IRS says Prince's estate undervalued by 50%, triggering another dispute in settlement

The Internal Revenue Service claims the executors of Prince's estate have lowballed its value by 50%, or about $80 million, triggering a dispute that could prolong the late musician's already tortuous and expensive probate proceedings.

The IRS determined that Prince's estate is worth $163.2 million, well above the $82.3 million valuation submitted by Comerica Bank & Trust, the estate's administrator. The big gap primarily involves Prince's music publishing and recording interests.

In the IRS' view, Prince's estate owes another $32.4 million in federal taxes, roughly doubling the tax bill based on Comerica's valuation, according to documents filed in U.S. Tax Court.

"This is a large discrepancy, both in terms of the dollars involved and the fact that the IRS thinks the estate is worth twice as much," said Michael Smith, an estate planning attorney at Larkin Hoffman in Minneapolis who's not involved in the case.

Plus, the IRS slapped a $6.4 million "accuracy-related penalty" on Prince's estate, citing a "substantial" undervaluation of assets, documents show.

Comerica and its lawyers at Fredrikson & Byron in Minneapolis maintain their estate valuations are solid. Comerica, as the estate's executor, sued the IRS this summer in U.S. Tax Court in Washington, D.C., saying the agency's calculations are riddled with errors.

"What we have here is a classic battle of the experts — the estate's experts and the IRS' experts," said Dennis Patrick, an estate planning attorney at DeWitt LLP in Minneapolis who's also not involved in the case. Valuing a large estate, Patrick added, "is way more of an art than a science."

Comerica, a Dallas-based financial services giant, has asked the tax court to hold a trial in St. Paul. A trial could dramatically lengthen the disposition of Prince's estate — and generate more legal fees at the expense of Prince's heirs.

"It could be several years before they get this worked out if they don't agree to a settlement," Patrick said. "It depends on how hard the IRS is digging in its heels."

Prince's death of a fentanyl overdose on April 21, 2016 — without a will — created one of the largest and most complicated probate court proceedings in Minnesota history. Estimates of his net worth have varied widely, from $100 million to $300 million.

With Prince's probate case dragging on, his six sibling heirs have grown increasingly restive, particularly as the estate has doled out tens of millions of dollars to lawyers and consultants. Prince's heirs range in age from 50 to 80; one brother died in 2019 of heart disease at age 66.

Sharon Nelson, Prince's sister and one of the six heirs, contacted the IRS herself recently, alarming Comerica's attorneys, according to a mostly redacted filing in Carver County probate court.

An attorney for Nelson defended her in an ensuing filing. "While she inquired as to the process and timing of settlement negotiations and urged such discussions, she did not disclose any information related to the estate or the heirs' settlement position."

Comerica has failed to "fully inform [the heirs] on business matters including the tax proceedings," the filing said.

A Frederickson & Byron attorney declined to comment, but Comerica's lawyers have rejected such assertions in the past.

Nelson, in an interview, said Comerica will negotiate the valuation of assets for taxes.

"We're going to have our own tax lawyer there," Nelson said in an interview. "Once our taxes are paid, then Comerica is gone and the heirs will take charge."

Comerica filed a tax return for Prince's estate in July 2017, and the IRS responded last June with a dreaded "notice of deficiency." No Prince asset seemed too small or esoteric to escape IRS scrutiny.

For instance, the agency found that Prince's forklift — yes, he owned one — was properly included in a general valuation of his assets, thus decreasing his estate's taxable value by $2,300.

But the IRS deemed that Prince's 2014 cash transfer to Wendy Melvoin for the benefit of her twin sister, Susannah Melvoin, was a taxable gift, although it was exchanged "for a promise to repay," tax documents say.

So, the IRS increased the Prince estate's taxable gifts by $36,000.

Wendy Melvoin was a guitarist in Prince's band the Revolution; Susannah, a singer and member of the Prince-formed group the Family, was Prince's fiancée in the mid-1980s before they broke up.

As for larger matters, the IRS said Comerica's $15.7 million appraisal of Prince's real estate holdings was $5.7 million too low, notably in regard to about 185 acres off Galpin Boulevard in Chanhassen.

Prince once lived on the property, though his former house there was razed in 2006. The land is now being developed into about 170 homes.

The IRS was even less sparing with Comerica's treatment of Prince's less tangible holdings.

The agency declared that the fair market value of Prince's ownership of NPG Music Publishing should be $36.9 million, not $21 million as calculated by the musician's estate. The tax agency also found that Prince's ownership of NPG Records should be valued at $46.5 million, not $19.5 million.

Plus, the IRS claimed the estate undervalued Prince's interest in his music compositions by $11 million, and ownership of miscellaneous personal and business property by $36 million.

"It is not surprising that the estate and IRS have such differing views in light of the difficulties involved in the valuation of music rights," said Smith, the Larkin Hoffman attorney. "Music is subjective, and the rights can be structured in different ways."

Plus, "the music industry is always changing," he said, noting the boom in music streaming.

Through subscription services like Spotify and Pandora, streaming has helped boost the value of aging rock stars' publishing and recording rights.

In December, Bob Dylan sold his song catalog to music industry heavyweight Universal Music Group, reportedly for around $400 million. Also last month, Fleetwood Mac star Stevie Nicks netted a reported $100 million for selling an 80% interest in her publishing rights to Primary Wave.

New York-based Primary Wave, a deep-pocketed investor in music copyrights, has been intensely interested in Prince's estate.

Two of Prince's sibling heirs have agreed to sell a good chunk of their rights (for an undisclosed amount) to Primary Wave. Sharon Nelson and at least two other siblings have rejected Primary Wave's offers in the past.

Sharon Nelson and other heirs have sent their own "transition plan" for Prince's estate to the Carver County probate court, according to a recent court filing. The filing didn't disclose the plan, and Nelson declined to delve into its details.

"It's a real good plan if we can get the judge on our side," she said last week. "He's not on our side right now."

Staff writer Jon Bream contributed to this report.

Mike Hughlett • 612-673-7003