The short answer is: YES!
A single-member limited liability company or “LLC” is a one-owner business, much like a sole proprietorship. You alone are the only member and manager of the company.
The main reason you probably formed your single-member LLC is to protect yourself from legal liability as you run your business. Your LLC is a valuable “shield” against all kinds of potential business and financial risks.
However, in order to keep these legal protections, the law requires you to maintain legal formalities in your LLC’s operation and management. Maintaining legal documents that are contemplated by your state’s Limited Liability Company Act, such as an operating agreement and annual member meeting minutes, is great evidence that you are following the required formalities.
Your operating agreement should memorialize the “who”, “how” and “why” you formed the LLC, including under which state’s laws you are governed by. The agreement should also describe the operations of the LLC and set forth the procedures followed in the business (for example, how are you – the member – going to contribute and distribute funds from the company?).
Having an operating agreement can also avoid certain pitfalls that frequently occur with single-member LLCs.
One of these pitfalls happens when the owner wants to sell his or her business or pass it on to a child. If there is no operating agreement with provisions making it clear that during a voluntary transfer of the entire LLC membership interest, the selling member will cease to be an owner while the buyer will automatically and simultaneously be admitted as the successor member, you may be at the mercy of statutes that mandate dissolution of the LLC. In other words, the business you were trying to sell suddenly does not legally exist!
If you need help setting up a single-member LLC, please contact our Small Business team today.
 The Colorado Limited Liability Company Act can be found in Title 7, Article 80, of the Colorado Revised Statutes.
That Tweet that has been making the rounds, and maybe even gone viral, should be fair game, right? Everyone has been retweeting it, so embedding the original tweet into my website isn’t hurting anyone…riiiight? Well, not so fast. The answer may depend on where the case is heard.
Katherine B. Forrest, a U.S. District Judge for the Southern District of New York, recently issued an interesting order on this issue. Seems that Breitbart News Network, Yahoo, and a number of other online news outlets failed in making the same argument.
It seems that they all embedded a tweet (which had gone viral) into their own online websites. The tweet included a photograph of Tom Brady taken by Justin Goldman, and originally posted by him to Snapchat.
The photograph caught fire and several users uploaded it to Twitter, and eventually landed on the news websites. Goldman argues that he never publicly released or licensed the photograph, so he’s suing for infringement of his exclusive copyrights in the image.
The news outlets claim that they never actually downloaded or copied the photograph because it technically remained housed on the Twitter servers, linked through the embedding code on their own websites.
In what some have labelled a “surprising” decision, Judge Forrest set aside the 9th Circuit’s “Server Test”, which would determine infringement based upon whether an image is hosted on the alleged infringer’s server. Rather, she granted partial summary judgment to Goldman, holding that the fact that the image was never stored on the news websites’ servers was not dispositive.
Judge Forrest did leave the issue open as to whether the news outlets had raised effective defenses against infringement—citing potential arguments under fair use, the Digital Millennium Copyright Act and innocent infringement theories.
In reaching her decision, Judge Forrest examined the exclusive right to display the photograph (as opposed to copy or make a derivative work) granted to Goldman under the Copyright Act of 1976. Her opinion delves into a history of the right to display and the fact the drafters of the Copyright Act wanted it to encompass “new, and not yet understood, technologies,” such as Twitter.
Her decision also references a 10th Circuit decision, out of the U.S. District Court for the District of Colorado, which came to a different result. In Colorado, the District Court has (at least for the time being) applied the “Server Test” to a similar case.
In the 2016 Grady v. Iacullo decision, the Court held that, when a website includes a hyperlink to a copyrighted work, a copy has been created and infringement may have occurred. “transferring a copyrighted work into a computer’s RAM can create a copy under the Copyright Act.” However, the court requested that additional information be provided to it by the parties and a final ruling has not been made.
While final rulings and appeals are yet to be announced, beware the shifting sands of technology…embedding another’s image in your website may be more trouble than it’s worth.
If you have questions about this or any other copyright or licensing issue, contact our Arts & Entertainment Team today.
Sometimes, things just go sideways.
Despite the best intentions of your organization’s Board, Officers, staff, and key volunteers, one misstep can threaten the entire mission. Whether there are allegations of financial malfeasance, inappropriate conduct, insufficient entity formalities, or some other variant, the Board of Directors must take quick action to decide if an internal investigation is warranted.
Once you know you need independent inquiry, who should you call to help you?
At the very least, your internal investigator must be unbiased. Ideally, an investigation is conducted by outside counsel or a special committee. And, your choice of investigators is an important as what they uncover.
In order to be productive and get meaningful results, your investigator should:
- Understand the culture of your organization.
- Commit to interviewing the correct parties, including individuals who were involved with the organization at the time period under investigation.
- Be well versed in how to conduct an investigation and how to evaluate credibility.
–(Remember, this is NOT a case of “he said/she said, so we’ll never know. Part of the investigator’s job is to make credibility assessments).
–Your investigator should know how to rely on asking open ended questions.
–Your investigator should have a delicate approach to asking questions that telegraph the subject or intention of the investigation, and should know when to ask them.
- Be adept at conducting interviews with emotional witnesses.
- NEVER use the services of an investigator unless they are licensed or subject to a licensing exemption. In Colorado, employees, attorneys, and CPAs for the entity may conduct an investigation under an exemption. Other exemptions do exist. But, for the most part, your wise and level-headed HOA President is not an appropriate person to conduct the investigation without an independent relationship to the organization.
- Always work with an investigator who understands the importance of defining the scope and purpose of the investigation with the board at the outset. In particular, you should understand what standards of proof will apply to the findings and recommendations. Miscommunications on scope will not only waste time and energy, but may result in a contaminated investigation. Once interviews have been conducted, it is difficult to revisit witnesses and receive answers that are free from outside influence or revisionist reflection.
- Always work with an investigator who has the expertise to identify and recommend ways that your organization can strengthen its policies, procedures, and formal documentation. The most productive investigations will help you minimize risks in the future.
Once your investigator has completed the investigation, the Board of Directors should use the findings and recommendations to come to a good faith, well informed decision about how to respond. Only independent Directors, those who are not implicated in the underlying issue, should make the decision. As always, Directors have a duty to act in the best interests of the organization. Hiring a competent investigator will not only help the organization reach a reasoned decision, but will protect the Board from individual liability.
If your business or nonprofit organization needs assistance with an internal investigation, contact our offices at (303) 763-1600.
By: Caroline R. Kert, Esq.
It is a volunteer Board member’s worst nightmare: after dedicating hours and hours of volunteer time supporting your favorite art organization, a scary issue raises its head. If you don’t deal with the concerns, you or your organization might be sued. Is the current Board to blame? What can you do to protect yourself and your organization? It may be time to hire a third party to do an internal investigation.
Arts organizations and nonprofits are unique creatures. The corporate structure is often the same as the largest for-profit companies, but many are headed by volunteers and operate on shoe string budgets. What the key employees or volunteers, Officers, and Directors sometimes lack in corporate governance experience, they make up in passion and belief in the organization’s mission.
Governance missteps can snowball into crucial issues and can leave the Board of Directors confused about what to do next. Even worse, bad PR surrounding the situation may have long term ramifications leading to the loss of committed volunteers, experienced employees, and donors. The types of issues I have helped organizations navigate cover the gambit:
- A Board Member suggesting that the organization “cook the books”
- A Board Member running personal expenses through the organization
- A Board Member comingling corporate assets with those of other organization
- An organization failing to properly pay employees under wage and hour laws
- A Board Member accused of physically assaulting a participant at an official event
- Volunteers serving alcohol to minors at an official event
- Lead volunteer sexually harassing teammates
When confronted with these types of issues organizations must focus on three simple goals: reducing current liabilities, avoiding costly litigation, and minimizing the collateral damage.
Once a potential issue comes to the attention of the current Board of Directors it should ask, “If we assume the allegations are true, what are the ramifications?” Have local, state, or federal laws been violated? Can the organization be held liable for an act or failure to act? Have current or past board members or officers breached their fiduciary duties? Does the swift resolution of this issue impact your very ability to survive?
If the answer to any of these questions is “Yes,” the Board has a duty to investigate and make a reasonable business decision regarding its response. If the issue is merely a staff dispute or a question of day to day operations, it may be in the Board’s best interest to allow its Executive Director or other leaders manage the problem.
Boards of all organizations have a fiduciary duty to apply good faith, care and loyalty to their actions. Under Colorado’s business judgment rule, officers and directors will not be held accountable for actions “taken in good faith and in the exercise of honest judgment in furtherance of a lawful and legitimate corporate purpose.” So, swift action that demonstrates the Board’s good faith inquiry into the circumstances will go a long way toward protecting the current Board and the organization. In order to fall under this business judgment rule, the action must be:
- Made by independent/disinterested board members
- Made in good faith
Hiring in an independent attorney to complete an investigation and present findings to the Board will help fulfill these criteria. If you or your organization need assistance with a current compliance issue or complaint, contact Caroline Kert at 303-763-1600 or email@example.com.
Bookmark our page to read more on this topic, including important criteria to consider when selecting your investigator.
An Internet domain name can be vital to branding and marketing, so it’s important for business owners to be familiar with some of the legal rules related to domain names, including the intersection of domain name rights with trademark rights. This post also reviews actions you can take to dispute domain names that may infringe upon your trademark rights.
A domain name is the primary “address” of a web site, and nearly all website owners want to have a domain name that is identifiable and easy to remember.
If my company is called “Betty’s Plumbing, Inc.” and I have a trademark for “Betty’s Plumbing”, it would be most logical for my website to also be “www.bettysplumbing.com”. This would be the best way for current and potential customers to find me online.
Domain Names vs. Trademarks
A trademark is a word, name or symbol used in commerce to indicate the source of the goods or services and to distinguish them from the goods or services of others.
Trademarks and domain names are not synonymous, but the two concepts often meet when there is an issue of whether use of the domain name is a trademark violation.
The United States Patent and Trademark Office (USPTO) has made clear: “Registration of a domain name with a domain name registrar does not give you any trademark rights.” The USPTO also states that simply using a trademark as part of a domain name does not necessary serve the function of “indicating the source” of goods or services. In other words, using someone else trademark in your domain name is not automatically infringement. However, additional uses of the trademark by your business beyond your domain name could lead to trouble!
The biggest takeaway is that the issue is not black and white. Generally, we recommend that before you spend money on acquiring a certain domain name, you do some research to make sure your desired domain name does not contain a trademark belonging to someone else who has not given you permission to use it. Trademark violations occur when there is “confusion in the marketplace” – when a consumer could confuse the business represented by the domain name with another business represented by a trademark contained in the domain name.
Further domain name registrars such as GoDaddy and Google Domains do not perform any trademark ownership verification before registering a new domain name for you so it is your responsibility to consider intellectual property matters! If you need any assistance with this, please contact our Intellectual Property team.
Domain Name Disputes
Domain name disputes often involve companies battling over the ownership of domain names from “cybersquatters.” Some cybersquatters register domain names with the intention of selling them at high prices to the companies who own the trademarks. Others exploit domain names by taking advantage of the online traffic that popular brands attract and misdirecting consumers to the cybersquatters’ own websites for such business as selling counterfeit goods, or at worst, websites loaded with viruses, malware, and other malicious content.
The Anti-Cybersquatting Consumer Protection Act (ACPA)
You can file a federal lawsuit to challenge a domain name under the ACPA, a law enacted in 1999. ACPA allows you to challenge domain names that are similar to your business name and other trademarks. ACPA makes it “illegal to register, “traffic in” or use a domain name that is identical or confusingly similar to a distinctive or famous. If a trademark owner successfully wins a claim under the ACPA, the Court will grant an order that requires the domain be transferred back to the trademark owner. In certain cases, the Court can also award monetary damages.
Uniform Domain-Name Dispute-Resolution Policy (UDRP)
Another (and likely cheaper) way to challenge a domain name is through the Uniform Domain-Name Dispute-Resolution Policy (UDRP), a process created by the Internet Corporation for Assigned Names and Numbers (ICANN), the non-profit corporation that manages and controls domain name registrations. UDRP provides a relatively quick legal mechanism to resolve a domain name dispute by providing a streamlined procedure to transfer or cancel ownership of domain names.
Beyond offering a quicker dispute resolution process beyond federal court litigation, UDRP proceeds are also nice because it does not matter whether the trademark owner and domain name holder live in different countries. Filing a lawsuit in U.S. federal court generally comes with jurisdictional issues that are tricky if the domain name holder lives in another country.
If your business needs help with a trademark or domain name issue, please contact us today!
To improve the quality of the consultation, as well as the case once it is accepted by the Firm, it helps if you prepare for your initial meeting with the attorney.
Before you come to the meeting, gather all documents, contracts, agreements, statements, invoices, guaranties, tax documents, notices, witness statements and/or witness information, pictures and videos, etc., you have in reference to your matter. If at all possible, sit down and make a timeline or a history of the issue so that dates and events flow in the proper order and the storyline is easier to understand. A journal or diary would be beneficial throughout the matter.
If you are seeking assistance with preparing a contract or a promissory note, take a moment to create an outline of the points to be addressed in the contract and note the consideration and who will be responsible to perform which point.
If you are an individual seeking assistance with an employment matter, sit down and make a timeline or a history of the issue so that dates and events flow in the proper order and the storyline is easier to understand. Include your start date, your title at start, your pay at start. You will want to include any changes to that information up to the present date. Also include any problems there were, evaluations, and any commendations or awards you received. Please provide any company policies you may have. All of this information is important in the resolution assessment.
If you are an employer seeking assistance with an employment matter, please bring the employment file, company policies, and an outline of the issues to be discussed so that a proper resolution can be assessed. If you are seeking to create company policies, then bring in an outline of the issues you have and ideas on policies you desire to create to address those issues.
If you are seeking a consultation in reference to a potential litigation matter (collections, business and owner disputes, real estate dispute, evictions, appeals, partnership conflicts, minority shareholder suits, family business issues, breaches of contract, employment matters, etc.), please make certain to bring all the documentation to show your position from start of the relationship to the present. In this type of matter, it might be an easier presentation of your matter if you make a timeline and then support the timeline with any documentation, etc., that you have. As many names of involved parties should be ready to be provided.
If you are seeking a consultation in reference to tax resolution (tax liens, levies and garnishments, audits penalty abatements, offers in compromise, etc.), then please bring whatever documentation you have regarding the situation, including copies of notices and your tax records for the past few years (or more if the situation in question began before then) to the present. Here again, a timeline or history of how you got into the situation, along with any supporting documentation would be beneficial.
If you are seeking a consultation for intellectual property, bring (as best you can) the property with you when you meet with the attorney. A copy will be needed for any application.
If you are seeking assistance for a small business or arts and entertainment (contracts, partnership agreements, business sales and purchases, franchises, etc.), bring whatever contracts or agreements for which you seek assistance with you. If you do not yet have a contract or agreement, bring the outline of the points you are looking to incorporate into a contract or agreement. If you are considering the start of a business or seeking to form an entity or obtain a liquor license, then bring your ideas and any documentation you have accumulated surrounding those ideas.
If you were involved in a collision and have sustained injuries, you might want to bring pictures of the damaged vehicles, videos of the scene, a rough sketch of the positions of the vehicles drawn out, a complete copy of your insurance policy, a copy of the police report and/or card of the responding officer, any witness information provided to you, and any pharmaceutical, medical, billing, and other expense records that you have in your possession related to the incident. Keeping a journal or diary of who you treated with and when, work/school you missed and why, prescriptions, out of pocket costs and expenses, limitations and the steps taken to work around those limitations now in your day-to-day life due to the injury would be beneficial through the matter. You might also include a list of equipment, people and companies or organizations (along with their cost) you have had to depend on and their expenses and limitations that they have had in providing you the assistance you have required since your injury.
Likewise, if you were involved in a personal injury resulting from a slip and fall, you might want to bring pictures of the location of the slip and fall in order to show what caused the slip and fall. You will want to compile as many of the same things you would had you been involved in a collision.
If the matter you have involves a wrongful death or a medical malpractice, bring a copy of the medical records from the date you were first aware of the potential malpractice or the treatment that caused the wrongful death, and a written statement from a doctor identifying the potential malpractice or other information, witnesses and evidence surrounding the wrongful death. Before a wrongful death or medical malpractice case can be filed, an expert in the subject field will need to be located and services paid for a determination that there was (or was not) practice below the standard of care. The attorney can help you to find an appropriate expert. The cost for the expert opinion varies.
If you seek assistance with a real estate matter, please note that no one in this Firm is a licensed broker. That being said, as attorneys, there are a number of real estate matters that can be handled such as disputes (including non-litigation and litigation), contracts of any kind, transactions, closings, transfers, deeds, lien review and placement or removal. You will want to prepare an outline of the issues, people involved, real estate involved, and lien information so that it is clear the type of assistance you will require that can be provided.
If you seek a power of attorney for some reason, then decide exactly what the power of attorney is for, the length of authority to be given, and who you trust to responsibly handle that authority. Bring in any documents that might pertain to subject matter of the power of attorney you desire.
If you seek to establish an estate plan, you will need to bring information on your family and potential heirs (names, addresses, relationships to you). You will also need to make a list of your assets and determine what you would like to have happen to them. You might want to determine how you would like to proceed in the event of your death, i.e., funeral, memorial service, cremation, burial instructions. Further considerations might be whether you want a power of attorney or a medical power of attorney (also known as a living will) and the extent to which you desire to allow your power to be shared and/or your health care plan should you become incapacitated. If you would like your estate plan brought up to date, then please bring your current estate plan with you.
If you seek assistance with a probate matter, please bring a copy of the will (assuming there is one) and any other documentation you have regarding the probate estate.
The more information you bring with you, the easier it is for the attorney to see and understand the overall picture and how you are affected by the circumstances. The attorney can review the documents and information and make a more knowledgeable assessment of your matter and advise you accordingly.
So after you have been in a car accident, you’ve made the first step in your personal injury claim: scheduling an appointment with a personal injury lawyer. Here’s what you may expect during this initial consultation:
- Details about the accident. Your lawyer will likely want to know everything leading up to and after the accident. The time of day, the weather conditions, what you were doing when you were hit, what you experienced upon impact, and all information that you obtained from the other driver. If you have the police report, pictures of the vehicles, and/or exchange of information sheet, make sure to bring a copy for your lawyer to review.
- Your insurance coverage. Specifically, whether you have UM/UIM (uninsured/underinsured motorist coverage) through your own insurance provider. Make sure you bring your policy information to the appointment.
- Your medical history. This includes past injuries and past motor vehicle accidents, especially if the car accident has aggravated any previous injuries.
- Your injuries. What injuries did you incur from the accident, and what medical attention you have sought. Bring the contact information for each medical provider that you have seen, along with any referrals that you have been given.
- The effect that the car accident has had on your life. Outside of injuries and medical appointments, how have your injuries affected your home life, personal life, work life, physical, emotional, and social health.
A good website for your business can be an invaluable marketing tool. However, if you’re not careful, you could get into trouble for using images, photos, videos and other content in violation of copyright law.
Rights Granted under Copyright
Under the U.S. Copyright Act, the owner of a creative work is granted certain rights, including the right to prevent others from reproducing or copying their work, publicly displaying their work, or distributing their work.
Posting copyrighted material, say, a photograph, on your website arguably violates all these rights! Moreover, your Internet service provider (ISP) can also be found liable for copyright infringement, even if they played no part in designing or maintaining your website.
All small business owners must therefore be extremely careful about what goes on their website!
Even big companies with sophisticated marketing campaigns get into trouble. In May 2017, world-renowned luxury brand Tiffany & Co. was sued by photojournalist Peter Gould for using his photograph in an ad campaign for a line of jewelry designed by Elsa Peretti. The photo at issue was a shot of Ms. Peretti back in the day. The case was quickly settled and dismissed in July 2017, presumably because Tiffany’s agreed to write a nice fat check to Gould.
Tiffany certainly had the deep pockets to quickly deal with the lawsuit and settle, but your small business may not have these kinds of resources.
As a general rule, we tell our clients to assume any content they may want to use for their website, brochure, promotional video or other project is protected by either copyright or trademark law unless they can confirm otherwise. A work is not in the public domain simply because you found it up on the Internet already (a common misconception) or because it lacks a copyright notice (another misconception). Just because you are a local small business with not a lot of revenue and not a great understanding of copyright law does not mean you can claim “fair use” for the content either. There are no safe harbors in the Copyright Act if you just made a mistake or misunderstood.
Finally, be aware: If you do see an image or video is affixed with a copyright notice (or “copyright management information“) and choose to remove the info and use it anyway, this makes you liable for additional statutory damages under copyright laws.
Statutory damages range from a few hundred dollars to $25,000 per violation, meaning a mistaken infringement on your website can cost you a lot.
Investigate Infringement Claims Promptly
If someone complains about an unauthorized use on your website, remove the offending material at once and begin to investigate the claim immediately. If necessary, consult with an attorney on how to handle the investigation and how to respond to the claimant appropriately.
You may find after your research that your use is perfectly legal. However, you should remove the material while you investigate in order to limit your possible damages should the claimant file a lawsuit. Continuing to use the infringing material after receiving notice will increase the chances of you being found liable and increase the amount of damages you may have to pay.
Removal of infringing material is also an element of the Digital Millennium Copyright Act (DMCA), a 1998 law establishing that an ISP can avoid liability by following certain rules, including speedy removal of infringing material. Thus, if you don’t stay on top of copyright infringement complaints about your website, your ISP may get dragged into your mess as well.
There are many kinds of tax penalties the IRS can assess against a small business, and the facts and circumstances behind when they may be applied are very different. What they all have in common, however, is they can significantly increase your tax bill!
This post will provide a quick overview of some of the tax penalties you may encounter if you are a small business owner. This post also provides information on how to abate or waive tax penalties the IRS may have imposed.
The IRS uses tax penalties to “encourage voluntary compliance” with the federal tax system. However, the tax code and rules are admittedly complex. Some taxpayers are unable to comply despite their best attempts to do so. Many small business owners have so much on their plates, they make mistakes.
The good news is the tax code authorizes penalty relief for taxpayers who may have made a mistake. The bad news is the IRS tends to do a very poor job of administering these tax relief programs in a fair or consistent manner, especially if the taxpayer is not being assisted by a tax professional such as a CPA or attorney.
Understandably, the IRS would rather not waive penalties – it means less money for them! The IRS is also chronically understaffed, and does not choose to devote much of its limited resources to those certain departments that work on taxpayer penalty abatement requests.
As such, successfully obtaining relief from tax penalties usually requires the assistance of a tax professional who is familiar with the IRS’s various internal offices and administrative procedures. If you would like to speak with us about your tax penalty problem after reviewing the information below, please do not hesitate to contact us.
There are 4 kinds of delinquency penalties that frequently hit small businesses:
- Failure to File (I.R.C. § 6651(a)(1))
This penalty is assessed when you file your tax return late. If you properly request for an extension on filing due dates, it can alleviate this penalty. However, some kinds of returns, such as the quarterly Form 941 employer tax return, cannot be extended.
- Failure to Pay Tax Shown on Return (I.R.C. § 6651(a)(2))
This penalty is assessed when you don’t pay the entire amount of your taxes showing as due on your returns on time. If you file your return and make the payment late, you will be hit with both penalties.
Remember, even if you correctly request an extension on a tax return, you do not get an extension to pay your taxes, only an extension to file!
- Failure to Pay Tax Not Shown on Return (I.R.C. § 6651(a)(3))
This penalty is assessed if you owe additional amounts after an audit or adjustment on your return, and you do not pay the new amounts within 21 days. If you owe more than $100,000 after the audit or adjustment, you have only 10 days to pay the bill!
- Failure to File Informational Returns (I.R.C. § 6721)
This penalty is assessed against a small business that did not file its annual W-2 or 1099 forms. There are 2 tiers of penalties here:
- Negligence Standard
The first is similar to the “Failure to File” penalty above. It is a negligence penalty, meaning you simply forgot or made a mistake. This is calculated at $100 per return up to a maximum of $1,500,000. Thus, the more employees or contractors you have working for you, the higher this penalty can be.
- Willfulness Standard
The second is a willful “intentional disregard” standard, calculated at $250 per return or 10% of the aggregate amount of the items reported on the W-2/1099 forms. This goes beyond forgetting or making a mistake – you purposefully refused to file the returns or tried to hide information from the IRS.
So, if your total payroll was $500,000 that year, your penalty would be $50,000 – a sum that might be equal to the cost of another employee! Paying this level of penalty would be unsustainable for many businesses.
In my experience, when the IRS notices a business did not file its W-2/1099 forms, it assumes the “intentional disregard” standard and slaps you with the higher penalty. Once it has done so, the burden will be on you to prove you did not fail to file the returns willfully. Usually, simply sending in the missing returns after receiving notice the government is missing them is not enough. You must submit a statement explaining your late filings were due to a mistake or unplanned accident.
Unfortunately, nothing in the IRS notices or letters informing you of the missing returns or your new Section 6721 penalties will inform you about the lower “negligence” penalty level! If you have been impacted by this kind of penalty, please contact our tax resolution team at once.
Accuracy-Related Penalties (I.R.C. § 6662)
This penalty comes up after an audit or other adjustment on the tax you reported on your returns. The policy behind this particular tax penalty system is to make sure taxpayers are taking reasonable and well-researched positions in support of the numbers they list on their returns. In layman’s terms, if you take a position that is so far out there and completely unreasonable, you will be at risk for this penalty.
The IRS will hit you with a 20% accuracy-related penalty if your incorrect position was due to negligence, a disregard of rules and regulations, or a substantial undervaluation misstatement.
The IRS will hit you with a steeper 40% accuracy-related penalty if your incorrect position was due to gross valuation misstatements or undisclosed transactions or information.
All the tax penalties discussed above can be abated or removed if you can show your delinquency was due to “reasonable cause”. You must show you exercised “ordinary business care and prudence” in preparing your return, determining what you owe, and when/how to pay it, but nevertheless, were unable to prepare an accurate return, file it on time, or pay on time with suffering undue hardship, due to circumstances beyond your control.
The internal IRS offices require taxpayers to meet a very high burden under the reasonable cause standard before they will waive penalties. Undoubtedly, the IRS has heard every excuse under the sun! You will have to demonstrate your “ordinary business care and prudence” in managing and operating your business, and then carefully document your special set of “circumstances beyond your control.”
Major illness, death, strikes/riots, and natural disasters are surefire “circumstances beyond your control” that will allow for penalty abatement. Sometimes, a business’s severe economic distress can also justify penalty abatement, but only if this is argued very carefully before the IRS. For example, perhaps your biggest customer filed for bankruptcy and did not pay you for tens of thousands of dollars of product or service. If you can carefully draw the line between losing that anticipated income and missing your tax payment deadlines, this may justify abating tax penalties. (In my experience however, a lot of employees at the IRS will assert financial distress never justifies paying your taxes late, even though this argument is provided by the Treasury Regulations and discussed by many tax court cases!)
Importantly, if you try to blame your tax noncompliance on a bookkeeper, accountant, bad office manager, or any third party who you brought on to help with your taxes, this will never be reasonable cause. The IRS holds the taxpayer ultimately responsible for compliance, and this is a nondelegable duty.
Unfortunately, convincing the IRS to waive your penalties is generally an uphill battle. More often than not, you will be summarily denied and will have to file an administrative appeal to get the IRS to actually look at your case carefully. There are also some tricks and special programs that may help you, but the IRS does not readily provide this information to taxpayers. If you need any help with a penalty abatement or even understanding if you may qualify for one, contact DTG Law today.
 Please be aware that the tax code is complicated, and this is by no means a comprehensive summary of all the issues and technicalities behind tax penalties!
 The FTF penalty is assessed at a rate of 5% of the tax due on the late tax return up to 25%.
 The FTP penalty is assessed at 0.5% per month update to 25% of the amount of tax that was not paid by the due date.
 This penalty is assessed at 0.5% per month update to 25% of the amount of tax that was not paid by the due date.
Filmmaking is rarely a cheap endeavor. Even a “budget” independent film may require tens or hundreds of thousands of dollars to produce, market and distribute. Here are the most common ways an independent filmmaker can finance his or her project:
This is where a studio agrees to pay for the costs of the film in exchange for the right to distribute the film. It is difficult to get this type of funding without some proven money-making element attached to the film, for example, a well-known director, screenwriter or actor, or valuable story rights to a bestselling novel, comic book or game.
This is where the film is financed by one or more persons who either buy shares of the company through which the film will be produced, or execute some form of “investment contract” related to the future revenues of the film.
Be VERY aware of state and federal securities laws that may kick in, depending on the form of your production entity or the number of investors involved. Even if you plan to finance your film with friends and family investors, reviewing state and federal securities laws with a knowledgeable attorney is mandatory. Consequences of violating securities laws can include rescission (meaning you must legally give all the money back, even if you’ve already spent it!), civil fines, or even criminal liability.
This is becoming a more common and more popular avenue for film financing. Spike Lee raised nearly $1.5 million via Kickstarter to produce his film, Da Sweet Blood of Jesus. The team behind 1998 cult classic SLC Punk also raised money for the sequel, Punk’s Dead: SLC Punk 2, through Indiegogo. If you go this route, be sure you review individual website rules carefully to ensure compliance.
You may just be lucky enough to have a significant amount of spare cash or disposable income to devote to your independent film. If so, the tales you may have heard about Hollywood’s creative accounting aside, keep in mind that only about 20% of all films actually turn a profit. Hollywood’s multibillion dollar production companies play a numbers game – hoping a few hits can cover all the other films that lost money that year. You probably don’t have the business model or resources to follow a similar plan.
If you do decide to proceed with self-funding however, consider taking advantage of local film tax credits. Numerous states offer tax credits for productions made, at least in part, in their state. Such tax credits can also be sold to a third party, typically at a discount, to raise cash for the production or marketing of the film.
The Colorado Office of Film, Television & Media, for example, offers a 20% cash rebate program for up to $100,000 of eligible production costs. Nevada’s revamped film tax credit law took effect in 2014 and allocated $80 million in credits to be issued to qualifying productions over a 4-year period. Other states offering tax incentives include California, New York, Louisiana, Georgia, and New Mexico
Limit Your Liability!
Keep in mind that, as with most other business ventures, you should ultimately work through a corporate shield for protection from personal liability. The form and timing of establishing this shield (typically an LLC) will depend on your particular circumstances.
However, if you’ve already started some activity for your independent film, make sure that all the contracts you have already entered into (or are imminently about to enter) are freely assignable. That way, you can assign those contracts to your new entity without problem.
If you need assistance with any of the legal issues discussed here, please do not hesitate to contact our Arts & Entertainment team at DTG!