November 30, 2011
Tax Exam Question: Charlotte Church and Rupert MurdochBill Turnier (North Carolina) passed along this real-life fodder for an income tax exam question:
Huffington Post, Charlotte Church: I Sang At Murdoch Wedding For 'Good Press':
Singer Charlotte Church gave damning testimony against the British press at the Leveson Inquiry into press ethics on Monday. In it, she claimed that she sang for free at Rupert Murdoch's wedding in exchange for favorable press coverage.
Church said that Murdoch gave her a choice: either she could take £100,000 for the job, or she could waive the fee in exchange for positive coverage from Murdoch's outlets.
Question: Discuss the income tax consequences to Charlotte Church and Rupert Murdoch.
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Income but washed out by an above the line deduction
Posted by: anon | Nov 30, 2011 5:49:17 PM
I am a college student, and am currently studying the Fair Tax in class. I read an article about this the other day. Rupert Murdoch has screwed a lot of people with this phone hacking scandal, and needs to spend some time in a prison.
Posted by: Fair Tax Guy 10 | Nov 30, 2011 6:31:37 PM
Assuming Ms. Church operates as a Schedule C taxpayer for her business of providing entertain, the step transaction approach would say that she received $100,000 of income in-kind and also had a $100,000 expense for publicity to support her entertainment business.
I would think it would be reported as $100,000 non cash income and $100,000 expense on Schedule C.
As for Mr. Murdoch's position, obviously he cannot deduct this as personal business expense, although given his character and background one should certainly assume he would try to do so. His newspaper would have to report $100,000 of revenue to match the $100,000 deduction taken by Ms. Church (Personal experience here. If they know about the one transaction they will insist on not getting whipsawed.
The net effect is $100,000 of taxable revenue (offset by any marginal expense the newspaper had in providing the favorable coverage)due to the fact that the payment by Mr. Murdoch was not deductible.
Posted by: David R. | Nov 30, 2011 7:55:52 PM
She wouldn't even receive a Form 1099 on this non-cash income. I would ignore it.
Posted by: Woody | Dec 1, 2011 12:52:00 AM
Woody: She wouldn't even receive a Form 1099 on this non-cash income. I would ignore it.
As we all know, if you don't receive a 1099 for it, it's not taxable. Just like if someone gets paid in cash it's not taxable either. amirite?
Posted by: the real anon | Dec 1, 2011 1:43:48 PM
No, real anon, that's not my point. Money or measurable consideration received for services is taxable to the extent that it is not offset by expenses.
After posting my comment, I wished that I had not continued the theme of this being "non-cash income." It's not income period.
If she had been paid in cash and turned around and paid the money back for the publicity, it would be reported on a 1099 but would still be a wash.
Can you imagine the IRS running down every in-kind contribution to charities and saying that's it's income to the donor if they are given credit for the donation in some listing? Then, too, the IRS might say the cost offset is not a deductible business expense but a Sch A donation, which very well could be limited. So, you pay tax on the value of the service but get no complete offsetting deduction for social security and income taxes.
You can make a point to change my mind, but, as of now, I still wouldn't put it on the tax return.
Posted by: Woody | Dec 1, 2011 3:35:03 PM
Uh Woody, you put things on the tax return, both the income and the expense wherever the expense belongs because you do the taxes correctly, not because it may or may not be caught by the IRS.
Posted by: David R | Dec 1, 2011 10:05:12 PM
I must not be making myself clear. I want returns to be correct and complete. All I'm saying is this looks like a non-issue. If you disagree, explain it to me and what you would do.
Posted by: Woody | Dec 1, 2011 11:40:48 PM
I think that for Church it is basically a wash with Church taking in income as she gets publicity. There is a valuation issue because she may get more than £100,000 worth of publicity over several years but this is solved by treating it as an open transaction for Church. She will never really know how much publicity she gets until it occurs and it will likely be spread over several years. Poor old Rupert (more accurately rich old Rupert) is realizing a constructive dividend from Newscorp when Church sings a requiem song at his wedding. Given that this involves transnational tax issues, there is a lot more to this that one would never expect to see on a tax exam. Lastly, because the income to Church and the deductions are all above the line the wash nature of what happens as to her will not impact her AGI thereby having an impact on her taxes as she fills out the return. To make this a good exam question, one would have to drop out the international aspects and assume all parties are US citizens and entities.
Posted by: Bill | Dec 2, 2011 10:16:19 AM