply the federal estate tax rules to publicity rights.69 In tackling this issue of first impression, the court held the value of an author’s name is an includible asset of her Estate to be valued based on a hypothetical transaction be-tween a willing buyer and seller as of the date of death.70

In Andrews, the decedent was a best-selling author from 1979 up until her death in 1986.71 A few weeks before she died, An-drews signed a contract with her publisher where she would re-ceive $3 million in advance royalties in exchange for two accept-able manuscripts.72 After her death, the executor of her Estate and the publisher revised the proposed contract to proceed with a ghostwriter.73 Just before the release of the ghostwritten book, the Estate executed a second contract with the publisher for three more ghostwritten books under Andrews’ name.74 In response to the continued commercial success of the ghostwritten books, An-drews’ Estate executed a third contract for three additional books under her name and in the “Andrews style.”75

Both the Estate and publisher’s exploitation of Andrews’ name through the ghostwritten books demonstrated the tangible value of the otherwise intangible asset.76 In contract negotiations, the executors of her Estate repeatedly referred to the prime im-portance of Andrews’ name in selling books.77 Furthermore, the publisher did not confirm Andrews’ death until the fifth ghost-written book, which included a brief excerpt that dubiously stated Andrews had completed most of the ghostwritten books before her death.78 The court found “[t]he fact that the publicity traded heavily on Andrews' name and reputation augers in favor of a finding that there was substantial value in Andrews' name on the date of death.”79

The Estate did not list Andrews’ name among its assets on its

8 Inside Basis

federal estate tax return.80 Accordingly, the IRS issued a notice of deficiency for the value of her name.81 The IRS valued her name at $1,244,190.84 at the date of her death and sought $649,201.77 in deficient taxes.82 The value of an author’s name at her date of death was an “issue of first impression” for the court to resolve.83

The IRS’s valuation of $1,244,910.84 was based on future in-come streams from royalties, focusing on her “success factor as of her death.”84 The IRS’s foundation for the valuation of Andrews’ name was $12 million, which equaled the $1.5 million for each of the eight ghostwritten books.85 The $1.5 million value per book was based on Andrews’ last contract of $3 million for two books.86 After deducting applicable expenses, a discount factor “for the contingency of failure” was applied to the value of each book, with later books having a higher discount factor due to their lower pre-dictability of success.87 The IRS assigned a discount factor of 33 percent on the first two books, 45 percent on the next three, and a 50 percent discount on the final three books.88

The Estate’s valuation of $140,000 offered at trial was based on a hypothetical transaction as prescribed by the IRS regula-tions.89 In determining the fair market value of Andrews’ name, the valuation considered several factors, including the market for Andrews’ books, the publishing industry, and the general eco-nomic conditions and investment market around the time of her death.90 The Estate’s valuation basis of $1.5 million, as compared to the IRS’s of $12 million, represented the total potential royal-ties for only the first book of Andrews’ last contract.91 The pos-sible return on investment carried a hefty 85 percent discount fac-tor, which reflected the “unattractive” investment opportunity’s uncertainties and risk of such a gamble in Andrews’ name.92

The court valued Andrews’ name at $703,500, which ulti-mately met in the middle of the IRS’s and the Estate’s valuations.93 Applying the regulations, the court found the name should be val-ued at the fair market value at the date of death based on the facts reasonably knowable to a hypothetical buyer and seller.94 The principal “knowable” fact was the inherent risk of the publisher’s acceptance of the ghostwritten manuscripts, a risk both the IRS and Estate recognized, albeit at different discount factor rates.95 Similar to the Estate’s valuation, the court’s basis was $1.55 mil-lion, which equaled the advance for the first book under Andrews’ last contract.96 The court, however, applied the IRS’s discount factor of 33 percent to arrive at the price Andrews’ name would fetch in the hypothetical transaction.97

The court faulted the IRS’s valuation for its lack of any “sig-nificant cognizance of the willing buyer and seller scenario pre-scribed by the IRS regulations and the applicable decisional law as the method for determining the value of an asset on the date of death.”98 The court also found the IRS essentially employed a wait-and-see approach based on its inclusion in the $12 million valuation basis of all eight ghostwritten books, which were writ-ten and published over the course of several years after Andrews’ death; these were not facts that would be reasonably known at the time of death.99 The likelihood the publisher would accept even the first ghostwritten book was speculative, and the assump-tion that seven more would be accepted and meet commercial success was unreasonable.100 Information that a hypothetical will-ing buyer could not have known is irrelevant and, thus, precluded

from a valuation.101 On the other hand, the court lauded the Estate’s “impres-

sive study” of the “practical economical considerations” inherent in such a speculative venture as purchasing a deceased author’s name.102 However, the 85 percent discount factor failed to take into account Andrews’ past success and the strong market for her books on the date of her death, while over inflating the risk of pro-ducing an acceptable ghostwritten manuscript.103 Although the court rejected the Estate’s valuation of Andrews’ name, it found the Estate overcame the IRS’s presumption of correctness of the value of Andrews’ name by establishing by a preponderance of the evidence that the IRS’s valuation was incorrect.104

II. VALUATION METHODS: MORE THAN ONE WAY TO SKIN A CAT

Estate tax valuations can be problematic because many assets included in a decedent’s estate at death are not simply cash, but rather various forms of property acquired throughout life.105 This valuation problem is exacerbated by the inclusion of intangible assets which can pose more difficult valuation concerns than tra-ditional tangible assets.106 Furthermore, with a highly unique and personal intangible asset like the right of publicity, valuation dif-ficulty in such a scenario can be particularly challenging.107

When faced with a difficult valuation issue, an estate attor-ney may first turn to the language of § 2033 which simply states the “value” of all property interests is included in a gross estate.108 Frustrated by this vague language, the next likely step is to turn to the regulations or the sporadic, and at times, inconsistent case law. The applicable estate tax valuation regulations specifically prescribe a variety of valuation methods for property including stocks and bonds, business interests, notes, annuities, life insur-ance policies, and household and personal effects.109

Publicity rights, however, fall outside the specific valuation regulations above and are, therefore, covered by the catch all provision in regulation 20.2031–9.110 This regulation states “any property not specifically described in §§ 20.2031–2 to 20.2031–8 is made in in accordance with the general principles set forth in § 20.2031–1.”111 The “general principles” of regulation 20.2031–1 provide that the value of all property includible in a gross estate is its fair market value based on a hypothetical transaction between a willing buyer and seller with a reasonable knowledge of all rel-evant facts.112

This hypothetical arms-length transaction should reflect the economic reality of the market, whereby a “prospective seller would inform a prospective buyer of all favorable facts in an effort to obtain the best possible price, and a prospective buyer would elicit all the negative information in order to obtain the lowest possible price.”113 Furthermore, for estate tax purposes, these rel-evant facts are limited to “reasonably knowable facts at the date of death.”114

While the hypothetical transaction standard may seem straightforward on its face, its application can be problematic, es-pecially for a unique asset like a decedent’s postmortem publicity rights. As discussed in Part I, Andrews illustrated this complexity where the IRS, the Estate, and the district court all reached sig-nificantly different valuations of the decedent’s name.115 As was

9Summer 2014 9

the case in Andrews, the result typically turns on a “battle of the parties’ experts.”116

The courts have applied the hypothetical sale standard in various ways over the years. Regardless of the method employed, the overarching goal of fair market valuation is always on the “the highest and best use of the property.”117 The highest and best use standard does not consider the owner’s actual use of the prop-erty.118 The following sections will discuss the usual methods to approximate the fair market value of a celebrity’s right of publicity in a hypothetical sales transaction.

A. The Income MethodThe income method, also known as the capitalization meth-

od, is principled on the recognition that “the only commercial value of any property lies in its future earning or usefulness.”119 This method is particularly useful in approximating the fair mar-ket value where either no market exists or there is an absence of relevant market transactions. It has been described as the most common valuation method for assets like the right of publicity where there are “relatively few sales of these types of assets, and even when there are such sales, the assets are hardly comparable with one another.”120

The income method of valuation calculates the present value of the projected future income stream of an asset.122 First, the estimated future earnings are calculated by looking ahead at the income potential of the asset.123 Past earnings are considered only if they reasonably help forecast future ones, with heavier reliance on the most recent data.124 Next, a capitalization rate, or discount factor, is applied to the projected future income stream.125 The capitalization rate reflects the investment risk of the asset, that is how realizable the future income is, plus the current rate of re-turn.126 The riskier the asset, the higher the capitalization rate and the lower the valuation.127

Post-death events may be relevant if known or reasonably foreseeable at the date of death.128 The income method essentially replicates the market value of the asset because, assuming a ratio-nal market, the fair market value is “the sum which represents the current estimate of the present value of its future earnings and of its final liquidation.”129

B. The Market ApproachThe market approach arrives at an asset’s value by looking to

the price the asset would bring on the open market in an arms-length transaction.130 The most reliable valuation assumes the sale would occur within a reasonable time before or after the dece-dent’s death.131 Despite its application by the Andrews court, the market approach is “rarely used to value intangible assets because the assets are so unique that sales of comparable property are not available to the appraiser.”132

C. The Combined MethodA combination of the income and market methods may yield

the best prediction of fair market value for a decedent’s publicity rights.133 First, the income method is employed by starting with a baseline value equal to the “personality's endorsement income streams existing at the time of death, such as royalty and licens-

ing agreements.”134 Next, the decedent’s marketability for future income streams is examined based on “offers for additional en-dorsements and any other indicators of the marketability of the personality's name.”135 “Marking points” further affect the dece-dent’s marketability for future endorsements.136 Marking points are significant events that either positively or negatively impact the value, including the personality’s death.137 Once the income potential is determined based on the current income streams and marketability for future income streams, a discount factor is ap-plied based on “an array of factors, including the diminution of value over time.”138

Next, the market approach is applied by examining the val-ues of comparable celebrities’ rights of publicity.139 First, a similar “proxy” is identified in an industry relevant to the decedent’s with a similar level of fame.140 Then estimates of the values of both the proxy’s publicity rights as well as the decedent’s must be obtained by experts.141 The values obtained by the income method above and the market approach combine to provide a “strong indication of the value of the personality’s post-mortem right of publicity.”142

D. Valuation of Michael Jackson’s Publicity RightsThe sheer magnitude of Michael Jackson’s celebrity poses

challenging valuation issues of his publicity rights. The valuation difficulty of Jackson’s right of publicity is clearly illustrated by the difference between the Estate’s valuation of $2,105 and the IRS’s of $430 million.143 An application of any of the three valuation methods previously discussed would be a staggering feat.

As demonstrated in Andrews, the fair market value of Jack-son’s publicity rights is based on the facts reasonably knowable to a hypothetical buyer and seller at the time of death.144 Further, a discount factor would also be applied to reflect the economic realities of such a transaction. A reasonable discount factor would likely take into account both Jackson’s past negative publicity, including alleged pedophilia and prescription drug abuse, and his then present career resurgence on the heels of a new world tour. Finally, a “wait-and see” approach that considers Jackson’s mas-sive postmortem success145 should be precluded from the valua-tion as such facts would not have been reasonably knowable at Jackson’s death.

One valuation expert suggests applying probabilities to three possible scenarios to determine a supportable, reasonable value of Jackson’s publicity rights.146 The three scenarios would reflect a best case, worst case, and middle of the road forecast of future cash flows.147 The cash flows would be estimated based on the predicted longevity and possibility of growth.148 Although look-ing to comparable bodies of work of other artists may be of some help, an apples to apples comparison is not practicable because of the uniqueness of this intangible asset.149 Furthermore, predicting the whims of public opinion, as well as the changing technologi-cal means of delivery, make this a particularly challenging valua-tion.150 Finally, the risks of ownerships of such a volatile asset, as well as investment alternatives, must also be considered.151

One of the most important considerations is to what extent Jackson’s death impacted the value of his publicity rights.152 A property interest owned at death is valued at the “instant of death . . when the ownership of the decedent ends and the ownership

10 Inside Basis

of the successors begins.”153 To calculate the value of Jackson’s estate at the precise moment of death would be a “herculean task” that would require comparing Jackson’s income from publicity rights before death with the income after his death.154 Even with the admission that such a calculation would only provide a “very rough”155 estimate for tax purposes, the $430 million valuation discrepancy between Jackson’s Estate and the IRS is perplexing. The explanation remains to be seen as the case is currently pend-ing resolution in the Tax Court.156

III: CURRENT SCHOLARLY DEBATE ON INCLUSION & VALUATION

Since Andrews, there has been much scholarly debate on the valuation of a decedent’s publicity rights. Much of the debate has been centered on the liquidity problems posed by these rights based on their inclusion in a decedent’s estate at their “highest and best use” for estate tax purposes.157 The Yale Law Journal Pocket Part has been the battleground where four estate plan-ning heavyweights have squared off on this issue. On one side is Mitchell M. Gans,158 Bridget J. Crawford,159 and Jonathan G. Blattmachr,160 who collaborated to propose a legislative fix to this problem.161 On the other side of the debate is Joshua C. Tate,162 who proposes no deviation from the current law of the inclusion of publicity rights in a decedent’s estate as it furthers the funda-mental policy goals of transfer taxation.163 At the heart of the debate is the question of whether post-death control is necessary for estate tax inclusion.164

A. “A Relatively Simple Legislative Solution”On the heels of recently enacted legislation in California

creating retroactive, descendible rights of publicity, Gans, Craw-ford, and Blattmachr (“G.C.B.”) recognized the estate planning implications of this otherwise ostensible victory for celebrities, particularly the concern that the estate tax value of the dece-dent’s publicity rights could exceed an estate’s liquid assets.165 They proposed state law should be written to effectively remove a decedent’s publicity rights from the federal estate tax regime by limiting the decedent’s ability to control the disposition of any postmortem rights of publicity.166

Under current law, publicity rights are included in a dece-dent’s gross estate unless they pass automatically to a surviving spouse under the marital deduction or are transferred to a charity under the charitable deduction.167 Absent these statutory excep-tions, a decedent’s publicity rights are includible in the gross es-tate at their fair market value, regardless of whether the decedent’s survivors choose to exploit them financially.168 The inclusion of these rights pose estate tax liquidity concerns as they are difficult to sell or convert to cash.169 Even worse, their illiquidity could result in forced-exploitation of these rights by unwilling heirs in order to pay the estate tax.170

G.C.B. propose a legislative fix to this problem:Under the California law as drafted, the decedent's abil-ity to designate who will receive his or her postmortem publicity rights triggers the imposition of federal estate tax. If, however, state law were modified to provide that

the postmortem rights of publicity pass automatically to a decedent's surviving spouse and descendants then the value of those rights should not be subject to federal es-tate taxation.171

In support of their proposal, G.C.B. analogize publicity rights that automatically vest in a statutory heir to wrongful death ben-efits:

Under state-law wrongful death actions, statutorily-designated individuals--not necessarily the beneficiaries under a decedent's will--have the right to sue for the decedent's wrongful death. Because the decedent has no ability to control who succeeds to such a right, the value of a wrongful death action (unlike an heir's tort claim for a decedent's lifetime pain, for example) is excluded from the decedent's gross estate for federal estate tax pur-poses.172

B. Tate’s Response: “A Testamentary Disposition Is No Less Tax-able When It Is Compelled by Statute”

Five months after G.C.B.’s article, Tate declared that “their ‘legislative solution’ will not solve the problem” because merely removing a celebrity’s testamentary control of his or her publicity rights by statute will not permit exclusion from the gross estate.173 Tate found their comparison of wrongful death benefits to public-ity rights that automatically pass by statute a “flawed analogy” that “misconstrues the reasons for excluding wrongful death benefits from the gross estate.”174

In his article, Tate argues that wrongful death benefits are excluded from the gross estate “not because the decedent lacked the power to devise them,” but rather because they “arose only at the decedent’s death, and did not belong to the decedent during life.”175 Tate contends that publicity rights, on the other hand, are included in the gross estate because a celebrity is entitled to those rights during life and, thus, enjoys a property interest in them at the time of death.176 Moreover, the elimination of testamentary control by automatic vesting in a statutory heir “does not change the fact that he or she enjoyed a property interest in them at the time of death.”177

C. Responding to the Response: Post-Death Control Still “An Es-sential Prerequisite for Estate Tax Inclusion”

Shortly after Tate’s response, G.C.B. responded that his anal-ysis “misconstrues fundamental estate tax principles and misun-derstands the precedents on which he relies.”178 They argue that Tate ignores a “bedrock principle” that “estate tax inclusion under § 2033 is not appropriate unless the decedent has the right to con-trol the post-death disposition of the interest.”179 Furthermore, they contend Tate is unable “to cite any affirmative authority to support his assertion that post-death control is irrelevant to estate tax inclusion.”180

D. A Broader Analysis: Policy Justifications for Staying the CourseIn the latest chapter, Tate “take[s] the debate to another

level” in addressing the broader policy justifications in explaining

11Summer 2014 11

why the state legislative solution proposed by G.C.B. “would be problematic under current law and unjustified in light of familiar policy considerations.”181 Tate argues the five federal estate tax policy goals below would not be served by G.C.B.’s proposal:

(1) supporting the progressive nature of the income tax; (2) “backstopping” the income tax system to ensure that certain income does not escape taxation; (3) preventing dynastic accumulation of wealth over multiple genera-tions; (4) promoting equality of opportunity among the citizenry; and (5) recognizing the role of the state as a “silent partner” in the accumulation of wealth.182 Tate further argues that a state forced-share statute could

have a widespread negative impact on the federal estate tax re-gime: “[i]f freedom of testation were made a prerequisite to inclu-sion of property in the gross estate under § 2033, then states could preempt federal estate taxation not only for postmortem publicity rights, but for any assets, simply by extending the forced share to cover those assets.”183 Tate also cautions that a state forced-share statute would produce inconsistent federal estate tax results de-pending on the celebrity’s domicile at death.184

IV: PROPOSALThe following proposal addresses two scenarios that share the

same issues, but need different solutions. A solution for celebrities who do not exploit their publicity rights during life is proposed, as well as a solution for celebrities who choose to exploit them. Regardless of a celebrity’s use of his publicity rights during life, however, the current state of the law poses the same issues to es-tates in either scenario; namely, valuation difficulties and liquidity concerns.

A. Celebrities Who Do Not Exploit Their Publicity Rights Dur-ing Life

To prevent the liquidity problems described by Gans, Craw-ford, and Blattmachr,185 as well as by Ray D. Madoff,186 an elec-tion for a special-use valuation, similar to that of qualified farming land of § 2032A,187 should be allowed for an estate with a post-mortem right of publicity. Section 2032A provides an election by the executor of an estate to value “qualified real property” at its current use by the decedent on the date of death, rather than its highest and best use.188 The justification for § 2032A lay in both tax relief and public policy.189 First, Congress “was concerned the resulting [estate] tax burden might force the sale of the farm to pay the tax if other assets are insufficient to meet it.”190 Second, Congress “felt that it was desirable to encourage the continued use of property for farming and other small business purposes.”191 In light of these goals, Congress could carve out a similar special-use valuation election for a decedent’s postmortem right of publicity. Analogous to the forced sale of a family farm in § 2032A, a griev-ing family should be not be forced to exploit a decedent’s publicity rights in order to pay the estate tax tab.

The special-use valuation acts as an exception to the “highest and best use” standard of the hypothetical sale method of regula-tion 20.2031-1.192 The special-use valuation will enable the estate

to value the publicity rights based on their actual use at the date of the decedent’s death. For celebrities who choose not to exploit their publicity rights during their lives, this method would solve the potential liquidity problem estates face when valuing publicity rights at their highest and best use. Because no financial benefit was ever reaped, the value of the actual use of the publicity rights in such a scenario would be zero, thereby solving both the com-plicated valuation issue and the estate’s liquidity issue. When a celebrity only uses his publicity rights as a shield during life, a sword should not be turned on his heirs at death.

Furthermore, the uniquely personal nature of a celebrity’s publicity rights lends to an undesirable application of the “high-est and best use” standard. A person is inextricably linked to his or her publicity rights, and, therefore, requiring the valuation of them at their best use is morally questionable. During life, a ce-lebrity cannot be compelled to exploit her publicity rights, and it follows that at death a family should not be compelled to do the same. The right of publicity is not as marketable a commodity as other assets, tangible or intangible.193 Simply put, the standard does not fit this asset well.

B. Celebrities Who Do Exploit Their Publicity Rights During LifeFor decedents who exploited their publicity rights during life,

and thus have value based on their actual use at the date of the death, the solution above will not resolve the valuation and li-quidity issues. Therefore, the legislative proposal as advanced by Gans, Crawford, and Blattmachr to automatically vest in a statu-tory heir is a desirable solution to these issues.194 Through auto-matic vesting in a statutory heir, the transfer tax is simply deferred to the next transfer of the rights. At the time of the subsequent transfer, a more accurate valuation can be made after the dust has settled following the celebrity’s death, and the market waters have been tested.

V: CONCLUSIONThis article has tracked the past changes and considered the

present issues that will affect the future of the federal estate tax landscape. Changes that pose taxing issues are nothing new for the estate planning profession. Fortunate for both wealthy clients and the rich scholarly debate, the trusts and estates practice is one of the most adept fields of law at addressing and adapting to change with novel, creative, and at times, ingenious ideas. What is certain is more issues will develop in the future but, thankfully, scholars and practitioners faced with them will be standing on the shoulders of giants. z

Endnotes1See generally Note, Federal Estate Tax and the Right of

Publicity: Taxing Estates for Celebrity Value, 108 harV. l. reV. 683-88 (1995) (discussing the effect the Andrews decision had on celebrity estate planning).

2850 F. Supp. 1279, 1281 (E.D. Va. 1994). 3The Internal Revenue Code (IRC) defines a gross estate as

the value at the time of the decedent’s death of “all property, real or personal, tangible or intangible, wherever situated.” I.R.C. § 2031(a) (2012).

4Andrews, 850 F. Supp. at 1289.5Mitchell M. Gans, Bridget J. Crawford & Jonathan G.

Blattmachr, Postmortem Rights of Publicity: The Federal Estate Tax Consequences of New State-Law Property Rights, 117 yale l.J. PoCkeT ParT 203, 207 (2008) [hereinafter Gans et al., Postmortem Rights].

6Id. “This is because the decedent had no interest in the financial benefit generated by the post-mortem publicity rights.” Id. at 207, n. 22.

7Joshua C. Tate, Marilyn Monroe’s Legacy: Taxation of Postmortem Publicity Rights, 118 yale l.J. PoCkeT ParT 38, 41 (2008) [hereinafter Tate, Taxation of Postmortem Rights].

8Mitchell M. Gans, Bridget J. Crawford & Jonathan G. Blattmachr, The Estate Tax Fundamentals of Celebrity and Control, 118 yale l.J. PoCkeT ParT 50, 53 (2008) [hereinafter Gans et al., Estate Tax Fundamentals].

9Joshua C. Tate, Immortal Fame: Publicity Rights, Taxation, and the Power of Testation, 44 ga. l. reV. 1, 9 (2009) [hereinaf-ter Tate, Immortal Fame].

10Alexander Ripps, Protests Surge as IRS Sets Jackson Image at $430 Million, BloomBerg (Sep. 16, 2013), www.bloomberg.com/news/2013-09-16/protests-surge-as-irs-sets-jackson-image-at-430-million-taxes.html.

11Other valuation discrepancies included the interests in two trust accounts, real estate, ownership interests in busi-ness ventures, rights in Jackson 5 master recordings, a contin-gency non-appearance and cancellation policy, and tangible personal property including a Bentley. Additionally, the IRS disallowed a $17 million estate deduction of debts to “other creditors.” Alexander Ripps, Michael Jackson’s Bentley Valued at $250,000 by IRS, BloomBerg (Aug. 30, 2013), www.bloomberg.com/news/2013-08-30/michael-jackson-s-bentley-valued-at-250-000-by-irs-taxes.html.

12Ripps, supra note 10.13Tom Clancy died in Baltimore on October 1, 2013.

Julie Bosman, Tom Clancy, Best- Selling Master of Military Thrillers, Dies at 66, N.y. TImes (Oct. 2, 2013), www.nytimes.com/2013/10/03/books/tom-clancy-best-selling-novelist-of-mili-tary-thrillers-dies-at-66.html?_r=1&.

14Jeffrey A. Cooper, Ghosts of 1932: The Lost History of Estate and Gift Taxation, 9 Fla. Tax reV. 875, 881 (2010).

15Id. at 886.16Id. at 887.17I.R.C. § 2010(c) (2012).18I.R.C. § 2010(a) (2012).19I.R.C. § 2001(c) (2012).20roBerT B. smITh, Federal esTaTe & gIFT TaxaTIoN ¶

2.01, 3 n. 47 (current through 2013). The effect of the 2010 Congressional estate tax legislation on decedents dying in 2010 is beyond the scope of this article. For a detailed discussion, see Boris I. BITTker & laWreNCe lokkeN, Federal TaxaTIoN oF INCome, esTaTes & gIFTs ¶ 132.9 (current through 2013).

21I.R.C. § 2001(a) (2012). 22I.R.C. § 2051 (2012).23I.R.C. § 2031(a) (2012).24I.R.C. § 2053 (2012).

25I.R.C. § 2055 (2012).26I.R.C. § 2058 (2012).27I.R.C. § 2033 (2012).28James r. hasselBaCk, eT al., Federal TaxaTIoN:

ComPreheNsIVe ToPICs 2009 ¶ 22,101 (“[Section 2033] is a catch-all provision, serving the same purpose as Code Sec. 61 does for income tax purposes.”); Paul L. Caron, Estate Planning Implications of the Right of Publicity, 68 Tax NoTes 95, 95 (1995), available at srn.com/abstract=1426629 (“The catch-all section 2033 reaches ‘all property to the extent therein of the dece-dent.’”) But see Estate of Gamble v. Comm’r, 69 T.C. 942, 947 (1978) (“Section 2033 is not a “catch all” provision bringing within the gross estate the value of all benefits which accrue to others upon one’s death. It requires the existence of property “beneficially owned by the decedent at the time of his death.”) (citing Estate of Tully v. United States, 528 F.2d 1401, 1406 (Ct. Cl. 1976) (holding death benefits transferred to the dece-dent’s wife at the time of his death were outside the scope of § 2033 and thereby not includible in the gross estate because the decedent lacked the requisite control to constitute an “interest” under the section’s language).

29Wendy C. Gerzog, Contingencies and the Estate Tax, 5 Fla. Tax reV. 49, 58 (2001).

30Morgan v. Comm’r, 309 U.S. 78, 80, 84 (1940)31BITTker & lokkeN, supra note 20, ¶ 4.1. State law defines

legal terms such as trust, marriage, corporation, contract, deben-ture, lease, and real property and their differing definitions from state to state affect tax status and filings at the federal level. Id.

32Cooper, supra note 14, at 881.33David Westfall & David Landau, Publicity Rights As Property

Rights, 23 Cardozo arTs & eNT. l.J. 71, 76 (2005).34202 F.2d 866, 868 (2d Cir. 1953).35Id. at 867.36Id. 37Id.38Id. at 868.39Id.40Id. 411 J. Thomas mCCarThy, rIghTs oF PuBlICITy aNd Privacy §

6:3 (2d ed. 2013) (current through April 2013).42Id. These states are California, Florida, Illinois, Kentucky,

Ohio, Pennsylvania, Texas, and Wisconsin. Id.43Id.44Id.; Stephano v. News Grp. Publ’ns, Inc., 64 N.Y.2d 174,

183 (1984) (“Since the ‘right of publicity’ is encompassed under the Civil Rights Law as an aspect of the right of privacy, which, as noted, is exclusively statutory in this State, the plaintiff cannot claim an independent common-law right of publicity.”).

451 mCCarThy, supra note 41, § 6.3. For a discussion of the federal right of publicity debate, see J. Eugene Salomon, Jr., The Right of Publicity Run Riot: The Case for A Federal Statute, 60 s. Cal. l. reV. 1179 (1987).

46New York’s right of privacy statute states: A person, firm or corporation that uses

for advertising purposes, or for the purposes of trade, the name, portrait or picture of any liv-

12 Inside Basis

13

ing person without having first obtained the written consent of such person, or if a minor of his or her parent or guardian, is guilty of a misdemeanor.

N.y. CIV. rIghTs § 50 (2013). For comparison, California’s right of publicity statute states, in pertinent part:

Any person who knowingly uses another’s name, voice, signature, photograph, or likeness, in any manner, on or in products, merchandise, or goods, or for purposes of advertising or sell-ing, or soliciting purchases of, products, mer-chandise, goods or services, without such per-son’s prior consent, or, in the case of a minor, the prior consent of his parent or legal guardian, shall be liable for any damages sustained by the person or persons injured as a result thereof.

Cal. CIV. § 3344(a) (2013).472 mCCarThy, supra note 41, § 9:1.48Id.49Id. § 9:17.50Morgan v. Comm’r, 309 U.S. 78, 80, 84 (1940)511 mCCarThy, supra note 41, § 6.3.522 mCCarThy, supra note 41, § 9:18.53Id.54Lugosi v. Universal Pictures, 25 Cal. 3d 813 (1979) (hold-

ing publicity rights must be exercised during the decedent’s lifetime to create an inheritable business or property interest), superseded by statute; Guglielmi v. Spelling-Goldberg Prods., 25 Cal. 3d 860 (1979) (applying same reasoning in Lugosi against descendibility).

55Lugosi, 25 Cal. 3d at 823.56The original 1985 statute extended publicity rights to 50

years postmortem. In 1998, the California legislature extended the postmortem duration of the statutory right of publicity to seventy years. Cal. CIV. § 3344.1 (2013).

572 mCCarThy, supra note 41, § 9:36.58Id.59TeNN. Code § 47-25-1104 (2013).60Id.61Price v. Hal Roach Studios, Inc., 400 F. Supp. 836, 844

(S.D.N.Y. 1975); Factors Etc., Inc. v. Creative Card Co., 444 F. Supp. 279, 282 (S.D.N.Y. 1977).

62Antonetty v. Cuomo, 502 N.Y.S.2d 902, 906 (Sup. Ct. 1986); Smith v. Long Island Jewish-Hillside Med. Ctr., 499 N.Y.S.2d 167, 168 (App. Div. 1986).

63Pirone v. MacMillan, Inc., 894 F.2d 579, 585 (2d Cir. 1990).

64Shaw Family Archives Ltd. v. CMG Worldwide, Inc., 486 F. Supp. 2d 309, 314 (S.D.N.Y. 2007) (“New York law does not recognize any common law right of publicity and limits its statu-tory publicity rights to living persons.”) (citing Pirone, 894 F.2d at 586).

65See discussion supra Part I.B.66See discussion supra Part I.C.67850 F. Supp. 1279 (E.D. Va. 1994) (holding an author’s

name is an asset includible in a gross estate).

68Note, supra note 1, at 683. But see Caron, supra note 28, at 95 (questioning the “shock wave” declaration because sec-tion 2033 plainly includes all property interests owned by the decedent in the gross estate and case law has long agreed that intangible assets are covered by section 2033). The only question is “whether the right of publicity is a property interest recognized under the applicable state law and descendible to the decedent’s heirs.” Id.

69William A. Drennan, Wills, Trusts, Schadenfreude, and the Wild, Wacky Right of Publicity: Exploring the Enforceability of Dead-Hand Restrictions, 58 ark. l. reV. 43, 129 (2005) (“It appears that only one reported case has considered the taxability (and the valuation) of a right of publicity for federal estate tax purposes.”) (referring to Andrews).

70Andrews, 850 F. Supp. at 1289.71Id. at 1281.72Id. at 1282.73Id. at 1283.74Id. at 1284.75Id. 76See id. at 1285-86.77Id. at 1285. 78Id. The accompanying text in the fifth ghostwritten book,

nearly four years after her death, read: When Virginia became seriously ill while

writing the Casteel series, she began to work even harder, hoping to finish as many stories as pos-sible so that her fans could one day share them. Just before she died we promised ourselves that we would take all of these wonderful stories and make them available to her readers.

79Id. at 1286.80Id. at 1281.81Id. 82Id.83Id. 84Id. at 1286-87. The IRS’ final judgment was summarized as

follows:The name, V.C. Andrews, and her likeness

have measurable value based on the prior earnings of decedent and the contract signed by her shortly before her death. The value of the name and like-ness were determined after valuing the potential novels that could be produced as written by her, deducting the amounts payable to the agent and amounts attributable to other factors involved in the production and marketing of the work, and discounting for the contingent nature of the work.

Id. at 1286.85Id. at 1286-87. The valuation report’s rationale for the $12

million base value was as follows:In order to establish a value for the rights to

use Andrews’ name we must examine her success fac-tor as of her death. At that time the publisher believed from prior earnings history that a novel written by her, using her name as author and the genre novels

Summer 2014 13

she had developed, could generate enough sales to justify royalty earnings to her of at least $1.5 million. Therefore, it was willing to advance that amount for each of two projected novels.

According to the publisher, the series gener-ated by V.C. Andrews had potential for six subse-quent novels in addition to these two. After that the serialization would have run their course. (empha-sis added).

Id. at 1287.86Id. 87Id.88Id. at 1291.89Id. The applicable regulation is 20.2031–1(b) (“The fair

market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reason-able knowledge of relevant facts.”)

90Id. at 1288.91Id. 92Id. 93Id. at 1295.94Id. at 1289.95Id. at 1291.96Id. at 1294.97Id. at 1294-95.98Id. at 1293.99Id. 100Id.101Id. at 1289. (“When considered together, these principles

governing consideration of events occurring subsequent to death have become a rule of relevance which precludes, as irrelevant, information that the hypothetical willing buyer could not have known and permits, as relevant, evidence of the actual price received after the date of death so long as the sale occurred within a reasonable time after death and no intervening events drastically changed the value of the property.” (internal quota-tions omitted)).

102Id. at 1293.103Id. at 1295.104Id. at 1296.105BITTker & lokkeN, supra note 20, ¶ 135.1.106daVId WesTFall, eT al., esTaTe PlaNNINg laW &

TaxaTIoN ¶ 2.04 (current through 2013).107See Robert C. O’Brien & Bela G. Lugosi, Update to the

Commercial Value of Rights of Publicity: A Picture Is Worth A Thousand Words ... or Sometimes A Million Dollars, 27 eNT. & sPorTs laW. 2, 2 (2009).

108I.R.C. § 2033 (2012).109Treas. Regs. §§ 20.2031–2 through 20.2031–8.110Treas. Reg. § 20.2013-9.111Id.112Treas. Reg. § 20.2013-1.113Rev. Rul. 78-367, 1978-2 C.B. 249.114Estate of Andrews v. United States, 850 F. Supp. 1279,

1281 (E.D. Va. 1994). The court found the IRS’s inclusion of all

eight ghostwritten books could not have been known or reason-ably knowable by the parties on the hypothetical date of death sale. Id. at 1293.

115See id. at 1286-95. The IRS, which did not use regulation 20.2013-1’s hypothetical sales transaction method, valued the rights at $1,244,910.84. Id. at 1286. The Estate’s valuation came in at $140,000, and the court effectively met in the middle at $703,500. Id. at 1288, 1295.

116Caron, supra note 28, at 96.117Estate of Pattison v. Comm’r, 60 T.C.M. (CCH) 471,

1990 Tax Ct. Memo LEXIS 445, at *6-7 (1990) (The highest and best use to which property can be put is a factor in deter-mining fair market value. The ‘highest and best use’ is defined as the most economic use which is reasonably probable.”) (cita-tions omitted).

118Stephen C. Gara & Craig J. Langstraat, Property Valuation for Transfer Taxes: Art, Science, or Arbitrary Decision?, 12 akroN Tax J. 125, 142 (1996). See also Symington v. Comm’r, 87 T.C. 892, 897 (1986) (“[T]he fair market value of property is not affected by whether the owner actually has put the property to its highest and best use.”) (citation omitted).

119BITTker & lokkeN, supra note 20, ¶ 135.2.120Id. 121Jeffrey K. Eisen & Allan E. Biblin, Estate Planning for

Clients in the Entertainment Business, esT. PlaN., Feb. 2006, at 26, 34-35.

122Note, supra note 1, at 688.123BITTker & lokkeN, supra note 20, ¶ 135.2.124Id.125Note, supra note 1, at 688.126Id. 127Id.128Eisen & Biblin, supra note 121, at 34. 129BITTker & lokkeN, supra note 20, ¶ 135.2 (citing

Comm’r v. McCann, 146 F.2d 385 (2d Cir. 1944).130Note, supra note 1, at 689.131Id. A “reasonable” amount of time is a question of fact

determined by market activity and economic shifts. Id.132Id. at 690 (internal quotations omitted).133Id. 134Id. 135Id. 136Id. at 691.137Id. 138Id. 139Id. 140Id. (“Specifically, consideration should be given to what

made the personality famous, to what industry or industries that fame is most applicable, and to what endorsements that fame is marketable. For example, an examination of Fred Astaire’s publicity rights would be useless in calculating the value of Mel Gibson’s post-mortem right of publicity, but would be extremely helpful in calculating the value of Gene Kelly’s.”)

141Id. 142Id. at 692.143Ripps, supra note 10. For comparison, the Estate in

14 Inside Basis

15

Andrews and the IRS valued the publicity rights at $140,000 and $1,244,910.84, respectively. See Estate of Andrews v. United States, 850 F. Supp. 1279, 1286-95 (E.D. Va. 1994).

144Andrews, 850 F. Supp. at 1289.145Jackson’s Estate reportedly earned $400 million within

two years of his death. Zack O’Malley Greenburg, Michael Jackson’s $400 Million Afterlife, ForBes (June 29, 2011, 11:23 AM), www.forbes.com/sites/zackomalleygreenburg/2011/06/29/michael-jacksons-400-million-afterlife/. He was also the top earner among dead celebrities in 2013 with $160 million. Dorothy Pomerantz, Michael Jackson Leads Our List Of The Top-Earning Dead Celebrities, ForBes (Oct. 23, 2013, 9:56 AM), www.forbes.com/sites/dorothypomerantz/2013/10/23/michael-jackson-leads-our-list-of-the-top-earning-dead-celebrities/.

146Interview with Richard Gray, CPA/ABV, CVA, ASA, Business Valuation & Litigation Partner with BDO USA in West Palm Beach, Fla. (January 2, 2014).

147Id.148Id.149Id.150Id.151Id.152Bridget J. Crawford, Joshua C. Tate, Mitchell Gans &

Jonathan G. Blattmachr, Celebrity, Death, and Taxes: Michael Jackson’s Estate, 125 Tax NoTes 345, 346 (2009).

153Id. (citing United States v. Land, 303 F.2d 170, 172 (5th Cir. 1962)).

154Id. at 347.155Id.156Ripps, supra note 10.157In addition to the debate discussed in Part III, other arti-

cles have addressed this liquidity issue. See Caron, supra note 28, at 97 (discussing the “estate planning disaster” posed by public-ity rights); Jessica Bozarth, Copyrights and Creditors: What Will Be Left of the King of Pop’s Legacy?, 29 Cardozo arTs & eNT. l.J. 85, 111 n. 170 (2011) (discussing estate tax liquidity problems posed by publicity rights); Eisen & Biblin, supra note 121, at 34 (“Another feature of [publicity rights] is that they are illiquid. These assets can result in substantial estate taxes becoming payable, leaving the Entertainer’s estate with serious liquidity problems.”)

158Mitchell M. Gans is the Steven A. Horowitz Distinguished Professor of Tax Law at Hofstra University School of Law and an Adjunct Professor at New York University School of Law. He teaches Federal Estate and Gift Tax, Federal Income Taxation of Corporations, Federal Income Taxation of Individuals, and Wills, Trusts, and Estates.

159Bridget J. Crawford is an Associate Professor at Pace University School of Law where she teaches Federal Income Taxation, Estate and Gift Taxation, and Wills, Trusts, and Estates.

160Jonathan G. Blattmachr is a Principal in ILS Management, LLC and a retired member of Milbank Tweed Hadley & McCloy LLP in New York, NY.

161See discussion infra Part III.A,C. 162Joshua C. Tate is an Associate Professor of Law at

Southern Methodist University School of Law where he teaches Trusts and Estates, Property, and History of Anglo-American Legal Institutions.

163See discussion infra Part III.B,D.164See discussion infra Part III.165Gans et al., Postmortem Rights, supra note 5, at 203.166Id. 167Id. at 206. See generally I.R.C. § 2056 (2012) (marital

deduction); I.R.C. § 2055 (2012) (charitable deduction).168Id. 169Id. 170Id. at 207. This echoes Ray D. Madoff’s concern that a

celebrity’s heirs may be forced to sell the publicity rights in order to pay the estate tax against their wishes and the wishes of the decedent. See Ray D. Madoff, Taxing Personhood: Estate Taxes and the Compelled Commodification of Identity, 17 Va. Tax reV. 759, 780-82 (1998).

171Gans et al., Postmortem Rights, supra note 5, at 207.172Id. at 207-08.173Tate, Taxation of Postmortem Rights, supra note 7, at 38,

41.174Id. at 40.175Id. at 41.176Id 177Id. 178Gans et al., Estate Tax Fundamentals, supra note 8, at 50.179Id. 180Id. at 52.181Tate, Immortal Fame, supra note 9, at 9, 43. (“This Article

has two narrow goals. First, I intend to show that there is no compelling reason to deviate from the default rule of testamen-tary freedom in the specific context of postmortem publicity rights. Second, I wish to demonstrate that neither current law nor any known policy considerations would justify treating pub-licity rights differently for federal tax purposes due to restrictions on the power of testation.”) Id. at 10.

182Id. at 53-58.183Id. at 57.184Id. at 58.185See discussion supra Part III.A,C.186See Madoff, supra note 170, at 780-82.187I.R.C. § 2032A (2012).188I.R.C. § 2032A(b) (2012).189WesTFall, eT al., supra note 106, ¶ 2.04.190Id.191Id.192Treas. Reg. § 20.2013-1.193See Madoff, supra note 170, at 809 (“The better solution

would be one which would also enable the personal representa-tive of the decedent to make the election not to treat the prop-erty interest as a marketable commodity.”).

194See discussion supra Part III.A,C.

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