Chances are that, prior to this month, you had never heard of Memories Pizza. The pizza parlor, located in the small town of Walkerton, Indiana, about 20 miles southwest of the University of Notre Dame, made national news when its owner, Crystal O’Connor declared during a television interview that the pizza parlor would not cater a wedding for a gay or lesbian couple due to religious reasons. O’Connor clarified that they would not otherwise deny service to a same sex couple.
The interview focused on Indiana’s controversial Religious Freedom Restoration Act (RFRA). The law, signed into law by Gov. Mike Pence, has attracted national attention. Many companies vowed to scale back activities in the state with Salesforce CEO Marc Benioff announcing plans to reduce investments in Indiana and offering to help employees who are uncomfortable with the new law to transfer out of state. Opponents of the law took to social media to urge other companies and individuals to #boycottindiana.
Of course, tweets and boycotts are one thing, while threats are quite another. After the Memories Pizza interview aired, the Walkerton Police Department asked residents to exercise calm and remain lawful after a threat to burn down the pizza parlor circulated on social media. There were subsequent threats to rob the owners and cause other harm.
The reactions didn’t stop there. As negative comments piled up on sites like Yelp, the O’Connors feared they might not recover from the backlash. They voiced their fears to Dana Loesch, who hosts a television show on Blaze TV. After that interview, Memories did actually close its doors.
Before the interview went on air, Lawrence Jones, one of the television opinion contributors on Loesch’s show, met with Loesch, the show’s producers and head writer Ben Howe. They agreed to set up a GoFundMe page with a goal of $25,000 to assist the O’Connors. In just a few days, the site had raised a whopping $842,387.
That’s a lot of money. There has to be some kind of tax consequence, right? Not necessarily. As in the case of Karen Klein (the bullied bus driver), there is no federal income tax due to the O’Connors on these donations. They are gifts. There’s no consideration given in return, no services rendered, no products being touted. The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return” based on the gift tax provisions found in the Tax Code beginning at section 2501. In the business, we like to say that gifts are given not for anything in return but out of “love, affection, respect or admiration.”
Even if tax was due, gifts are subject to the federal gift tax rules, which means that the giver, not the recipient of the gift, is responsible for the tax. For 2015, you can give up to $14,000 per person, without being subject to federal gift tax. Exemptions exist for gifts made to qualifying charitable organizations but that’s not the case here (and, to be clear, no one is arguing that it is).
Taking a look at the donations to Memories, most are relatively small donations. There are 29,166 individual donors which averages out to just under $30 per donor. If you check out the details, the highest individual gift was $5,000, which falls safely under the annual gift tax exclusion.
That doesn’t mean that the transactions are entirely simple. Where money comes from initially is important but just as important is where it goes.
Gifts are generally made to a specific donee. So say, for example, that my exceedingly wealthy great aunt Mabel (who exists only in my head) wants to give me $1 million. That’s above the exclusion amount (remember that it’s $14,000) and would be subject to gift tax.
Now let’s say that Mabel wants to give me $1 million and tells me that I should do the right thing and share some of the money with my brothers. Assume that I actually listen to her and I give them each $250,000. The transfer of that $1 million to me is a taxable gift (we just established that). But the subsequent gift to each of my brothers is also a taxable gift – from me. Mabel gave up control of the gift and I had control over the gift. Mabel couldn’t revoke or otherwise reverse the transfer once it was in my hands. It was mine. That makes it, for tax purposes, a completed gift from Mabel to me and when I subsequently gave it to my brothers, it’s another completed gift.
If, however, Mabel had retained control over the gift, the result would be different. If she retained the right to control where the money went or had the right to take it back from me if I didn’t follow her direction, it’s not a completed gift for gift tax purposes. Control matters.
Now let’s circle back to the GoFundMe account. According to GoFundMe, when you set up an account that’s intended to benefit a third party, you can either withdraw the funds and subsequently turn the money over to the third party or contact GoFundMe to give the third party access to the account. That can be an important distinction because of – you guessed it – control.
When it comes to the O’Connors, the fund made it clear that “[a]ll money, save whatever percentage GoFundMe takes, will be transferred directly to whichever bank account the O’Connors wish to use.” That’s not surprising. I’ve been following Dana Loesch on Twitter for some time. She’s a smart woman and I imagine that she surrounds herself with advisors who know what they’re doing. I’m sure they’ve done their homework vetted this through their legal.
That statement is important, I think, because it establishes that there is no intent of the third party to take control of the funds at any time. I’m not implying, of course, that funds managed by third parties without that language are necessarily setting themselves up for gift tax and other liabilities but it should raise a red flag or two for donors and organizers when evaluating campaigns. The worlds of online fundraising through sites like GoFundMe and online project building though sites like Kickstarter are still relatively new. IRS has, to date, offered very little in the way of guidance about how funds raised online – especially those raised by third parties for a noncharitable beneficiary – might be regarded.
The Regulations do make it clear that a donor can make a gift to a donee through a third party acting as an agent. But remember that bit about control? How much control the third party has is key, as is who the third person is deemed to represent (the donor or the donee). With crowdfunding, these questions can be taken to a whole other level: a number of factors can influence the outcome, including rules and restrictions in place by the fundraising platform (like GoFundMe).
My best advice?
As the donor, do your homework and make sure that your donations are ultimately going where you want them to go. Use a trusted donation site, one with a proven track record. And if you’re hoping for a tax deduction for a charitable gift, make sure that the donation qualifies: remember that donations to individuals would not result in a charitable tax deduction while donations to qualified charitable organizations would result in a charitable tax deduction (some platforms, like GoFundMe, mark charitable funds as such directly on the site).
As the organizer, you’ll also need to do your homework. And then do some more. Consult with your tax professional to make sure that the project is structured the right way. If you’re a third party organizer – and not the beneficiary – you’ll want to consider language that makes it clear that you’re merely acting as a conduit. Where possible, keep your hands off of the funds altogether.
Most crowdfunding projects are about quickly achieving a particular result. It may feel easy to leap over the details in an effort to get there – but don’t just jump. Take a moment to plan and consider what the potential consequences can be. Then proceed with caution. Remember, when you put your project online, you’re sharing it with the world. Who knows when it might strike a chord with potential donors and become bigger than you ever expected? Make sure that when you attract that attention, it’s for all of the right reasons.
(Author’s Note: I did speak with Mr. Jones after the article was initially published. He confirmed that the plan had always been to pay out the funds to the O’Connors with no intermediary. He also confirmed that he had been in contact with the administrators at GoFundMe to ensure that the appropriate language, at their direction, made it clear where the money was going. Finally, Mr. Jones confirmed that a financial advisor had met with the O’Connors on a pro bono basis to advise on tax and financial consequences.)
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