On-Line Fundraising, Some Tax Implications

Many have participated in, or know someone who has launched, a “Kickstarter” campaign or other online means of securing funds for a project.  Others may have encountered a request for contributions to a “fund” for some tragic occurrence (such as a scholarship fund for the children of a decedent) which is not supported by a charitable organization.  Such projects, generally known by the term “crowdfunding”, raise interesting tax issues.

A third party (such as a credit card issuer or other payment collection service) need not report to the Internal Revenue Service the transactions of any participating payee (such as a musician, inventor, etc.) if the aggregate payments to the payee by the third party for the calendar year do not exceed $20,000 or if the aggregate number of transactions between the third party and the payee that would otherwise be reportable does not exceed 200 within the calendar year.

It is bedrock tax law that all amounts received by an individual are income to that person unless excluded under other provisions of tax law.  A gift is excluded from the recipient’s income.  However, there is no gift, under tax law, if there is something of value received in return for the payment to the recipient.  All gifts are subject to the gift tax and the applicable annual “per donee (recipient)” and lifetime exclusion amounts.

In the charitable contribution arena, one looks to the “insubstantial benefit” test to determine if a “reward” given for a contribution if fully tax deductible.  Presumably, the same rationale would apply to crowdfunding campaigns.  For the 2015 tax year, the adjustments in the value of insubstantial benefits that may be received by a donor in return for a contribution without causing the contribution to fail to be fully deductible are:

  • $10.50 (total of all low-cost gift items received by the donor)
  • $52.50 (minimum amount of the donor’s contribution)
  • $105 (fair market value of all the gifts received by the donor in connection with the contribution, or 2 percent, whichever is less)

With these latest adjustments, a gift can be ignored for tax purposes if the gift is no more than $105 or 2 percent of the payment, whichever is less. Alternatively, a gift can be ignored for tax purposes if a donation is $52.50 or more and the gift qualifies as a low-cost item. Low-cost items are, for example, token gifts such as tee shirts, coffee mugs, or key chains bearing the charity’s name or logo. The total of low-cost items cannot exceed a wholesale value of $10.50.

The expense of conducting a crowdfunding campaign (including the “incentives” mentioned above) may be deductible if the project involved is a trade or business carried on with the expectation of profit.  In such a case, losses are handled in the same manner as any actively conducted business.  However if there is no such profit expectation, (e.g. just getting a performer’s music “out there”) the “hobby loss” rules come into play and deductions are usually only allowed to the extent of income from the hobby.  In evaluating the issue of the deduction of expenses, one must be aware of the “startup” expenditure rules which treat those expenses differently than those of an ongoing business, but generally would probably not apply in a smaller crowdfunding campaign below statutory limits regarding startup expenditures.

Finally, a charitable deduction is not allowed for contributions to an individual unless, possibly, the crowdfunding is sponsored by a charitable organization and the rules for charitable deductions are met.

PK Law’s Corporate and Business Services Group can help with setting up and monitoring crowdfunding campaigns.  They can also provide advice and guidance on charitable donations and deductions.

This information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.

Sony Data Breach Class Action Survives Motion to Dismiss Suit

As previously reported upon by PK Law, Michael Corona and eight other individuals (“Plaintiffs”) filed a class action on March 2, 2015 against Sony Pictures Entertainment, Inc. (“Sony”). (U.S. District Court, Central District of California Case No.14-CV-09600 RGK (Ex)) The action arises out of a security breach wherein Sony’s information technology infrastructure and network were hacked, and sensitive personal data of former and current Sony employees were stolen. Plaintiffs, all former employees of Sony, allege the following claims: (1) Negligence; (2) Breach of Implied Contract; (3) Violation of the California Customer Records Act; (4) Violation of the California Confidentiality of Medical Information Act; (5) Violation of the Unfair Competition Law; (6) Declaratory Judgment; (7) Violation of Virginia Code § 18.2-186.6; and (8) Violation of Colorado Revised Statutes § 6-1-716.

Sony filed a Motion to Dismiss the case. On June 5, 2015 the Court (R. Gary Klausner, U.S. District Judge) granted the Motion, but only in part, thereby allowing the case to proceed to trial.

Widely reported press accounts attributed the Sony “hack” to have been performed by North Korea.  Ostensibly, the attack was a response to the release of the movie “The Interview” which that country and its leadership found offensive.

As a factual matter Judge Klausner’s opinion states:

“In November 2014, as a result of inadequate security measures, Sony was the victim of a cyberattack, wherein Sony’s information technology infrastructure and network were hacked. The perpetrators stole nearly 100 terabytes of data from Sony’s system. Among the data was sensitive personal information of at least 15,000 current and former Sony employees. The information, which included financial, medical, and other personally identifiable information (“PII”), was used to threaten the individual victims and their families, and was posted on the internet. Because Sony was focused on its own remediation efforts and not on protecting its former and current employees, Plaintiffs have had to purchase identity protection services and insurance, and take other measures to protect their compromised PII. Notwithstanding these measure, Plaintiffs face ongoing future vulnerability to identity theft, medical theft, tax fraud, and financial theft because their PII has been, and may still be, publicly available to anyone with an internet connection. In fact, Plaintiffs’ PII has already been traded on black market websites and used by identity thieves.”

Sony argued that the Plaintiffs had sustained no current injury or a threatened injury that is certainly impending.  The Court rejected those arguments.  Relying on Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir. 2010), in which a laptop containing personal identifying information of 97,000 employees was stolen, “allegations of increased risk of future identity theft were a credible threat of real and immediate harm.”  Judge Klausner went on to state:  “The[se factual allegations] alone are sufficient to establish a credible threat of real and immediate harm, or certainly impending injury.”

The court rejected the negligence claim of the Plaintiffs arising out of a failure to timely notify them of the security breach but allowed the negligence claim to proceed on the basis of Sony’s “alleged breach of duty to maintain adequate security measures.”

Plaintiffs argued that by hiring them and paying them there arose an implied contract to protect their data.  The Court disagreed with this argument and granted Sony’s Motion to Dismiss as to that cause of action.

The Court also granted Sony’s Motion to Dismiss as to an alleged violation of the California Records Act.  However, the Court found that under the California Confidentiality of Medical Information Act which requires that “[e]ach employer who receives medical information shall establish appropriate procedures to ensure the confidentiality and protection from unauthorized use and disclosure of that information” the Plaintiffs could proceed as no formal “disclosure” was required on Sony’s part.

Sony’s Motion to Dismiss was denied under the Unfair Competition allegations of the complaint but was granted as to alleged violations of the Virginia Code.  As to the latter the lead Plaintiff, Corona, as a Virginia resident, “discovered an unencrypted spreadsheet containing his [personal information] online, before he received any notification from Sony, and before he had an opportunity to obtain identity protection services.”  The Court relied on its reasoning as to the rejection of Plaintiff’s negligence claim, in part, on similar grounds, mentioned above.

The Motion to Dismiss was granted as to violation of Colorado’s Consumer Protection Act, there being no private right to sue under that statute.  Only the State’s Attorney General may maintain such an action.

The Court failed to bar the Plaintiffs from seeking injunctive and declaratory relief.

There is evidently a split of opinion among the United States Courts of Appeal regarding the use of the Krottner case mentioned above.  Eventually, should the case be tried and the Plaintiffs succeed in reliance on that case, the matter may be headed to the Supreme Court.

PK Attorneys will continue to monitor the Corona case for further developments.  In the meantime, as PK Law attorneys point out to corporations and their directors and officers facing possible litigation over data breaches, data security should be of paramount concern and businesses should be proactive in securing same.  PK Law Corporate and Business Services and Litigation Attorneys are available for consultation on this important issue.

This information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.

New Proposed Rules on Overtime

The President recently announced an “expansion” of the coverage of overtime rules to employees.  In that regard, the U.S. Department of Labor’s Wage and Hour Division (the “DOL”) issued proposed updated regulations governing the payment of minimum wage and overtime pay to “white collar workers” on July 6, 2015 (29 CFR 541).

Since 1940, the Department’s regulations have generally required each of three tests to be met for one of the Fair Labor Standard Act’s (“FSLA”) white collar exemptions to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount; and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.  Last updated in 2004, the regulations presently provide for a “minimum specified amount” for exemption of $455 per week ($23,660 per year).

The DOL proposes to:

  • Set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers ($921 per week, or $47,892 annually);
  • Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually); and
  • Establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.

As proposed, this would raise the salary threshold from present levels to about $970 a week ($50,440 a year) in 2016.  The proposed rule would automatically update the standard salary and HCE total annual compensation requirements.  The DOL estimates that the higher salary level would extend increased minimum wage and overtime eligibility to approximately five million employees.

In addition, the Department discusses the current duties test and solicits suggestions for additional occupation examples and requests comments on the current requirements.  While the DOL is not proposing specific regulatory changes at this time, it is seeking additional information on the duties tests for consideration in the Final Rule. Specifically, it seeks comments on the following issues:

  • What, if any, changes should be made to the duties tests?
  • Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
  • Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be employee’s primary duty) as a model?  Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
  • Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees?
  • Should the Department reconsider our decision to eliminate the long/short duties tests structure?
  • Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) work appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?

Similarly, the Department seeks comment on the possibility of including nondiscretionary bonuses to satisfy a portion of the standard salary requirement. The Department is not proposing specific regulatory changes on either of these issues.

Written comments to the proposed regulations are due to the DOL on or before September 4, 2015.

PK Law’s Employment and Labor attorneys have extensive experience in the application and interpretation of wage and hour laws for employers.  To contact an attorney in PK Law’s Worker Misclassification and Wage and Hour Law Group click here.  For additional information contact information@pklaw.com.

 

his information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.

Some Tax Implications of Same Sex Marriage

By now, the U.S. Supreme Court’s decision in Obergefell v. Hodges holding that the Fourteenth Amendment requires all states to license a marriage between two people of the same sex has been widely reported upon, including in the PK Law newsletter.  However, the opinion of the Court raises some interesting and thorny tax issues which we wish to call to our readers’ attention.

The Internal Revenue Service issued Revenue Ruling 2013-17, 2013-38 Internal Revenue Bulletin 201, which stated that a same-sex couple legally married in a domestic or foreign jurisdiction would be treated as married for federal tax purposes, regardless of where they currently live, and must file as married couples for federal income tax purposes.  Thereafter, many states required same-sex couples married in other states to file separate state income tax returns, even if their filing status was married filing jointly for federal income tax purposes.

The Obergefell decision results in those in a same-sex marriage being considered married for state and federal return purposes, eliminating the dichotomy between state and federal filings.  However, those couples in a “domestic partnership” or “civil union” (“marriage substitutes”) under state law apparently cannot file a joint federal return but may be able to file a joint state return.

In any event, couples in marriage substitute types of relationships will now have to consider the social and tax advantages of becoming married.  They will need to bear in mind that with marriage comes divorce and all of the state and federal rules which come into play regarding division of property and payment of spousal and child support.

Same-sex couples who were married in states that allowed marriage but subsequently moved to states that didn’t recognize same-sex marriages are now married for state income tax purposes.  Those couples should consider amending state returns for those years available for amendment and examine the following points:

  • Will amendment result in lower taxation?
  • Should the couple itemize deductions or claim the standard deduction as married filing jointly?
  • What tax credits might the combined income of the couple make them eligible or ineligible for?

In states that impose estate and gift taxes (or inheritance taxes), a thorough estate planning review should be conducted to determine if it is advantageous to utilize rules regarding spousal transfers as part of an individual’s or couple’s estate plan.

Finally, Justice Roberts, in his dissenting opinion in Obergefell, raised the point of whether those religious charitable organizations which follow policies which conflict with same sex marriage would continue to receive status as “charitable organizations” under tax law.  Bob Jones University lost a similar such case in the U.S. Supreme Court.  Would the same be true under the current decision?  As of when would such an exemption be lost?  As Justice Roberts points out, many such questions remain to be answered as to such organizations and their policies.

PK Law’s Wealth Preservation and Tax attorneys stand ready to answer questions regarding the tax implications of same sex marriage.  Should you require guidance in that area, do not hesitate to contact a PK Law attorney.

To contact an attorney in PK Law’s Same Sex/LGBT Practice click here.

 

This information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.