Originally published on Forbes.com.
It looks like RF, who was found guilty of a first-class misdemeanor as an indirect result of her appearance on the Ellen DeGeneres Show, may have caught just a bit of a break thanks to a decision of the Court of Appeals of the Ohio Second Appellate District. In 2013, Ms. F, then an underemployed substitute teacher with four children, wrote to Ellen to ask her to recognize someone, who had been helping her out with Christmas presents for the kids.
Ellen ended up giving Ms. F $55,000: $5,000 in an impressive stack of cash to upgrade her wardrobe and five $10,000 checks to help fund educational expenses for herself and each of the four kids. If you are willing to invest a quarter-hour of lifespan, you can view the show segment here. I’d love to figure out what denomination the bills in the stack Ellen handed Ms. F were.
The troubles of Ms. F come from the City of Xenia, Ohio thinking it was entitled to income tax in the amount of $1,758.61 on the $55,000.
Don’t Mess With Xenia
The IRS has a pretty fierce reputation, but you would be hard-pressed to find somebody who had to face doing time over less than $2,000. Years ago, somebody who had reasons to know about these things told me that you had to avoid over $100 thousand a year for three years to get IRS CI interested in you. In Xenia, Ohio it is a different story, I guess. Ms. F ended up with a $75 fine and a suspended thirty-day sentence, which doesn’t seem that bad. The misdemeanor conviction is really bad news, though, since it constitutes a criminal record. Given that employ-ability was pretty much at the root of the problem for Ms. F, the last thing she needs is a criminal record. I figure she probably does not need this story being what pops up when somebody googles her, which is why I am using initials, even though all of this is quite public and you will learn her name if you watch the video.
Where The Money Came From
The money came from a company called Shutterfly, which describes itself as:
…the leading manufacturer and digital retailer of high-quality personalized products and services offered through a family of lifestyle brands. Our vision is to make the world a better place by helping people share life’s joy. Our mission is to build an unrivaled service that enables deeper, more personal relationships between our customers and those who matter most in their lives. Our primary focus is on helping consumers manage their memories through the powerful medium of photography. We provide a full range of personalized photo-based products and services that make it easy, convenient and fun for consumers to upload, edit, enhance, organize, find, share, create, print, and preserve their memories in a creative and thoughtful manner.
Shutterfly refers to itself as a partner in giving with the Ellen DeGeneres Show.
Shutterfly’s vision is to make the world a better place by helping people share life’s joy. Thanks to our partnership with The Ellen DeGeneres Show, we’ve given close to $2 million in donations to people in need. We’re so proud of what we’ve been able to do together.
Did Somebody Tell The Tax Department It Was A Donation?
Code Section 102 provides that gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. If you watch the video and read about the “partnership” between the show and Shutterfly, you can make a pretty good case for the $55,000 not being taxable. There was one problem that seemed insurmountable to the Trial Court
The Court will state at the outset that, after watching the YouTube video , it certainly does not seem that the $55,000 Defendant received was “Nonemployee compensation.” It appears to the Court the money was an unexpected gift to help Defendant and her children.
With that said, the Court is faced with City’s Exhibit 1, the IRS Form 1099-Misc which clearly lists Defendant as the sole recipient of $55,000 for “Nonemployee compensation.” This Court is unaware of any case law that authorizes it to change the characterization of the money as reported to the IRS by the payer, Shutterfly, Inc. It would seem any change would need to occur at the behest of Shutterfly Inc. (Emphasis added)
I’m still scratching my head about that one. “We’re just judges. Who are we to contradict the determination of some grunt in Shutterfly’s tax department?”
The Appeal
The Appellate Court indicated that the trial court was probably wrong about it not being able to overrule Shutterfly’s determination. That would have been a matter for trial though and since there was no trial that was no help to RF. On the advice of counsel, RF had entered a plea of “No contest”. And that is where the Appellate Court was able to cut her some slack – ineffective assistance of counsel.
We are concerned by the procedural history of this case. F’s motion to dismiss raised an issue that was more properly raised at trial, yet the parties and the trial court proceeded on the motion on its merits. This led to the entry of a no contest plea in an effort to preserve the right to appeal the denial of the motion to dismiss. Issues such as whether F actually owed income tax (the issue at the motion to dismiss) and whether her failure to pay was willful (which included whether she had an honest dispute about whether she owed taxes and/or had the ability to pay them) were not presented at trial, which would have been the proper forum for those issues. (Initial substituted for name)
In terms of her ability to pay F had put $40,000 of the $55,000 in four separate college funds, one for each of her children as “apparently intended by The Ellen Degeneres Show and Shutterfly”.
Will Ellen Take Notice?
One of my earliest blogging dreams was to be noticed by Ellen Degeneres, as I assiduously covered the tax controversy about same-sex marriage. The obsession grew over the years enough so that someone whose opinion I value told me that it was getting creepy. At any rate, I never got the impression that her people were following my blog. It does strike me though that it would be a good thing if her show and Shutterfly did some followup on the people that they helped to make sure there are not unintended consequences. I think Shutterfly’s tax department needs to take a look at their decision to send out 1099’s to the beneficiaries of their philanthropy.
Mostly, though I think the tax collectors of Xenia, Ohio should probably just back down on this and go fight crime someplace else. This situation is in no way comparable to that of Survivor, Richard Hatch, who was competing for the million-dollar prize he failed to report.
Other Coverage
Jeff D. Gorman has a piece on this on Court House News – Court Overturns Tax Conviction for ‘Ellen’ Money.