federal estate tax and the right of publicity: taxing estates for celebrity value. january, 1995 108...

Copyright (c) The Harvard Law Review Association 1995.Harvard Law Review

JANUARY, 1995

108 Harv. L. Rev. 683

LENGTH: 10323 words

NOTE: FEDERAL ESTATE TAX AND THE RIGHT OF PUBLICITY: TAXING ESTATES FOR CELEBRITYVALUE.

LEXISNEXIS SUMMARY:... On May 10, 1994, the U.S. District Court for the Eastern District of Virginia held that a right of publicity, asembodied in a deceased person's name, can be valued and taxed for federal estate tax purposes. ... After concluding thatthe right of publicity is a taxable asset, this Note considers how that right should be valued on an estate tax return andhow personalities can decrease their estate tax burdens by placing restrictions on their rights of publicity in their estateplans. ... In valuing the right of publicity, the IRS is least likely to attempt a cost valuation. ... One valuation expertsuggests that the proper method for valuing a deceased personality's right of publicity is a combination of the incomeand market approaches. ... A beneficiary's decision not to exploit a property right, or a beneficiary's attempt to placerestrictions on the use of the property right, will have no effect on the valuation of the property for estate tax purposes.... Assuming that a testator can theoretically destroy value in her estate plan, the IRS may nonetheless refuse to honorthe terms of the plan for fear that the relevant provisions of the estate plan are designed solely to avoid estate tax. ...Additionally, exploitation of the deceased personality's right of publicity might impinge upon the family's right toprivacy by forcing family members into the public eye. ...

TEXT:[*683] On May 10, 1994, the U.S. District Court for the Eastern District of Virginia held that a right of publicity, n1as embodied in a deceased person's name, can be valued and taxed for federal estate tax purposes. The decision, Estateof Andrews v. United States, n2 sent a shock wave through the estate planning profession. Traditional practicesuggested that a decedent's right of publicity was valueless for the purposes of federal estate tax and need not bereported on the estate tax return. n3 In the wake of Andrews, knowledgeable estate attorneys are scrambling todetermine what famous personalities must do to protect their estates from potentially devastating tax burdens.

The facts of Andrews suggest that value can be found in the publicity rights of many deceased personalities. Likeintellectual property rights, the right of publicity can be valued through a host of different measurements. Althoughdifficult to measure, in some cases the right of publicity may be a significant wealth transfer to the estate's beneficiaries.The right of publicity, when descendible to a decedent's beneficiaries under state law, is thus potentially a prime targetfor the federal estate tax. n4

The resulting tax liability may prove an unreasonable burden on the estates of personalities who either do not wanttheir rights of publicity exploited after their death, or do not have other significant liquid assets in their estates withwhich to pay the estate taxes. The problems associated with the tax liability, and the public policy underlying the rights

of privacy and publicity, suggest that personalities should be allowed to reduce or destroy the value of their rights ofpublicity in their estate plans.

After concluding that the right of publicity is a taxable asset, this Note considers how that right should be valued onan estate tax return and how personalities can decrease their estate tax burdens by placing restrictions on their rights ofpublicity in their estate plans. Part I describes the facts and holding of the Andrews decision. Part II examines whetherthe right of publicity is a taxable asset under state [*684] and federal law. Part III assesses the various methods theIRS may use to value a right of publicity. Part IV urges that personalities can use restrictive provisions in an estate planto limit or destroy the value of their rights of publicity. Part V examines the need to make the provisions of the estateplan, discussed in Part IV, enforceable. Part VI argues that in light of the policy rationale underlying the rights ofprivacy and publicity, personalities should be allowed to destroy the value of their rights of publicity. Finally, Part VIIconcludes with a summary of the argument.

I. THE ANDREWS DEClSION

In Estate of Andrews the court held that a deceased personality's right of publicity could be valued for purposes ofcalculating the federal estate tax. n5 Virginia C. Andrews (V. C. Andrews), a well-known author, entered into acontract on November 11, 1986 with Pocket Books (the 1986 contract) to produce two manuscripts in exchange for $ 3million in advances against royalties. n6 Shortly thereafter, on December 19, 1986, Andrews died. n7 A few daysafter her death, Jack Romanos of Simon & Schuster -- the owner of Pocket Books -- suggested that publication ofAndrews's books could proceed under the 1986 contract if a new author could be found to mimic Andrews's style. n8

Originally, Andrews's estate resisted the idea. The executors feared that a poorly written ghostwriting effort wouldadversely affect the sales of titles published prior to Andrews's death. n9 Nonetheless, within three months ofAndrews's death, her agent arranged for an author to attempt to duplicate Andrews's style. n10 The ghostwriter,Andrew Niederman, produced an outline and several pages of text. n11 On the basis of Niederman's efforts, Romanosnegotiated with Andrews's estate to amend the 1986 contract to reflect the fact that publication would proceed with aghostwriter. n12

Andrews's estate simultaneously negotiated an agreement with Niederman. n13 Both the publishing contract andthe Niederman agreement provided for publication to cease if the first book was a failure. n14 Despite the considerablerisk of failure, the first ghostwritten text, Garden [*685] of Shadows, was a tremendous success. Several other booksand publishing contracts followed. n15

The estate's federal estate tax return did not report Andrews's name among its assets. n16 The IRS issued a noticeof deficiency on November 16, 1990, valuing Andrews's name at $ 1,244,910.84, and seeking additional estate taxes inthe amount of $ 649,201.77. n17 The estate paid the tax plus interest in the amount of $ 947,483.87 and filed suit for arefund. n18

The district court agreed with the IRS and held that Andrews's name constituted a taxable asset. Withoutacknowledging the novelty of valuing a "name and likeness" for estate tax purposes, n19 the district court began itsanalysis by considering what is a valid basis for determining value. The court held that one must calculate the price thatwould have been paid by a willing buyer to a willing seller, based upon what each would have known at the time of thepersonality's death. n20 The court found that a number of facts were relevant to calculating this hypothetical price:Andrews was a renowned author; she achieved an unparalleled level of success in her chosen genre; her most recentbook was a best-seller; and repeated throughout her work were themes and characteristics reflective of her unique style.n21 On the other hand, the court recognized a significant risk that a buyer might be unable to find a ghostwriter suitableto the publisher. n22

In arriving at its valuation, the court considered the 1986 contract because "its existence and the possibilities itpresented were reasonably knowable on the date of death" to a willing buyer and seller. n23 The court noted that

108 Harv. L. Rev. 683, *683

consideration of the 1986 contract was consistent with prior decisions holding that the sale price of an item sold neardeath is persuasive evidence of the item's value when no material change in circumstances has occurred between thetime of sale and the time of death. n24 However, the court rejected the IRS's contention that the value of all of theghostwritten books should be considered in the valuation, n25 on the ground that it was unlikely that the parties couldhave foreseen at the time of Andrews's death the publication of multiple [*686] books. n26 Rather, the court held thata willing buyer and seller would have negotiated a sale price for Andrews's name based upon the possibilities for thesuccess or failure of the first ghostwritten book. Valuing the first book at $ 1,550,000 based on the 1986 contract,deducting the requisite expenses, and applying a risk discount factor of thirty-three percent, the court valued Andrews'sname at $ 703,500. n27

II. IS THE RIGHT OF PUBLICITY A TAXABLE ASSET?

Andrews's estate conceded that Andrews's right of publicity was a property interest subject to federal estate tax.n28 As a general matter, the question of what "property" a decedent owned is a state law question, determinedconclusively by statute or by the state's highest court. n29 Like Andrews's home state of Virginia, n30 many statesprovide for a descendible right of publicity as a matter of either statutory or common law. n31 For example, section990 of the California Civil Code creates a descendible right of publicity, expiring fifty years after the death of thepersonality. n32 The statute defines "personality" to include any person "whose name, voice, signature, photograph, orlikeness has commercial value at the time of his or her death." n33 It also establishes a chain of descent for the rights,should none be specified by the personality during the personality's lifetime or at death. n34

In states with laws similar to the California statute, it is clear that the transferee designated by the decedent ownsthe decedent's right of publicity. n35 The existence of a state law property interest does not, however, necessarily meanthat the interest is subject to the federal estate tax. The question of what property is subject to the estate tax [*687] is afederal question -- one to which the courts have given little attention. n36

The IRS's mandate regarding the estate tax is to value and tax any and all property that constitutes part of thedecedent's estate. The Internal Revenue Code (IRC) defines the value of the gross estate as "the value at the time of . . .death of all property, real or personal, tangible or intangible, wherever situated." n37 In other words, all rightstransferable to the beneficiaries of a decedent's estate should be valued and taxed. Under the broad definition in theIRC, a right of publicity qualifies as an intangible property right.

The Andrews court made it clear that it was not receptive to an argument that the right of publicity was not ataxable asset. Noting the estate's decision to concede that the right of publicity was subject to the estate tax, the courtcommented, "[w]isely, the Estate has foresworn that argument." n38 Efforts by the IRS to value and tax property rightsanalogous to the right of publicity also suggest that the right of publicity should be valued and taxed. n39 Courts andcommentators have noted that the right of publicity is analogous to trademark and copyright entitlements, which aretaxable. n40 The trademark/copyright analogy is especially apt in states, such as California, that have explicitly createdan enforceable, descendible publicity right with a limited period of protection.

Difficulty in valuing an asset will not preclude the IRS from assessing a tax. In Andrews, the court rejected theestate's claim that Andrews's name had no measurable value. The value was tied to book sales but, according to thecourt, was still measurable. n41 Other courts have shown a similar willingness to support IRS valuation efforts. n42For example, the IRS routinely values copyrights and patents, which are by their very natures unique and difficult tovalue. n43 In light of these considerations, it is unlikely that federal courts considering the issue after Andrews n44will find the estate tax inapplicable to a descendible right of publicity.

[*688] III. METHODS OF VALUATION

It appears that the real question is not whether the right of publicity is subject to estate taxes, but rather whatvaluation method the IRS will assert is appropriate. There is no well-established method for valuing a right of publicity.

108 Harv. L. Rev. 683, *685

Tax law provides no single answer to the question of what valuation technique must be used to value property. n45There is, however, a unifying principle: property should be valued at its "fair market value" at the time of the decedent'sdeath. n46

If there is no established public market for an asset, determination of value becomes a fact-specific inquiry. Realestate valuation is usually based on one or more of the income, market, and cost approaches. n47 While not directlyapplicable to the right of publicity, real estate valuation techniques are routinely applied in other contexts n48 andprovide useful insight into the array of methods that may be used to calculate value.

The income method of valuation, which requires consideration of the income that the property is currentlyproducing, attempts to project the income the property will produce in the future. n49 Also referred to as thecapitalization method, this method is commonly applied to income-producing real estate. Significantly, it is used to[*689] value many forms of intellectual property, such as patents, profit participants, and residuals. n50 The key tothis method is identifying the future income to be capitalized and the rate of capitalization. n51 The rate ofcapitalization takes account of the time value of money based on current rates of return and the risk that the propertywill not produce the projected income. n52 The greater the risk associated with the income projection, the higher thecapitalization rate, and the lower the value of the property. n53

Where there are existing streams of income from the exploitation of a right of publicity, the IRS should employ thecapitalization method. It would be relatively easy for the IRS to examine the streams of income from existing andanticipated endorsement contracts and sponsorship agreements, to ascertain rates of return, and to discount the futurestream of income for the risks that the income stream will decrease as a result of the personality's death.

The market approach, on the other hand, relies on the price that the property brings or would bring on the marketwhen or if it were sold. n54 Assuming that the sale takes place in an arm's-length transaction, and that the sale occurswithin a reasonable time before or after the decedent's death, the property's sale price is likely to be the best evidence ofits fair market value. n55 What constitutes a reasonable time before or after death is a question of fact, determined byconsideration of activity in the market and of general economic shifts. n56

The market approach generally focuses on sales of similar property. n57 For estate tax purposes, the pieces ofproperty in question need only resemble one another. n58 The determination whether the pieces are similar is afact-specific inquiry. In the real estate context, experts consider the sale price of comparable property to be a betterdetermination [*690] than rejected offers for the property in question. n59 Applying this principle, the value of adeceased personality's right of publicity may be determined in relation to endorsement contracts entered into bypersonalities similarly situated, in terms of age, fame, and other subjective factors.

It may be difficult to estimate a sale price for the right of publicity. If the personality appeals to a limited market --as in the case of V.C. Andrews -- it is possible to determine a sale price. However, if a personality's celebrity appeals toa large market for endorsements, the estimation of a sale price for the right of publicity is far more difficult. It might bepossible to create a formula based on the endorsement contracts existing at the time of the personality's death to gain anindication of what the entire right of publicity would fetch on the market, but such a formula would bear a strongresemblance to the income approach. Although the Andrews court relied on the market approach, the approach is rarelyused to value intangible assets because the assets are "so unique that sales of comparable property are not available tothe appraiser." n60

In valuing the right of publicity, the IRS is least likely to attempt a cost valuation. The cost method relies on thecurrent costs of replacing the property in question. The underlying notion is that an investor in the market would notoffer more for an item of property than it would cost to build or craft similar property from scratch. n61 If such avaluation is difficult regarding real estate, it is impossible regarding the right of publicity because of the difficulty ofcalculating the amount "invested" in a person.

108 Harv. L. Rev. 683, *688

One valuation expert suggests that the proper method for valuing a deceased personality's right of publicity is acombination of the income and market approaches. n62 Under this combined method, it is necessary first to examinethe value of the personality's endorsement income streams existing at the time of death, such as royalty and licensingagreements. n63 Using the existing contracts as a valuation baseline, the next step is to assess the marketability of thepersonality's endorsements at the time of death by examining offers for additional endorsements and any otherindicators of the marketability of the personality's name. n64

[*691] The facts of each case must be examined to determine the impact of "marking points" on the value of thepersonality's name. n65 "Marking points" are significant events, including the personality's death, that either positivelyor negatively affect the values used. n66 For example, allegations that Michael Jackson molested children may havebeen a negative marking point, requiring that calculations of future value based on income streams prior to theallegations be discounted to take into account the impact of the allegations on future endorsement availability. Theresulting value must then be discounted for an array of factors, including the diminution of value over time. n67 As inthe case of patent valuation, it is important to measure the actual life of a right of publicity. Where the actual life isshorter than the legal life, the actual life should be the object of valuation. n68

Following a calculation based on the income method, or in the absence of any useful income streams at the time ofdeath, the next step is to examine the values of comparable personalities' rights of publicity. n69 This analysis involvestwo steps. First, an adequately similar personality, or proxy, must be located by focusing on the nature of the proxy'sright of publicity, the proxy's relevant industry, and available endorsement vehicles. n70 Specifically, considerationshould be given to what made the personality famous, to what industry or industries that fame is most applicable, and towhat endorsements that fame is marketable. n71 For example, an examination of Fred Astaire's publicity rights wouldbe useless in calculating the value of Mel Gibson's post-mortem right of publicity, but would be extremely helpful incalculating the value of Gene Kelly's.

Once a comparable proxy is located, it is necessary to rely on the advice of experts in sports, entertainment, orpublishing to estimate the value of both the proxy's and the personality's rights of publicity. n72 Because much of theinformation regarding personalities' endorsement agreements is confidential, the proper course is to consultknowledgeable professionals who have access to the proxy's agreements, and to rely on those professionals to estimatethe value of similar agreements for the relevant personality. n73 The best valuations are those based on comparablesituations. n74 Therefore, detailed information about a proxy or proxies provides a good basis for valuation. [*692]Combined, the income and market values provide a strong indication of the value of the personality's post-mortem rightof publicity. n75

In light of the foregoing discussion, it is clear that valuing a personality's right of publicity requires use of theincome approach, the market approach, or a combination of the two. When income streams from existing endorsementsor offers to buy future endorsements are readily available, the income approach will be useful. In other cases, such asAndrews, where offers or contracts to purchase the entire right of publicity are available, the market approach will beuseful.

IV. LIMITING THE USE OF THE RIGHT OF PUBLICITY: DESTROYING VALUE IN AN ESTATE PLAN

Regardless of the valuation method used, in seeking to maximize the tax the IRS and the courts will endeavor tovalue the right of publicity at something akin to its highest and best use. n76 The highest-and-best-use standardmeasures the full market value of an asset regardless of how the testator used the property or how the beneficiaries willuse the property in the future. n77 However, because the estate tax is an excise tax on the privilege of transferringproperty, it taxes the highest-and-best-use value of the estate property as the property exists prior to being transferred tothe estate beneficiaries. Terms of the estate plan that decrease the value of the estate's property before the property isdistributed to the beneficiaries should therefore be considered in calculating the property's value at the time of thetestator's death. Thus, a personality who wishes to restrict the use of her right of publicity should be able to avoid aburdensome tax liability by encumbering her right of publicity in her estate plan before the right is transferred to her

108 Harv. L. Rev. 683, *690

beneficiaries.

Measures taken by the beneficiaries to reduce the value of a property right once they gain ownership are irrelevantto the calculation of the estate tax. A beneficiary's decision not to exploit a property right, or a beneficiary's attempt toplace restrictions on the use of the property right, will have no effect on the valuation of the property for estate [*693]tax purposes. This point is illustrated by Black v. Commissioner. n78

In that case, Black's husband left her an unencumbered parcel of land valued at $ 200,000.00 on the estate taxreturn. n79 Black later sold the land with certain restrictive use covenants for $ 157,880.00 and claimed a lossdeduction of $ 43,917.08 on her income tax return. n80 The court rejected Black's claim to a deduction. It reasonedthat the difference between the estate tax value of the property and the sales price of the property was entirelyattributable to the restrictions Black had placed on the property. n81 Therefore, the "loss" was not a loss; the buyersimply did not pay what for was not sold. n82 The court refused to alter the assessment of the property's value forestate tax purposes. n83 The court assumed that Black retained some benefit in the encumbrance, the value of whichaccounted for the difference between the assessed value of the property and the market value. n84 Black is thus anexample of a court ignoring as irrelevant any measure taken by the beneficiaries to reduce the property's value.

There is uncertainty, however, about whether a court will consider the terms of the testator's estate plan in assessingthe highest-and-best-use value of a decedent's property. From an economic point of view, some restrictions should beconsidered because they influence the price the estate could command for the property on the free market. Case lawsuggests that courts will recognize the need for such valuation.

Principally, the cases in this area have involved situations in which a control premium was at issue because atestator bequeathed a control block of stock to numerous beneficiaries, such that no one beneficiary received acontrolling block. n85 Courts have generally held that a control premium will be included in the valuation for estatetax purposes even though the execution of the estate plan divides the block. n86 Although this approach seems toimply that restrictions placed on the property by the testator do not affect the court's valuation, in reality it [*694]simply exemplifies the proposition that for estate tax purposes courts value the total pool of the decedent's assets to betransferred to the beneficiaries, irrespective of diminutions of value that might be brought about by the transfer itself.

However, courts should recognize that some terms of an estate plan, by taking effect at the time of death, transformthe estate property and affect its highest-and-best-use value before distribution. Indeed, the Supreme Court hassuggested that the terms of a decedent's estate plan must be considered in the valuation of the estate. In United StatesTrust Co. v. Helvering, n87 the Court held that the proceeds from a decedent's insurance policy payable to his widowshould be included in the decedent's gross estate for estate tax purposes. n88 Rejecting the estate's claim that theproceeds were exempt from the estate tax because they were paid directly to the beneficiary without accruing to thetestator or his estate, the Court noted: "An estate tax is not levied upon the property of which an estate is composed. Itis an excise imposed upon the transfer of or shifting in relationships to property at death." n89 In other words, the taxapplies not to what the testator owned, but to the value transferred as a result of his death. The value for estate taxpurposes is the value of the decedent's total estate, including those changes in value brought about by the death of thetestator.

Logically following the United States Trust rationale, some courts have recognized that terms of an estate plan thatrestrict or destroy the decedent's property prior to transfer to the beneficiaries reduce the estate's value. For example,the Ninth Circuit held, in Ahmanson Foundation v. United States, n90 that the valuation of property in a decedent'sgross estate must take account of aspects of the estate plan that necessarily reduce the estate's value prior to thedistribution of property to the beneficiaries. n91 Upon his death, Howard F. Ahmanson owned fifteen percent of asavings and loan and controlled a holding company that owned eighty-one percent of the savings and loan. Ahmansonalso owned a shell corporation. n92 At the time of Ahmanson's death, the shell corporation became entitled to hiscontrolling interest in the holding company. The Ahmanson Foundation, a private non-profit foundation, receivednon-voting stock in the shell corporation, and Ahmanson's son received voting stock in the shell corporation. n93

108 Harv. L. Rev. 683, *692

[*695] The IRS and the Foundation disagreed over the assets to be valued. The IRS contended that the votinginterest in the holding company, which represented the controlling interest in the Ahmanson group of enterprises, wasthe estate's asset. n94 The Foundation contended that the stock in the shell corporation was the estate's asset. Thedistrict court agreed with the Foundation, and held that the transfer must be viewed as impacting the estate at the time ofdeath. The court assessed the estate's assets for tax purposes as the value represented by the shell corporation's stock.n95

On appeal, the Ninth Circuit agreed with the district court's analysis. The court of appeals noted that in valuing thevarious shares for estate tax purposes, it was required to take account of any transformations to the property thatoccurred prior to the distribution to the beneficiaries. n96 At the moment of Ahmanson's death, the holding companyshares became assets of the shell corporation. As a result, the shell corporation stock was effectively all that had to bevalued. n97

In dictum, the court explained that the estate tax is a "tax on the privilege of passing on property, not a tax on theprivilege of receiving property." n98 Therefore, as the court stated:

The valuation should . . . take into account transformations brought about by those aspects of the estate plan whichgo into effect logically prior to the distribution of property in the gross estate to the beneficiaries. Thus, for example, ifa public figure ordered his executor to shred and burn his papers, and then to turn the ashes over to a newspaper, thevalue to be counted would be the value of the ashes, rather than the papers. n99

In other words, the Ahmanson court believed that a testator could decrease the value of the assets of his estate bydevising an estate plan to transform those assets prior to distribution. n100

The reasoning in Ahmanson, which follows logically from United States Trust, should be applied in the context ofrestricting the right of publicity. n101 After all, if restrictions on the right of publicity are included in the estate plan,such restrictions take effect at the time of [*696] death. n102 Therefore, the value of the alienable right of publicitynecessarily reflects those restrictions, and the estate tax should, in turn, be assessed in light of those restrictions even ifthose restrictions reduce the value of the asset. n103

V. SUSPECT PRIOR ARRANGEMENTS

Assuming that a testator can theoretically destroy value in her estate plan, the IRS may nonetheless refuse to honorthe terms of the plan for fear that the relevant provisions of the estate plan are designed solely to avoid estate tax. Forexample, the IRS and the courts are skeptical of arrangements between interested parties. n104 In valuing partnershipinterests, a buy-back provision in the partnership agreement requires a "legitimate business purpose" before it will beconsidered a limitation on the value of the partnership interest. n105 Both the IRS and courts scrutinize carefully anyuse restrictions in an estate plan to ensure that the restrictions are not shams. n106 A number of factors may berelevant to the analysis. The likelihood that use restrictions will, in fact, be enforced will be extremely important. For[*697] example, although restrictions in the estate plan stipulate that the beneficiary's ownership will be impressed witha trust, that stipulation will count for little unless another beneficiary will raise a claim if the restrictions are violated.Difficulty in assessing the likelihood of such a claim may lead the IRS to conclude that the right of publicity should bevalued at its unencumbered highest and best use. Alternatively, the IRS may reject the Ahmanson/United States Trustrationale in its entirety simply because of the possibility that it might be abused. n107

VI. A POLICY RATIONALE FOR ACCEPTING AHMANSON/UNITED STATES TRUST

To reject the Ahmanson/United States Trust rationale would undermine the very policy basis on which the right ofpublicity rests. Arising from the right to privacy, n108 the right of publicity builds on the liberty interests protected bythe right to privacy. The right of publicity, then, reflects governmental acknowledgement of the premiums societyplaces both on preserving one's ability to remain private -- a liberty interest -- and on preventing one's image from being

108 Harv. L. Rev. 683, *694

wrongfully exploited -- a property interest. n109 In a perverse way, valuing for estate tax purposes a restricted right ofpublicity as if it were unrestricted might force beneficiaries to infringe upon the liberty and property interests the rightof publicity was designed to protect.

The nature of the right to privacy and the right of publicity is exemplified by the development of those rights inGeorgia. The Georgia Supreme Court, in Pavesich v. New England Life Insurance Co., n110 was among the firstcourts to recognize the right to privacy. n111 In so doing, the Georgia court noted that ancient law recognized a rightof liberty, including the right to choose the appropriate times and places [*698] for exhibiting oneself. n112 In otherwords, the right to privacy included a right to prevent the exhibition of one's face before the public:

The right to withdraw from the public gaze at such times as a person may see fit, when his presence in public is notdemanded by any rule of law, is also embraced within the right of personal liberty. . . . If personal liberty embraces theright [to pursue] publicity, it no less embraces the correlative right of privacy, and this is no new idea in Georgia law.n113

Later courts combined the libertarian interest in controlling one's image under a right to privacy with a propertyinterest in controlling one's image to create the right of publicity. n114 In Martin Luther King, Jr., Center for SocialChange, Inc. v. American Heritage Products., Inc., n115 the Georgia Supreme Court, formally adopting the right ithad suggested in Pavesich, n116 invested the right to privacy with property interests that were available to relatives ofa deceased. Recognizing a formal "right of publicity," the court held that personalities have a descendible, in gross"property" right in the publicity value of their names and likenesses. n117 Like the right to privacy, the right ofpublicity allows a personality to control her image to remain private; unlike the right to privacy, however, the right ofpublicity allows a personality or her beneficiaries to control her image to secure economic gain. The court noted thatencouraging or requiring commercial exploitation of one's image is not necessarily a policy goal of the right ofpublicity. n118 In the court's view, "a person who avoids exploitation during life is entitled to have his image protectedagainst exploitation after death just as much if not more than a person who exploited his image during life." n119

[*699] The development of the right of publicity by the Georgia court is representative of a body of law designedto permit individuals to maintain their privacy and their dignity by controlling the ways in which their names, images,and likenesses are used. n120 That the right of publicity, based largely on property rights, evolved from the right toprivacy, based largely on liberty rights, means that property and liberty rights are inextricably intertwined in the right ofpublicity. n121

An estate tax valuation at the right of publicity's unencumbered highest and best use ignores the policy basis of theright of publicity and therefore jeopardizes both the liberty and property interests protected by the right. For example, alarge estate tax could either cause a celebrity to relinquish the right while alive, thereby giving up all control over hisown image but avoiding estate tax, or force the estate beneficiaries to exploit the right against the wishes of the testatorin order to pay the estate tax. n122 Additionally, exploitation of the deceased personality's right of publicity mightimpinge upon the family's right to privacy by forcing family members into the public eye. Finally, the threat ofpost-mortem exploitation and degradation might discourage personalities from making artistic contributions. n123Such a result would undermine one of the primary arguments in favor of the right to publicity: providing an incentivefor artistic development. n124

Viewed in this light, failure by the IRS to honor good faith efforts to restrict a personality's right of publicity wouldproduce a bizarre result. A law designed to permit a personality to control the exploitation of his name or likeness -- adescendible right of publicity -- [*700] would actually function to force the exploitation of that name and likeness afterthe personality's death.

VII. CONCLUSION

It is clear that the Andrews rationale is applicable to rights of publicity generally. What remains unclear is how the

108 Harv. L. Rev. 683, *697

right will be valued for estate tax purposes. Ultimately, the proper valuation will be determined by the facts andcircumstances of each case. Existing endorsement contracts, offers for endorsement contracts, the nature of thepersonality's celebrity, the cause and impact of the personality's death, and the risk that in a few years the star may beforgotten will all be relevant to the determination. Comparable personalities and expert accounting appraisals will oftenbe central to the analysis.

Subjecting the right of publicity to the estate tax will inflict very large tax burdens on some estates. For thepersonality who has always exploited her right of publicity, and wants her beneficiaries to do so in the future, a large taxliability should not be unfairly burdensome. In such cases, valuation will be easier in light of existing streams ofincome, and money will presumably be available to pay the tax. However, for personalities who wish to remain privateby prohibiting or at least curtailing the use of their rights of publicity, the large tax burden may prove troublesome. Insuch cases, the estate may neither benefit from existing streams of income from the exploited right nor have theopportunity for future benefits if it respects the decedent's wishes. Yet the right of publicity might well be valued as ifthe right were fully exploited.

To remedy the problems presented for personalities who desire their privacy, this Note has argued that suchpersonalities should be able to limit their estate tax burden by restricting the use of their rights of publicity in theirtestamentary planning. Merely drafting such restrictions may not be enough, however. The IRS may still look to thesurrounding facts and circumstances to ensure that the restrictions will be enforced.

Assuming that the estate plan is not a sham to avoid the estate tax, there is a compelling policy argument forallowing personalities to reduce the value of their publicity rights by the terms of their estate plans. Applying anunencumbered highest-and-best-use value to the estate, irrespective of the terms of the estate plan, may force theexploitation of the right of publicity against the wishes of the personality, thereby undermining the very policy goalsthat led to the development of the right of publicity. The mechanics of the tax code should not function to nullify theright of publicity in cases in which the personality wishes to restrict its use.

Legal Topics:

For related research and practice materials, see the following legal topics:Real Property LawProperty ValuationTax LawState & Local TaxesEstate & Gift TaxValuationRealPropertyTortsIntentional TortsInvasion of PrivacyAppropriationGeneral Overview

FOOTNOTES:

n1 The right of publicity is the exclusive ability to sell a personality's name and likeness for advertising,marketing, product endorsements, and other economic purposes. See Zacchini v. Scripps-Howard BroadcastingCo., 433 U.S. 562, 575-78 (1977).

n2 850 F. Supp. 1279 (E.D. Va. 1994).

n3 Cf. Reply Brief of Estate of Virginia C. Andrews at 5, Andrews (No. 2:92cv97) (commenting on theGovernment's inability to "produce one iota of evidence" that anyone has valued a deceased author's name).

n4 Cf. Sheldon W. Halpern, The Right of Publicity: Commercial Exploitation of the Associative Value ofPersonality, 39 VAND. L. REV. 1199, 1238 (1986) (noting that one can be "quite comfortable" with the idea oftaxing the right of publicity when it can be defined as a property right).

108 Harv. L. Rev. 683, *700

n5 See Andrews, 850 F. Supp. at 1293-95.

n6 See id. at 1281-82.

n7 See id. at 1281.

n8 See id. at 1283.

n9 See id.

n10 See id.

n11 See id.

n12 See id.

n13 See id. at 1284.

n14 See id.

n15 See id.


n17 See id.

n18 See id.

n19 See Reply Brief of Estate of Virginia C. Andrews at 5, Andrews (No. 2:92cv97) (noting that the IRScould not supply any evidence of prior cases in which the court had recognized a name or likeness as anindependent taxable asset).

n20 See Andrews, 850 F. Supp. at 1289.

n21 See id. at 1289-90.


n23 Id. at 1292.

108 Harv. L. Rev. 683, *700

n24 See id.


n26 See id.

n27 See id. at 1294-95.


n29 See Commissioner v. Estate of Bosch, 387 U.S. 456, 465 (1967).

n30 See VA. CODE ANN. § 8.01-40 (Michie 1992).

n31 Courts have generally recognized a right of publicity at common law. See, e.g., Memphis Dev. Found.v. Factors Etc., Inc., 616 F.2d 956, 957-58 (6th Cir. 1980). Most state courts that have considered the issue haveheld the right of publicity to be descendible. See Reeves v. United Artists, 572 F. Supp. 1231, 1233 (N.D. Ohio1983). Many states have adopted statutes establishing the descendibility of publicity rights. See, e.g., FLA.STAT. ANN. § 540.08 (West 1988); TENN. CODE ANN. § 47-25-1103 (1988); TEX. PROP. CODE ANN. §§26.001-26.015 (West Supp. 1994).

n32 See CAL. CIV. CODE § 990(g) (West Supp. 1994).

n33 Id. § 990(h).

n34 See id. § 990(d). If the deceased personality fails to transfer her right of publicity by contract or by atestamentary document and none of the surviving persons described in the statute exists, then the right ofpublicity terminates. See id. § 990(e).

n35 Cf. Timothy P. Terrell & Jane S. Smith, Publicity, Liberty, and Intellectual Property: A Conceptual andEconomic Analysis of the Inheritability Issue, 34 EMORY L.J. 1, 55-56 (1985) (arguing that a legal schemecreates an inheritable property interest if the scheme's definition of the right of publicity is sufficiently specific).

n36 See Michael F. Beausang, Jr., Valuation: General and Real Estate, 132-3d Tax Mgmt. (BNA) A-2(1984).

n37 I.R.C. § 2031(a)(1988). The executor may elect to value the estate's assets six months after thedecedent's death. See id. § 2032(a).

n38 Estate of Andrews v. United States, 850 F. Supp. 1279, 1287 (E.D. Va. 1994).

108 Harv. L. Rev. 683, *700

n39 See, e.g., Estate of Pascal v. Commissioner, 22 T.C.M. (CCH) 1766, 1768 (1963) (noting that rights toproduce a musical must be valued and taxed for estate tax purposes).

n40 See Zacchini v. Scripps-Howard Broadcasting Co., 433 U.S. 562, 573 (1977); Paul Goldstein,Publicity: The New Property?, STAN. LAW., Winter 1982/3, at 10-11.

n41 See Andrews, 850 F. Supp. at 1295.

n42 See, e.g., Compton v. United States, 334 F.2d 212, 216 (4th Cir. 1964) (holding that the tax assessmentmade by the IRS is presumed to be correct).

n43 See, e.g., Smith v. Commissioner, 41 T.C.M. (CCH) 1427, 1428 (1981) (relying on expert testimony toassess the value of a patent given as a charitable contribution).

n44 As with many valuation cases, the facts of Andrews are unique. The name "V. C. Andrews" wasvaluable only to subsequent ghostwriting efforts. See Andrews, 850 F. Supp. at 1285-86. Much of the value ofAndrews's name stemmed from her outstanding success in a specific genre. The executors of the Andrews estatewere willing to exploit Andrews's name and had an interested publisher who was familiar with Andrews's work.See id. Finally, Andrews published in paperback, meaning that critics rarely reviewed her work, therebyincreasing the odds of successfully representing to the public that Andrews wrote the ghostwritten books. Seeid.

The Andrews fact pattern suggests that other deceased authors' names may be of limited value. Forexample, some authors may have writing styles not conducive to analysis and replication by a ghostwriter.However, the names of other personalities may have substantial value. Many personalities' names are valuableto an array of interested advertisers. For example, basketball star Michael Jordan's right of publicity may beused successfully to market everything from athletic shoes to hamburgers. Technological developments havemade it possible to use the voices and images of deceased personalities in advertisements, songs, and othercommercial endeavors. This technology could render the possibilities for future exploitation of highlymarketable personalities limitless. Ultimately, the presence or absence of value will turn on the factssurrounding the celebrity of the personality in question and the extent to which that celebrity survives thepersonality's death.

n45 See Beausang, supra note 36, at A-2.

n46 See id. at A-2, A-5.

n47 See id. at A-5; see also Rev. Proc. 66-49, 1966 C.B. 1257 (noting that cost, selling price, sales ofcomparable properties, cost of reproduction, and expert opinion may all be relevant in valuation); GORDON V.SMITH, CORPORATE VALUATION: A BUSINESS AND PROFESSIONAL GUIDE 145-47 (1988)(describing the use of the cost, income, and market approaches in the valuation of intangible assets).

n48 See SMITH, supra note 47, at 145-47 (discussing the use of these techniques in valuation of intangibleassets); Allan B. Cutrow, Paul N. Frimmer & Paul A. Sczudlo, Tax & Estate Planning for Entertainers, Artists &Writers 13 (Mar. 4, 1993) (Los Angeles County Bar Association Second Annual CLE Convention and Trade

108 Harv. L. Rev. 683, *700

Show) (on file with the Harvard Law School Library) (discussing use of comparable sales, replacement costs,and income stream capitalization to value entertainment properties).


n50 See id.; Debra Perrotta, Estate Planning for Owners of Patents and Copyrights, 21 EST. PLAN. 94,95-96 (1994); cf. Smith v. Commissioner, 41 T.C.M. (CCH) 1427, 1428 (1981) (relying on a patent's potentialincome stream to establish its value).

n51 See Learner v. Commissioner, 45 T.C.M. (CCH) 922, 927-28 (1983).

n52 See id.

n53 See id.

n54 See Dresser v. Commissioner, 15 T.C.M. (CCH) 242, 244 (1956) (relying on the price that a piece ofproperty would bring on the market as a measure of its value for tax purposes); Beausang, supra note 36, at A-5to A-9; cf. 3 MELVILLE B. NIMMER & DAVID NIMMER, NIMMER ON COPYRIGHT § 14.02, at 14-9(1994) (stating that the measure of damages for copyright infringement is the decrease in the fair market value ofthe copyright).


n56 See id. Where there are no existing contracts, the IRS may examine offers. An unaccepted offer mayconstitute evidence of the property's fair market value. See id. at A-6. The offer, assuming it is legitimate,represents the offering party's willingness to pay and may be accorded substantial weight. See Estate of Wilsonv. Commissioner, 5 B.T.A. 615 (1926); Beausang, supra note 36, at A-6.


n58 See id.

n59 See id.; see also Slater v. Commissioner, 18 T.C.M. (CCH) 557, 560 (1959) (holding that the pricereceived for property is a more accurate measure of the property's fair market value than higher offers that wererefused).

n60 SMITH, supra note 47, at 146.


n62 Telephone Interview with Troy Dahlberg, Senior Manager of the Los Angeles, Cal. Office of KPMG

108 Harv. L. Rev. 683, *700

Peat Marwick (Aug. 29, 1994) [hereinafter Dahlberg Interview].

n63 See id.

n64 See id.

n65 See id.

n66 See id.

n67 See id.

n68 See id.

n69 See id.

n70 See id.

n71 See id.

n72 See id.

n73 See id.

n74 See id.

n75 See id.

n76 Cf. 26 C.F.R. § 20.2031-I(b) (1994) ("The value of every item of property includible in a decedent'sgross estate . . . is its fair market value . . . ."); Rev. Proc. 66-49, 1966 C.B. 1257 (defining the value of propertyfor income tax purposes as "the price at which the property would change hands between a willing buyer and awilling seller"). In Lewis v. United States, the court described the highest-and-best-use value as that value whichwould be negotiated between a willing buyer and a willing seller for the use that would give the property itshighest fair market value. See 71-1 U.S. Tax Cas. (CCH) P 12,379, at 86,814 (D. Wyo. Dec. 8, 1970). The usemay be "the actual use of the property on that date, or a use to which it was then adaptable, even though on thedate in question the property was not being put to such use." Id.

n77 See Lewis, 71-1 U.S. Tax Cas. (CCH0 at 86,814.

n78 38 T.C. 673 (1962).

108 Harv. L. Rev. 683, *700

n79 See id. at 673.

n80 See id.

n81 See id. at 676-77.

n82 See id.

n83 See id. at 677.

n84 See id.

n85 See Tech. Adv. Mem. 89-07-002 (Nov. 1, 1988); cf. Estate of Salsbury v. Commissioner, 34 T.C.M.(CCH) 1441, 1451-52 (1975) (discussing the rationale for including a control premium in valuation); Ruth R.Longenecker, A Practical Guide to Valuation of Closely Held Stock: Strategies to Assist the Tax Practitioner inValuation Cases, TR. & EST., Jan. 1993, at 32, 38-40 (outlining arguments for and against a control premium).Some courts allow "minority discounts." See Cravens v. Welch, 10 F. Supp. 94, 95 (S.D. Cal. 1935)(acknowledging that minority stock in a closed corporation is worth less than the share of assets it represents).

n86 See Ahmanson Found. v. United States, 674 F.2d 761, 768 (9th Cir. 1981) ("There is nothing . . . in thecase law that suggests that valuation of the gross estate should take into account that the assets will come to restin several hands rather than one.").

n87 307 U.S. 57 (1939).

n88 See id. at 60-61.

n89 Id. at 60.

n90 674 F.2d 761 (9th Cir. 1981).

n91 See id. at 767 (citing Provident Nat'l Bank v. United States, 581 F.2d 1081 (3d Cir. 1978)).

n92 See id. at 765-66.

n93 See id. at 766.

n94 See id. at 767.

n95 See id.

108 Harv. L. Rev. 683, *700

n96 See id.

n97 See id.

n98 Id. at 768.

n99 Id.

n100 The Ahmanson court distinguished the case before it from a situation in which changes in valueresulted from a distribution of assets to a number of beneficiaries, a situation similar to that presented in thecontrol premium cases discussed above in note 85 and in the accompanying text. See id.

n101 The IRS could adopt a rule akin to § 2032A(b)(1)-(3) of the tax code for rights of publicity. See I.R.C.§ 2032A(b)(1)-(3) (West 1994) (providing an exception to the highest-and-best-use value requirement forfarmers and small business operators). Alternatively, state laws could provide methods to allow a personality torestrict all use of her right of publicity by registering the restriction with the state, thereby permanently limitingthe right of publicity's value.

n102 One can imagine a number of techniques that a testator might use to restrict the use of her right ofpublicity. For example, the testator could transfer the right to a restrictive trust.

n103 Creative estate administrators could employ a number of tactics to avoid paying estate tax on the rightof publicity. For example, an estate administrator might claim that the total of all revenue streams fromendoresements existing at the time of death is the entire value of the "right of publicity," and thereby avoid anytax liability for future endoresement opportunities. Alternatively, an estate administrator might claim that theright of publicity was exploited to such an extent during the personality's life that no further endoresementopportunities exist. This latter claim would require the estate to demonstrate that the market for the personality'spublicity right was saturated -- a difficult claim to prove. In either case, a diligent IRS agent is likely to seethrough such maneuvers, labeling them shams to avoid estate tax.

n104 For instance, if an individual's voting or liquidation rights in a business entity lapse, and thatindividual and his family control the entity, the lapse will be treated as a transfer to the family for estate taxpurposes. See I.R.C. § 2704 (West 1994).

n105 See I.R.C. § 2703 (West 1994) (requiring that certain restrictions on property be disregarded in estateand gift tax valuation unless such restrictions represent a "bona fide business arrangement"); cf. Estate ofBischoff v. Commissioner, 69 T.C. 32, 39 (1977) (discussing the IRS's argument that restrictive buy-sellprovisions in partnership agreements require a legitimate business purpose before the partnership's value isreduced for estate tax purposes); Hoffman v. Commissioner, 2 T.C. 1160, 1184-85 (1943) (holding that atransfer of assets to a family trust was not a bona fide sale and noting that the trust assets were properly includedin the gross estate), aff'd sub nom. Giannini v. Commissioner, 148 F.2d 285, 287 (9th Cir.), cert. denied, 326U.S. 730 (1945).

n106 In designing provisions to be included in an estate plan, a testator should make certain that the

108 Harv. L. Rev. 683, *700

provisions are enforceable in order to avoid accusations from the IRS that the estate plan is a sham. One methodof ensuring that use restrictions will be enforced is to transfer ownership of the right of publicity to multipledisinterested parties. Alternatively, enforcement may require setting aside some estate funds for futureenforcement actions. In such a case, the restrictive provisions may be a liability to the estate because theenforcement requirements will be an estate expense. Finally, state legislatures could pass statutes providing forenforcement either by the state attorney general's office or by private citizens proceeding under private rights ofaction available to anyone willing to bring suit.

n107 A personality could transfer his right of publicity while still alive. Such a transfer would, however,present a number of problems similar to those discussed in the text. For example, the IRS would probablyscrutinize the transaction for indications that it was a sham, and the IRS would assess a gift tax on the valuetransferred. Additionally, a transfer prior to the personality's death would force the personality to relinquishcontrol of his right of publicity even though he might wish to exploit the right while he is living.

n108 Although they are conceptually distinct, the terms "privacy" and "publicity" are often usedinterchangeably. See, e.g., N.Y. CIV. RIGHTS LAW §§ 50-51 (McKinney 1992) (describing New York's rightof publicity as a "right of privacy" tort).

n109 The right of publicity is the "offspring" of an "interplay" between liberty and property rights. SeeTerrell & Smith, supra note 35, at 3. It is possible to describe the right of publicity as nothing more than "theright of famous people to waive their right of privacy when and if they choose." Id. at 6. However, some statesplace such emphasis on the property aspect of the right that they include it as property acquired during marriagefor the purpose of community property division. See Robin P. Rosen, Note, A Critical Analysis of CelebrityCareers as Property Upon Dissolution of Marriage, 61 GEO. WASH. L. REV. 522, 523 (1993) (noting thatNew York and New Jersey include publicity rights as marital assets and arguing that the view of these statesreflects a distorted definition of property).

n110 50 S.E. 68 (Ga. 1905).

n111 See WILLIAM L. PROSSER, HANDBOOK OF THE LAW OF TORTS 802-04 (4th ed. 1971).

n112 See Pavesich, 50 S.E. at 70.

n113 Id.

n114 Commentators disagree over whether the right of publicity is a species of tort intended to protect anindividual's personality and feelings or whether the right, as it has evolved, is a property interest designed toprotect the commercial value of one's image. See SHELDON W. HALPERN, THE LAW OF DEFAMATION,PRIVACY, PUBLICITY AND "MORAL RIGHTS" 504-06 (1988). States that protect the descendibility of theright tend to describe it as a property right, and it is this property interest that the IRS will target for estate taxpurposes. However, the fact that many states define the right as a property interest does not mean that the publicpolicy of protecting privacy through the right of publicity should necessarily be discarded. On the contrary, thelink between the two rights suggests that the right of publicity should be viewed as a means of protecting boththe right to be left alone and the right to prevent wrongful exploitation.

108 Harv. L. Rev. 683, *700

n115 296 S.E.2d 697 (Ga. 1982).

n116 Although the Pavesich court recognized that the right to privacy is a personal right that dies with theperson, it noted that "we do not desire to be understood as assenting to the proposition that the relatives of adeceased cannot, in a proper case, protect the memory of their kinsman . . . from an invasion into the affairs ofhis private life after his death." Pavesich, 50 S.E. at 76.

n117 Martin Luther King, Jr., 296 S.E.2d at 705.

n118 See id. at 706 ("Without doubt, Dr. King could have exploited his name and likeness during hislifetime. That this opportunity was not appealing to him does not mean that others have the right to use hisname and likeness in ways he himself chose not to do.").

n119 Id.

n120 Many definitions of the invasion of privacy tort treat the right to privacy as encompassing the right ofpublicity. See HALPERN, supra note 114, at 386; ROBERT E. SMITH, CELEBRITIES AND PRIVACY 2,6-7 (1985).

n121 It is worth noting that to the extent that a personality has a right to privacy, only the publicity ormisappropriation component of the right survives death. See SMITH, supra note 120, at 14. But see Kiraly v.FBI, 728 F.2d 273, 277-78 (6th Cir. 1984) (holding that the "privacy exemption" under the Freedom ofInformation Act survives the death of the object of the information). One might argue that because only theright of publicity -- based partly on a property interest -- is descendible, courts and the IRS should beunconcerned about forcing the estate to exploit the right because the personality's right to privacy -- basedprimarily on a liberty interest -- no longer exists. According to this argument, the only basis for an objection tothe exploitation is the right to privacy, which does not survive a personality's death. Therefore, as a matter oflaw, the personality has no express right to prevent exploitation after her death. Such an argument would,however, ignore the link between the rights of privacy and publicity described in the text.

n122 Cf. Gary S. Stiffelman, Community Property Interests in the Right of Publicity: Fame and/or Fortune,25 UCLA L. REV. 1095, 1126 & n.133 (1978) (noting a similar problem with regard to placing a high value onthe right of publicity for the purpose of dividing marital property).

n123 Cf. Lahr v. Adell Chem. Co., 300 F.2d 256, 258 (1st Cir. 1962) ("A charge that an entertainer hasstooped to perform below his class may be found to damage his reputation."); George M. Armstrong, Jr., TheReification of Celebrity: Persona as Property, 51 LA. L. REV. 443, 458 (1991) (suggesting that artistic workdeclined in 19th century England because of the threat that the work might be used for advertising purposes).

n124 See Zacchini v. Scripps-Howard Broadcasting Co., 433 U.S. 562, 576 (1977).

108 Harv. L. Rev. 683, *700

federal estate tax and the right of publicity: taxing estates for celebrity value. january, 1995 108...

Documents