May 10, 2016

The musical artist Prince died on April 21, 2016, apparently without a will in place. If this turns out to be true, the handling of his estate, including its valuation, will be administered by a Minnesota probate court. Minnesota statutes and federal tax code will dictate who gets what and at what cost. Prince's estate will have to foot a potentially huge tax bill. An article in Billboard cited a conservative estimate of the value of estate’s assets at $250 million.

The intellectual property valuation associated with a world-famous artist such as Prince is a daunting task. Below, Scott Weingust, a Managing Director and leader of Stout's Intellectual Property Valuation practice provides us with insights as to the steps involved in such a valuation process.

The most valuable intellectual property (IP) assets that are likely to be found in Prince’s estate include his rights to publicity, copyrighted music and other works of art, and potentially various trademarks representing his name and likeness (the Prince IP Portfolio). In fact, given his prolific music career and high profile as a celebrity, it is likely that Prince’s IP assets make up the lion’s share of the value of his entire estate.  Given that there may be significant estate tax issues associated with the Prince IP Portfolio, the valuation of the portfolio will be closely scrutinized by the IRS and the ultimate heirs to Prince’s estate.  Given these circumstances, it is worth noting some of the key IP valuation issues that will be considered by the IRS and others who have an interest in Prince’s estate.

For one, simply the identification of all of the relevant IP assets that make up the Prince IP Portfolio will likely be a challenging exercise, although one that will be integral to perform a reliable valuation. Certainly, to the extent it is true, the fact that Prince reportedly does not have a will that might have listed at least some of these assets will make it more difficult to develop a comprehensive inventory of the relevant IP assets.

Second, while some artists are able to maintain ownership of the IP rights associated with their music and other works of art, many sell or otherwise lose control of all or a portion of such rights for various reasons. Certainly, the nature of the legal ownership of the assets in the Prince IP Portfolio will directly affect its value.  For example, as previously reported by Forbes, after miscalculating the value of certain publishing rights owned by Michael Jackson’s estate upon his death, the IRS increased its tax demand by $29 million.

A third key valuation issue relates to the challenge of determining an accurate value of Prince’s name and likeness. The value of such intangible assets is typically a function of the estate’s ability to generate future income from the relevant celebrity’s name and likeness (i.e., the use of an Income Approach to determine value). In addition, to the extent such information is available, a valuation analyst will also typically consider the value of the same assets determined for other similarly popular artists or performers (i.e., the use of a Market Approach to determine value). The value of a celebrity’s name and likeness is a challenging question to answer and, even among professional appraisers, such valuations may vary widely.  Given the similarities between the two as long time popular music stars, the value of Michael Jackson’s name and likeness may provide insights into the value of these assets as part of the Prince IP Portfolio.  However, illustrative of the challenges in valuing such assets, it was reported that Michael Jackson’s estate valued his name and likeness at only $2,105 compared to the IRS’s valuation of $434 million. Notably, the dispute over the value of Jackson’s name and likeness was the first time ever that the IRS had pursued estates taxes related to such assets.

IP valuation is difficult, and the valuation of the Prince IP Portfolio is likely to be fraught with differences of opinion between the IRS and Prince’s heirs given the potentially huge tax bill at stake. Careful and complete due diligence and analysis associated with the three issues discussed above, likely along with many others, will be key in developing an IP valuation that is reasonable and reliable for addressing estate tax issues.