Estate of Andrews v. United States
1994 U.S. Dist. LEXIS 6408, 73 A.F.T.R.2d (RIA) 2395, 850 F.Supp. 1279 (1994)
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Rule of Law:
For federal estate tax purposes, the fair market value of an intangible asset, such as a deceased author's name, is determined based on the price a willing buyer and seller would agree upon, considering all facts and reasonable future possibilities, such as the potential for ghostwritten works, that were known or reasonably foreseeable at the date of death.
Facts:
- Virginia C. Andrews was an internationally recognized, best-selling author in the 'children in jeopardy' genre, having published seven highly successful novels by 1986.
- Her publisher, Pocket Books, consistently rejected her attempts to write outside of this successful genre.
- In October 1986, while Andrews was terminally ill, her agent began negotiating a new two-book contract with a $3 million advance.
- On November 11, 1986, Andrews signed the proposed contract, but she died on December 19, 1986, before her agent received the executed copy and before the publisher countersigned it.
- Immediately upon learning of her death, the president of Pocket Books, Jack Romanos, conceived of the idea to continue the book series with a ghostwriter.
- Shortly after her death, the Estate, her agent, and Pocket Books successfully engaged a ghostwriter, Andrew Niederman, to mimic Andrews' style.
- In March 1987, the Estate and Pocket Books executed a formal publishing contract, based on the one Andrews had signed, for two ghostwritten books.
- The first ghostwritten book was published in October 1987 and became an immediate commercial success.
Procedural Posture:
- The Estate of Virginia C. Andrews filed a federal estate tax return, paying over $2 million in taxes but did not list the value of Andrews' name as an asset.
- The Internal Revenue Service (IRS) issued a notice of deficiency, asserting that Andrews' name was an asset worth $1,244,910.84 and assessed additional taxes and interest.
- The Estate paid the deficiency of $947,483.87 under protest.
- The Estate filed a claim for a refund with the IRS.
- After the IRS took no action on the claim for six months, the Estate filed this action for a refund against the United States in the U.S. District Court.
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Issue:
For federal estate tax purposes, what is the fair market value of a deceased, famous author's name, based on the income potential from future ghostwritten works that was reasonably foreseeable at the time of death?
Opinions:
Majority - Payne, District Judge.
The fair market value of Virginia C. Andrews' name at the date of her death was $703,500. The valuation of such an intangible asset must be based on the 'willing buyer, willing seller' standard, which considers facts and potential uses that were reasonably foreseeable at the time of death, not on speculative future success or events that occurred long after death. The court reasoned that the 'relevant facts' are those that a hypothetical buyer and seller could have reasonably known on the date of death. While post-death events are generally not considered, they are relevant to the extent they were reasonably foreseeable. Here, it was foreseeable that a ghostwriter would be hired to continue the series, making the First Publishing Contract, which was based on pre-death negotiations, a valid basis for valuation. However, the subsequent success of the ghostwriting venture and the execution of further publishing contracts were not foreseeable, as all parties viewed the project as highly risky and speculative at the outset. Therefore, the IRS erred by valuing the name based on a projection of eight successful post-death books. The correct valuation begins with the $1.55 million advance for the first foreseeable book, subtracts approximately $500,000 in expenses to produce it, and applies a 33% risk discount factor to account for the significant uncertainty of the project's success. This calculation yields a final value of $703,500.
Analysis:
This case is a landmark decision establishing that a deceased celebrity's name and associated goodwill are taxable assets of their estate. It provides a crucial analytical framework for valuing unique intangible assets by focusing on what was 'reasonably foreseeable' at the moment of death. The decision affirms that future earning capacity, not just past earnings or existing contracts, is part of the valuation, but it carefully limits this forward-looking analysis to non-speculative possibilities. This precedent guides courts in balancing the recognition of an asset's potential value against the impermissible use of hindsight, shaping how celebrity estates and other intangible intellectual property are valued for tax purposes.
