Contests & Promotions Category

IRS Ruling Affects Media (and Other) Businesses Dabbling in Bitcoin Use

Scott R. Flick

Posted March 26, 2014

By Scott R. Flick

While it has been around since 2009, Bitcoin has seen substantial media coverage in the past few months. Media outlets (as well as many other businesses) have been increasingly dabbling in the Bitcoin world, if for no other reason than to show they are up to date with the latest consumer fixations.

While numerous businesses have begun accepting Bitcoin transactions, the most likely place to find them in the media world is as contest prizes or as part of an advertiser promotion. Of course, one of the principal reasons for the novelty of Bitcoin is its goal of being an electronic currency unregulated by governments. As a result, how businesses have been treating their usage of bitcoins from an accounting and legal perspective is highly variable, since it is in many ways a new frontier.

That frontier changed significantly yesterday, when the IRS ruled that virtual currencies like Bitcoin are to be treated as property for federal tax purposes, with transactions using virtual currency subject to much the same tax treatment as those involving U.S. currency. Our own Jim Gatto, head of Pillsbury's Social Media and Games Team, distributed a Pillsbury Client Alert discussing the ruling. In that Alert, Jim notes that the impact of the IRS ruling includes:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by the employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue IRS Form 1099.

  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

  • For purposes of computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of virtual currency received as measured in U.S. dollars, as of the date that the virtual currency was received.
The Client Alert provides additional detail, but if you are using bitcoins for any type of transaction, whether as contest prize, currency for purchases on your website, or payments to employees and vendors, the IRS has made clear that you will need to follow the same procedures (and pay taxes) as though the transaction had occurred in dollars.

While that is a big issue for businesses doing large Bitcoin transactions, businesses dabbling in small and occasional Bitcoin transactions will need to pay even closer attention than they would to a transaction using traditional currency. For example, if the prize in a station contest is one bitcoin, the station will need to assess whether awarding the prize triggers the need for issuing IRS Form 1099 to record the awarding of the prize. In a cash prize contest, that is straightforward, since the Form 1099 currently specifies a prize of $600 or more as the threshold for needing to issue the form. As I write this, however, the current Bitcoin exchange rate is roughly $582 U.S. dollars per bitcoin. That means a one bitcoin prize would not trigger the need for a Form 1099, but a two bitcoin prize would.

Similarly, yesterday's IRS ruling seems to indicate that the bitcoin must be valued for tax purposes at the time it is received. As a result, the station holding the contest would need to check the value of a bitcoin on the day the prize is awarded to see if it is above or below the $600 threshold for tax purposes. Of course, given the volatility of the Bitcoin exchange rate, this raises other questions, such as how do you value the bitcoin for tax reporting if the exchange rate was below $600 for part of that day and above $600 for part of that day, or if the day the prize is "sent" is not the same day as the prize winner receives or "cashes" it.

Like so many things, Bitcoin appears to be another example of something meant to simplify life, but which is turning out to only make life more complicated. Look for life to get even more complicated as individual states formally adopt a similar approach in treating virtual currency transactions as taxable events.

Scott R. Flick and Lauren Lynch Flick of Pillsbury to Speak on "Playing by the Rules: A Broadcaster's Guide to Contests and Sweepstakes," February 29, 2012

Posted February 29, 2012

Scott R. Flick and Lauren Lynch Flick of Pillsbury will review the FCC rules governing on-air contests and sweepstakes during this Executive Briefing Webinar presented by Texas Association of Broadcasters on February 29th from 2-3:30 pm Central Time. Learn the best practices and pitfalls when it comes to airing contests on your station and why to be wary of "boiler plate" contest rules.

Click here for more information and to register for this FREE informative session.

FCC Enforcement Monitor

Scott R. Flick Christine A. Reilly

Posted December 15, 2010

By Scott R. Flick and Christine A. Reilly

Pillsbury's communications lawyers have published FCC Enforcement Monitor monthly since 1999 to inform our clients of notable FCC enforcement actions against FCC license holders and others. This month's issue includes:

  • Failure to Heed Warning by FCC Field Agent Costs Broadcaster $10,000
  • FCC Fines AM Broadcaster $6,000 for Excessive Nighttime Power Levels
  • AM Broadcaster's Limited Disclosure of Contest Rules Nets $4,000 Fine
FCC Fines Pennsylvania Broadcaster $10,000 for Repeated Failure to Employ Adequate Personnel

In keeping with lasts month's "meaningful management and staff presence" Notice of Apparent Liability ("NAL"), the FCC again upwardly adjusted a fine, totaling $10,000, against a Pennsylvania broadcaster for repeated failure to maintain at least one management level and one staff level employee at the main studio during regular business hours as required by Section 73.1125 of the FCC's Rules. At the time of the initial inspection by a local Enforcement Bureau Field Agent, the "main studio", which was located within a church, was unattended and locked.

The FCC requires that licensees maintain a "meaningful management and staff presence" at a station's main studio. Based on a 1991 FCC decision, the FCC defines "meaningful" as at least one management level employee and one staff level employee generally being present "during normal business hours."

Continue reading "FCC Enforcement Monitor"

Is It Game Time or Gambling? Prize, Chance, Consideration, NCAA Tickets and Your Next Promotion

Posted September 7, 2010

By Paul A. Cicelski and Lauren Lynch Flick

Anyone who has enjoyed March Madness knows that Lady Luck often intervenes in a team's journey to the NCAA Final Four. But is getting to the game a literal roll of the dice for spectators too? The Seventh Circuit Court of Appeals in Chicago has recently ruled that a lawsuit can go forward which claims that the NCAA's ticket sales for the NCAA tournament are an illegal lottery akin to a game of poker or roulette.

Those who run sweepstakes and contests live in fear of having such an accusation leveled against their promotional campaigns. While they know that they must avoid combining the three elements of a lottery: (1) prize, (2) chance, and (3) consideration (such as money), those who are new to the industry can often be heard to say "it's not like this is real gambling or anything." Much of the time, the focus is on how to make sure that "chance" or "consideration" (or both) are not present in your promotional game. There is very rarely any debate as to whether there is a "prize," as there is usually little point to having a promotion without one. Yet, it is that issue which is at the heart of the case against the NCAA. More to the point, the Court seems to have been influenced by the fact that Final Four tickets are highly sought after, so the chance to buy them in and of itself could be a "prize."

For years, the NCAA has used random selection to determine who will be allowed to purchase tickets to its Final Four basketball games. According to the plaintiffs in this case, to have a shot at scoring a pair of tickets, they were required to pay the NCAA in advance for both the face value of the tickets and a "non-refundable handling" fee of $6-$10. To maximize the chance of being selected, each person could enter up to ten times, submitting the face value of ten tickets plus handling fees, although participants would only be allowed to purchase a single pair of tickets if selected, regardless of the number of entries submitted. After the random selection process, "winning" entrants would receive two tickets and a refund of the face value of the other nine entries, while those who were not selected would receive a refund of the face value of ten pairs of tickets. However, none of the applicants received a refund of the handling fees.

The plaintiffs filed a class action lawsuit alleging that the ticket distribution process is an illegal lottery. They allege that the opportunity to purchase a pair of Final Four tickets at face value is a prize, that the prize is distributed by chance, and that they paid consideration for that chance in the form of the handling fees that were not refunded. From this assessment, the plaintiffs conclude that the NCAA is engaged in illegal gambling in the sale of Final Four tickets.

The trial court initially dismissed the case based on an Indiana court of appeals case, Lesher v. Baltimore Football Club, which held that the Indianapolis Colts were not engaged in gambling when they used a similar ticketing system. In Lesher, however, the handling fees were refunded for all but the tickets that were actually purchased. The Lesher court decided that there was no "prize" involved in the Colts ticket distribution scheme because a "prize" is "something of more value than the amount invested." Ticket purchasers "invested the price of the tickets and received in exchange either the tickets or the entire amount invested . . . those receiving tickets got nothing of greater value than those who received refunds." With regard to the NCAA's ticket sales, though, the Seventh Circuit faulted the trial court for relying on Lesher. According to the Seventh Circuit, the plaintiffs had adequately argued the existence of a "prize" because they asserted that the fair-market value of the NCAA Final Four tickets was much greater than the face value at which the winners had purchased them, and that the plaintiffs had "invested" the handling fees to participate in the random drawing.

While the trial court will ultimately have to decide these issues, the Seventh Circuit's ruling certainly nudges the trial court in an interesting direction, and the result may expand the definition of what qualifies as a "prize." This case is a reminder of the importance of structuring promotions with care to avoid the legal morass and potential liability facing the NCAA in this class action lawsuit. Marketers and broadcasters cannot merely rely on doing things the way they were done in the past to protect against lawsuits and prosecution. That approach is, quite simply, a gamble.

Drawing the Line: A Guide to Avoiding Illegal Content for the On-Air Performer

Posted July 16, 2009

By Scott R. Flick

As the sources of content available to the public proliferate, attracting and retaining an audience grows more challenging. A common strategy is to use provocative or "attention-getting" on-air elements to increase station awareness among media-saturated listeners and viewers. However, stations must be mindful of the numerous legal restrictions on content, particularly given that illegal on-air content can garner fines as high as $325,000 per violation. In addition, certain types of illegal on-air content can subject a broadcaster to civil and criminal liability, as well as loss of its license.

Familiarity with the FCC's rules regarding on-air content is not optional for on-air talent, station programmers or station management. In most cases, editorial judgments made in advance, especially in the case of syndicated or pre-recorded programming, can prevent illegal content from reaching the air. It is therefore important that those involved in airing broadcast programming be up-to-date on the boundary lines that the FCC and the courts have drawn to distinguish legal from illegal on-air content.

Continue reading "Drawing the Line: A Guide to Avoiding Illegal Content for the On-Air Performer"

FCC Fines Television Licensee $4,000 for Violations of Contest Rules

Posted May 1, 2006

By Scott R. Flick

May 2006
The FCC recently fined a television licensee $4,000 for violations that occurred during a contest run by the station in 2004. The FCC determined that the station failed to conduct the contest substantially as announced and advertised, a violation of Section 73.1216 of the Commission's Rules. It was discovered during the investigation that the licensee excluded multiple entries from consideration, misplaced legitimate entries, and failed to award all announced prizes.

A PDF version of this entire article can be found at FCC Fines Television Licensee $4,000 for Violations of Contest Rules.