Option and PUrchase Agreement

[Margaret CPA in OH]

Sigh, here's another one.  A tiny new 501(c)(3) SMLLC wants to publish a book and movie.  $5000 has been paid to another person to assist in writing the screenplay and marketing to producers.  There is a lot of legalese but it seems to state that the other person will shop the idea around and, when a producer acquires the exclusive media rights, the writers will split the income.

Client thinks of this as an investment, I think of it as, well, not exactly sure.  Is it a payment from the LLC that needs a 1099 of some sort?  The income is well below, very well below, $25,000 so 990N is easy.  Client is no notice to find someone else after this year but what to do, if anything, about a possible 1099? 

[Lee B]

Margaret, it's like you're a magnet that attracts these strange client tax scenarios

Kinda sounds like a for profit endeavor that should be a partnership . Why are they a 501 (c) 3?

 

[Margaret CPA in OH]

It does seem that I attract some weird clients!  The client is a 501(c)(3) SMLLC as stated.  Client has a book and desires it to be made into a movie or something.  Client stated that $5000 was paid to other person to facilitate this.  The beginning of the "Option and Purchase Agreement" states "This agreement, effective as of DATE is made by and between XYZ Entertainment LLC (an individual is named here) and client.... concerning the rights to a script....  then goes on to specify terms and conditions.

I think you may be correct to call this a partnership.  Without naming the arrangement as a partnership, it explains why client referred to this $5000 as an investment.  My client is a 501(c)(3) with an IRS determination letter.  I am not comfortable detailing the stated purpose in the current climate.  Suffice to say that the application was approved.

I will suggest to client that client seek other counsel about this arrangement and soon.  Despite this development, I am still okay with filing a 990N as the entity meets the criteria.  After that, client is gone.

How can I learn to say no?  A current client today said daughter recently relocated from CA and needs a preparer for at least 2024 with the two states.  It's been several years since I've done a CA return.  I said we could meet and chat.  If there is anything other than wages and maybe interest, I need to say no! 

LeeB, thanks for continuing to read and respond to may ongoing tales of, well, not exactly woe but, interesting challenges in my professional life, let's say.

[Patrick Michael]

11 hours ago, Margaret CPA in OH said:

How can I learn to say no?  A current client today said daughter recently relocated from CA and needs a preparer for at least 2024 with the two states.  It's been several years since I've done a CA return.  I said we could meet and chat.  If there is anything other than wages and maybe interest, I need to say no! 

Be careful preparing CA tax returns. It may make you subject to apportionment rules, creating the obligation to file a CA tax return and pay CA tax.  Here is an excerpt from a Forbes article (https://www.forbes.com/sites/robertwood/2022/07/07/california-is-taxing-nonresidents-who-never-once-visited-really/).

I doubt they would come after you for a single return, but if you prepare many CA returns you may be fair game.

"In the Matter of Blair S. Bindley, OTA Case No. 18032402 (May 30, 2019), a sole proprietor performed all of his services outside of California, but some of his customers were in California. Is that enough for the poor guy to attract California tax liability? The California taxing authorities said he was operating a "unitary" business. Therefore, his tiny business was subject to California's apportionment rules. The FTB would not budge, so Mr. Bindley went over their head to the state’s Office of Tax Appeals (OTA), but it agreed with the FTB. This case has precedential effect, so it is clear that the Golden State can go after other non-Californians too, and it’s happening."

[Margaret CPA in OH]

Curses!  You think for a single part-year return for an ex-resident?  If so, I may prepare it and show her how to submit on her own - maybe.  I think the apportioned income would yield less CA tax than it would cost CA to manage it.

[BulldogTom]

10 minutes ago, Margaret CPA in OH said:

Curses!  You think for a single part-year return for an ex-resident?  If so, I may prepare it and show her how to submit on her own - maybe.  I think the apportioned income would yield less CA tax than it would cost CA to manage it.

I would not worry about a single part year return.   In Bindley quoted above, the rule is that the benefit of the work was received in CA.   In your case, you could argue that the benefit of the work is received in OH, where your client sits at the time you deliver the work papers.   If your client was in CA when you delivered the work, you would be subject to the rules above.   At least that is how I read it.

FYI, I have a lot of clients in CA and I apportion my income in the state and out of the state.

Tom
Longview, TX

[DANRVAN]

On 1/27/2025 at 5:05 PM, Margaret CPA in OH said:

"Option and Purchase Agreement" states "This agreement, effective as of DATE is made by and between XYZ Entertainment LLC (an individual is named here) and client.... concerning the rights to a script.... 

Does not sound like a partnership to me.  Not enough information to tell what it is.  Sounds like legal advice is needed.

Regardless of the determination letter, I am curious of how the entity will meet the public support test going forward.  Otherwise 990-N is not allowed and 990-PF needs to be filed even if receipts are less than $50,000.

[Margaret CPA in OH]

DANRVAN, thanks for this message.  I will discuss with client about next steps recommended.  I still think 990-N is good for 2024 as nothing has happened with the 'arrangement' to date other than the transfer of the $5000.  I agree about the public support concern but it is still valid for 2024.  Client will not be mine after this year - whew!