Originally published on Forbes.com.
A small, but passionate, Youtube community has become absorbed in what appears to be a very small stakes business lawsuit. The passion provides fuel for litigation costs that are out of proportion to the amount of money involved in the underlying dispute. I write about it here because of the insight it gives into the economy of Youtubers and also the lessons it gives about entity formation and how some people don’t understand the simplest tax concepts.
The NonSequitur Show
The case is McRae v Curtis being heard by James L. Gale, Senior Business Court Judge in the General Court of Justice Superior Court Division in Guilford County, NC. (You can find the documents using the search function at this site). The case is between Steve McRae and Kyle Curtis and concerns a Youtube channel called The NonSequitur Show which describes itself as:
NonSequitur is crafted around uncommon philosophy and influenced by a simple ideology. Here, bold ideas are righteous, unique perspective are gospel, and strong opinions are sacred
NonSequitur opened strong on January 17, 2018, with a debate between Young Earth Creationist Kent Hovind and Dr. Herman Mays that garnered over 71,000 views. The channel hit a high point with a March 2, 2018 discussion between Aron Ra and Kent Hovind that scored 557,676 views. The last of 548 videos, NonSequitur & Mr. Atheist Take Your Calls,went up on September 8, 2019, as the channel went into a sort of suspended animation due to the dispute between Steve and Kyle.
NonSequitur Audience And Revenue
During its life so far the channel has had over 6.2 million views. According to financial information provided by Kyle in response to an order in the case the channel produced $49,158.72 in revenue in 2018 and 2019. The videos continue to produce revenue, but it is likely not that significant.
In the first half of 2019 when shows were being produced monthly income was between $1,600 and $3,400. It drops precipitously as production declined and then ceases. Revenue in January 2020 was $127.87. That is what Steve McRae refers to as residuals.
Steve told me that the residual income on the existing body of material would be larger if shows were still being actively produced. These shows are live streams which have a lot of viewer interaction in a comment stream. Besides ad revenue, there is also income from super stickers and super chat which allow viewers to make their comments more prominent. Those will often be acknowledged by the moderator.
Here is a video from Jimmy Tries The World about the dynamics of Adsense revenue which is one of the components in the income stream from Youtube. The data that Kyle provided in his court-ordered response does not give us fine detail on Youtube income just a total of $33,000. Most of the rest of the income ($13,000) comes from Patreon. All in NS was getting $8 per thousand page views, but we can’t tell how much of that would be recurring.
Extraordinary Interest
The most extraordinary thing about this controversy is the amount of coverage it has generated on Youtube. I tried to compile a comprehensive collection of videos. I identified 65 videos on 22 different channels with a total of 93 hours and 204,724 views. I know my list is not complete because a more curated compilation by Cheshire Viq includes many videos I did not catch. (Note many of the YouTubers involved in and following this story, unlike Steve McRae and Kyle Curtis, use a handle or perhaps a nom de guerre which I will indicate by using italics).
This is a dispute between two guys about how to split up fifty grand that they made over two years. Never in the course of human history have so many said so much about so little. I think there is a critical mass sort of thing that is going on, because much of the material, which I have only sampled, is people talking about what other people have said and why they are right or wrong. Steve and Kyle in their bickering have set off a sort of Youtube chain reaction that appears to be self-sustaining.
Steve indicated to me that the group of people involved so intensely used to spend a lot of time trash-talking one another. (He used a different word than trash). Grudges built up and a lot of it has to do with personalities.
Kyle did not respond to my request for comments, but I did hear from Agrippa who has been helping him with the litigation.
Out Of Proportion Litigation Cost
I spoke with Bradley Rooney of Surratt Thompson & Cebrio PLLLC, (a Winston-Salem Firm, which is part of the Triad area that includes Greensboro the county seat of Guilford County) to get an idea of what putting on a case like this might cost. Mr. Rooney is not involved in the litigation.
The majority of attorneys in the area will charge $250-$400 per hour. From the time of filing the lawsuit though discovery to trial or mediation cost would likely run from $20,000 to $60,000 for each litigant. It might make sense, but only if you are confident that you will be able to get attorneys fees which would mean fraud of deceptive practice. Triple damages would also raise the stakes, but you have to be confident that you can actually collect from the other party.
Steve and Kyle are released from these constraints. Glenn Williamson (roohif) who has substantial resources is committed to funding Steve’s efforts as a matter of principle. Kyle has had some success raising money for his defense on Gofundme.
Kyle was assisted in putting together the financial data by Agrippa who roped in his CFO to help.
The Case
Kyle had control over the administrative rights to the channel and the financial accounts. Steve’s understanding was that they were 50/50 partners. From our discussion it was clear to me that Steve does not understand fundamental partnership taxation.
Steve was under the impression that income was sort of in suspense until he received a distribution. Actually if there was a partnership it should have filed form 1065 and provided Steve and Kyle with K-1s that would should income or loss. Income would be taxable regardless of distribution, something you need to watch out for when you get involved in flow through entities. Steve never received any distributions.
A little over a year ago Kyle proposed that they actually had or would have a different deal which led to the blowup and the litigation which was commenced by Steve.
Kyle did not respond to the complaint that was filed so Steve received a default judgment that ordered control of the channel to go to Steve and Kyle to provide an accounting.
The Accounting
The accounting that Kyle provided was a month by month income statement. In the aggregate it shows a $20,000 loss. That is arrived at by subtracting from the $50,000 in revenue about $4,000 in expenses to third parties and $65,000 ($120 per show) for Kyle’s design work and the like with respect to images that are included.
Kyle further claims that he owns the copyright on all the images. On a forward going basis if Steve were to end up with the channel there would either need to be a royalty agreement or the images would need to be removed. From what I know about film from my experience with Risorgimento Productions, that could be an expensive proposition.
It is clear that the $120 per show charge is an after the fact item rather than something that was claimed and disclosed by Kyle on an ongoing basis.
Debate about these issues is pretty much on hold as another issued emerged.
Service
Kyle has argued that he has not been properly served. If he prevails on that the default judgement will be overturned and they will be back at square one. There will be a hearing on that Friday September 11, 2020 at 10:00 AM. Nate The Lawyer will be live streaming the hearing on the service issue.
He will have guests to discuss the case including me.
In my opinion, Nate’s coverage is the most well grounded. He refers to the court filings in many of the videos. Nate is a lawyer, a former prosecutor and police officer working out of New York City.
Some of Nate’s videos on other topics show a powerful merging of video with legal analysis. The two that I find most compelling and timely analyze the self-defense claim of Kyle Rittenhouse and the question of whether the police shooting of Jacob Blake was justified. Nate is a Black man who grew up in Harlem and, as noted, a former police officer and a lawyer, and he presents very well.
Some Law That Will Ultimately Be Considered
As far as I can tell nobody has been discussing the North Carolina Uniform Partnership Act which is sure to come up regardless of the outcome of the service hearing. Here are a few provisions which will likely be important.
A partnership is an association of two or more persons to carry on as co-owners a business for profit. (Emphasis added)
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.
This is also the tax rule, as you might expect. I’m thinking this puts Kyle in a bit of a box. If he wants to charge expenses to a revenue stream that is being split, it needs to be a partnership.
You can share expenses or revenue without being partners, but if you share both, then you are sharing profits and are partners, regardless of how you refer to the relationship.
If the arrangement is a partnership, then the following rules may be a problem for Kyle.
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.
Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits (Emphasis added)
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.
Agrippa does have answers to these concerns. Simplistically it would be that their partnership was in doing the shows, but the running of the channel that fell entirely on Kyle was a separate business in which Steve was not involved.
These issues have been overshadowed by the standing issue.
The Lessons
In establishing this venture Steve and Kyle should probably have established an LLC. (I would not rule out an S Corporation, but let’s keep things simple). Then they would have had an entity that owned everything. Their rights and duties would be established under an operating agreement.
On an ongoing basis, there should have been more transparency from Kyle and Steve should have been paying more attention. They should have gotten some accounting and legal advice.
The reason the upfront work of establishing an entity and creating agreements did not happen was that they started the channel on a shoestring. There was no initial capital. However, once it became clear that some significant money was coming in, some of that could have been used to set up the business infrastructure.
In a way, playing out their dispute so publicly might be viewed as valuable public service. The issues that they appear to have i.e. principals feeling that they are doing more than their share of the work relative to the compensation scheme is pervasive in partnerships of all sorts. Certainly accounting firms – don’t get me started.
On The Other Hand
Frankly, working on a handshake can be quite effective, but it requires people who trust one another and have a sense of long term mutual interest and that somehow things will even out to be fair. Or you need to be able to just let things go.
Kyle and Steve are unusual in being able to fund litigation. They are providing so much entertainment to their corner of the internet that I sometimes think that they are frenemies. Maybe we are not watching an actual lawsuit. It is more like professional wrestling.
Does Anybody Make Any Money On Youtube?
I reached out to #TaxTwitter to see if I could get some insight into seriously profitable Youtube channels. I received one response from a partner in a top 50 firm which is revealing
We have a client that has, for several years, generated revenue and net income of over $1M annually from YouTube videos. They produce high quality educational and entertaining videos targeted to children; and their financials look more like a small film company with substantial filming costs, production costs, purchases of high tech video equipment, props, sound equipment, etc.
As they are extremely guarded and private, they decline all interviews.
I did meet somebody who stumbled into fortune through Adsense. It was a game site, not Youtube. He had been happily running it as a hobby. His wife suggested that he try running ads to offset his $300 per month server cost. When I met them in a park in Florida, they had driven their TeslaTSLA down to purchase a second home. They had no other employment than the site. You can read about it here.
Other Coverage
Initially I did not consider this story Forbes worthy so you can find two pieces by me on Your Tax Matters Partner.
An Accountant Looks At The NonSequitur Lawsuit – The $65,000 Question
NonSequitur Lawsuit Divides Hovindologists
And one by Robert Baty.
Preparing For The McRae Curtis Service Showdown On September 11
There is a spirited discussion on the Reddit channel Dear_Mr._Atheist.
NonSequitur Nightmare by Nicholas Lamar Soutter is over a year old.
Robert Baty has Steve McRae v. Kyle Curtis – “Service” on his site.
I suspect that there is more text that I have not found, but you have 93 hours of video to watch. When will you have time to read?
Update
There have been a lot of developments in the case pretty much around the standing issue which is going Steve’s way. That matter defies easy summary, so I will refer you to Steve’s channel.
Steve, on Twitter has indicated that he thinks I have treated him unfairly. In reviewing the piece, I have to acknowledge that there are two things that might not be clear.
The first and most important is that even though Kyle acknowledged that Steve was due some share of the revenue, Steve received nothing at all.
The second is that, in my opinion, as a matter of business law there is not a good argument for charging the undertaking for Kyle’s services.