Original YTMP content by Peter J. Reilly.

The fallout from the end of The NonSequitur Show (or perhaps an indeterminate hiatus) and the resulting lawsuit by Stever McRae against Kyle Curtis have inspired a passionate response among a YouTube community, that I am not sure how to characterize. A partial compilation I did came up with 65 videos on 22 different channels totaling 97 hours. I compared that to a more selective curated collection by Cheshire Viq. There is overlap, but she has things I don’t and I am sure there are some that neither of us does.

Now that I have been bitten by the bug I’ve stopped wondering why so many people can have so much to say about two guys arguing about how to split up fifty grand they earned over two years.

Some Background

The nutshell version is that the show went into limbo when Steve McRae and Kyle Curtis had a falling out which caused Steve to file a lawsuit.  Kyle failed to respond and Steve got a default judgment.  In partial compliance with the resulting order, Kyle filed some financial data indicating that over its two-year history (2018 and 2019), the 548 videos which had 6.2 million views had generated about $49,000 in revenue with $4,000 in expenses to third parties,  Kyle claimed that he was due roughly $65,000 for design work and claimed copyright on all the images embedded in the videos.

Kyle also claimed that he was not properly served which if so determined by the court would void the default judgment. The chatter and related filings over this issue have been the main theme of late in the videos. There appears to be an astounding amount of insight about the intricacies of North Carolina legal procedure out there. The latest excitement includes seemingly well supported accusations of forgery.

Steve at least has a backer giving him an effectively unlimited legal budget, while Kyle has managed to raise defense funds on Gofundme, which allows the show to go on.

One important inference that I think is reasonable to make is that there was never an entity bank account for this venture or undertaking or whatever you choose to call it.  All the money that came in went to Kyle and he used a bit of it to pay some bills related to the channel. The balance he kept for himself and never turned anything over to Steve. Steve, not without reason,  characterizes that as stealing.  So in addition to the ugly civil litigation, there is talk of a criminal complaint against Kyle not only over the money but also over alleged forgery.

As noted that is a nutshell.

My Qualifications

I am a CPA with over 40 years of experience mainly focused on tax. What intrigues me now is how somebody like me would sort this out so that after the dust settled so Steve and Kyle would be reasonably in tax compliance.  I am not a lawyer, but in order to do tax work it is of course necessary to know tax law, but also something about business law along with some other areas depending what comes up.

I also follow a lot more court cases than most CPAs and even some lawyers.  So I have a good bit of legal knowledge because you can’t go calling a lawyer every five minutes, but on the other hand, you need to know when to call one.  The service issue falls into that latter category.  I don’t have a clue as to how it will come out. It’s a procedural issue.

And everything I have learned about criminal law I have learned by watching Law and Order and following Kent Hovind’s trial in 2015 – fruit of the poisoned tree, inevitable discovery, better to hire a real lawyer than a sovereign citizen wackadoodle. So I am going to pass on the question of whether any of Kyle’s behavior is criminal and, if it is criminal whether it is something that a prosecutor would bother with rather than fighting crime someplace else.

Also, I don’t know much about intellectual property law.  If the content of The NonSequitur Show has substantial value, there are a lot of issues to consider there.  It is conceivable that other people besides Steve and Kyle have claims on

Unscrambling The Egg

I hate when it happens, but it happens a lot that it is not clear how to characterize business arrangements or sometimes the way they work for tax purposes is different than people expect including lawyers.  This can actually be advantageous sometimes, but it is usually not.

In Steve and Kyle’s case, it is not clear that they ever had a contract since there was not a meeting of the minds.  It is clear though that Steve thought that he was entitled to some of the money that had been coming in and had an ownership interest in the channel. He was rather passionate that it was 50% and in perpetuity.  And it is clear that Kyle agreed that he was supposed to pay Steve something.   The unmet minds are in display in the showdown video in June of 2019.

It is a reasonable inference that there was never a bank account associated with a joint effort, so I further infer that whatever money came from YouTube, Patreon etc.  ended up running through Kyle’s accounts.  In the financial information that was provided in compliance to the order from the default judgment there is a month by month income statement, but no statement of cash flows.  It includes an accrual to Kyle of $120 per show for his services. Agrippa who aided in putting the numbers together clearly confirmed that the $120 per show charge was something after the fact that was not agreed to.  I don’t think it stands up very well.

Without the charge by Kyle using round numbers, there is a profit of $20,000 in 2018 and $25,000 in 2019 from gross revenue of $21,000 in 2018 and $28,000 in 2019.  Glenn Williamson (roohif) seems to have the means and desire to spend on the litigation out of proportion to the stakes of the case, so we can hope that when it starts getting into discovery and the like a forensic accountant will be engaged.  That should make for an interesting report that can generate scores of YouTube discussion among people, a few of whom might actually understand the report.

The Tax Problems

This the part of the story that fascinates me.  There is actually a pretty practical answer.  I don’t know exactly what the 1099 procedure is with YouTube and Patreon, but I believe that they must have sent 1099s to somebody and that it was probably Kyle.  If we figure that in the end, Kyle is going to pay Steve half, then a good outcome would be for Kyle to have reported $20,000 in 2018 and $25,000 in 2019. For talking purposes assume that Kyle pays Steve $22,500 in 2022.  Kyle would get a deduction then and Steve would have income.

A better result would be Kyle reporting $10,000 in 2018 and $12,500 in 2019 and having Steve report the $22,500 when he gets it with no deduction for Kyle.  A bad result is Steve having to pay on half the income in 2018 and 2019 even though he does not get it until 2022.  At Joseph B Cohan and Associate in the eighties, we would refer to picking up income without getting cash as getting fucked without getting laid. Had to stop talking like that after the Clarence Thomas hearings.

The other big issue is ownership on the channel and the videos.  From a planning perspective, if things got split up you would want that to happen without creating a taxable event for either party.

The Problem With A Partnership

One way of characterizing the arrangement between Kyle and Steve is as a partnership. The definition of a partnership under North Carolina law is:

A partnership is an association of two or more persons to carry on as co-owners a business for profit..

This is the same definition as for tax purposes.  So if there is a finding that the arrangement is a partnership under North Carolina law, it is a partnership under the Internal Revenue Code.

The state law finding of partnership is not good for Kyle’s claims.  There is no written partnership agreement so you go to default provisions.

Unless the contrary intention appears, property acquired with partnership funds is partnership property.

All partners have equal rights in the management and conduct of the partnership business.

No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.

Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits

Having the arrangement as a partnership for tax purposes is bad for both of them.  Steve might be taxed on his share of the income even though he got no distributions.  And Kyle might be taxed on his share of the income and also for a distribution in excess of basis.  And then there is the penalty for late file on a partnership return $195 per partner per month for up to 12 months.  They are at about $6,000 on that on their way to $9,000.  That is a worst-case scenario.

The only thing good about a partnership is that they could split up the videos without any gain recognition on liquidation.

The Problem With Independent Contractor

If Kyle owned the channel and was obligated to pay Steve based on revenue, that is an OK result except for creating a mismatch for Kyle.  The problem would be with splitting up the property without gain recognition.  The same problem exists if Steve is an employee although that has a bunch of other problems.

A Revenue Sharing Agreement

The best idea I have been able to come up with so far is that it was Kyle’s channel, but Steve and Kyle each owned the videos that they were responsible for.  They had agreed to share the revenue.  Kyle in collecting the revenue was acting on behalf of both of them without being Steve’s agent.  Arguably that would allow Kyle to only report the revenue he gets to keep while Steve is not taxed until he receives some money.  And they could each take home their videos with no gain or loss.

The concept is supportable under North Carolina law, which in this case the tax law follows.

The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.

An alternative would be that they each own an undivided interest in all the videos, but that would be a problem if they split them up since there would be exchanges that no longer qualify for nonrecognition under 1031 since the Tax Cuts and Jobs Act.

All Hypothetical

This has been a thought experiment rather than a realistic exercise since it seems very unlikely that they will settle. It is shaping up as a deathmatch and the ultimate ruling might be something that has tax consequences that are bad for both of them.  On the bright side, whatever they report when everything is done will probably fly since the dollars are not that high.

Barring any surprise filings, the next big event will be the hearing on the service issue. I hope to be on with Nate the Lawyer for a livestream of the hearing with commentary.