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Author's Success Yields Estate Taxable Asset
Source: The CPA Journal, July 1994, v64 n7 p16 In a case of first impression, the Tax Court has held that the name of the late immensely successful novelist V.C. Andrews constituted an asset in Ms. Andrews' estate. Andrews created the "children-in-jeopardy" genre of literature, which has become very popular with teens and young women. A measure of her success is her publisher's advances which grew from $7,500 for her first book to $2 million for her last two books. And at the time of her death, she had signed a two-book contract, calling for a $3 million advance. Following the author's death, her estate, publisher, and a ghostwriter entered into a series of contracts to produce more books under the Andrews name. Several such books were published and were successful. The estate tax return did not list the decedent's name among its assets. By the end of the ensuing, two-year IRS estate tax examination, five ghostwritten books had been successfully marketed with substantial income accruing to the estate. The IRS determined that the estate tax return should have included the author's name with a value of nearly $1 million. In valuing the author's name, the examining agent analyzed the income stream from the post-death novels, applying higher discounts for later-published books. The Tax Court agreed with the IRS that the estate's value should have included the author's name, but disagreed with the IRS's approach to valuation. The court looked to Treasury regulations on the subject and concluded that a proper valuation should attempt to reconstruct what facts would have been reasonably knowable to a hypothetical buyer and seller at the time of decedent's death. The court identified such factors as the experience in publishing the ghostwritten works of other deceased novelists, the nature of the paperback market, the enormous success of Ms. Andrews in creating her own genre, the risk that a poorly received ghost-written novel would depress sales of novels written by Andrews, and the risk of being unable to find a ghostwriter capable of writing novels acceptable to the publisher. Weighing these factors, the court arrived at a value of the author's name of $703,500.
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