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What Did we Learn Today About .XXX From IFFOR Tax Return

Michael Berkens

The 2011 Tax return for IFFOR has been filed and our friend George Kirikos of Leap.com found it (pdf).

So IFFOR's tax return is important for two reasons.

First IFFOR return shows us how how much money the non-profit, which is suppose to receive $10 for each .XXX registration, actually received from ICM the operator of the .XXX TLD and how IFFOR spent the money.

Second the return is important to see how the money ICM the registry operator of the .XXX TLD paid to IFFOR matches up to ICM reported number of .XXX domain name registrations.

The short answer is it doesn't

So as for IFFOR, tax return for 2011 shows revenue of just $208,000.

It also shows "deferred revenue" of $326,000.

It shows compensation of officers and directors of IFFOR in the amount of $130,000, or roughly 65% of collected revenue; another $100,000 in travel which again we would assume is mostly, if not fully for officers and directors or IFFOR, plus another $37K in conference expenses.

There is also another $60K in a Board of Directors Stipend, and Policy Council Stipend of $37K.

As far as following its mission statement, only $20,000 was spent on "content labeling" which is of course is one of the main missions and purpose of the entire organization.

As far as directors go Joan Irvine who was the Director received $130K in compensation, Clyde Beattie received $32K and Sebastien Bachollet received $26K.

It should be noted that Ms. Irvine didn't even start working for IFFOR until May 2, 2011 so that $130K was only for 8 months of work which is $195,000 annualized and .XXX didn't even go live until December 2011.

In all IFFOR the organization had a loss in 2011 of $333,000.

However, and quite important IFFOR is reporting their taxes on an accrual basis not a cash basis.

What that means is that they should be reporting the income they earned it in 2011 in 2011 even if they didn't receive the cash, and the same for expenses.

So IFFOR should have reported and therefore we can only assume they did in fact report, all of the revenue they earned and expected to receive in 2011 on their 2011 return, even if they money wasn't going to be paid until 2012.

So we have to disregard this "deferred income" entry and just call it like the returns says, that IFFOR only got $208,000 from 106,000+ registrations of .XXX domain names.

Now as for what these numbers mean as far as the .XXX registry is concerned?

My understanding is that of the $62 wholesale cost for each .XXX domain registration, ICM gets $50, IFFOR gets $10 and ICANN gets $2.

According to the report ICM filed with ICANN, as of December 2011, there were 106,549 .XXX domain name registered, not including the 80,000 10 year blocks sold to trademark holders.

That should have generated some $1,006,000 for IFFOR.

However IFFOR says the only got $208,000.

It is showing on its return deferred income of $328,000 as a liability not an asset but we think this is unimportant as IFFOR elected to pay on the accrual rather than cash basis, but more on that later.

Of the $1,006,000 that ICM collected ($10 per registration not including blocks, ICM only paid the non-profit IFFOR, $208,000 or 20% of what it collected in the name of IFFOR

Even if it owes IFFOR another $326K ("deferred income") then they ICM paid IFFOR just over 50% of the money they collected for IFFOR.

What happened to the rest of the money?

The question is why IFFOR hasn't said a peep (publicly) about being underpaid $800K from ICM nor have they filed a lawsuit for the underpayment.

There is a thought out there that the $10 per .XXX registration ONLY gets paid to IFFOR for those domains which the registrant has elected to be a member of adult community.

Obviously those who registered a defensive .XXX registration are not electing to become a member of the adult community.

However that's not the way ICM application to ICANN reads nor how the .XXX extension has been marketed.

If community use is how ICM based their payment to IFFOR, then it would mean that only 20,800 of the 106,000 initial .XXX registrations are owned by members of the adult community, which are domainers and adult website owners).

Stuart Lawley CEO of ICM, the company that operates the .XXX registry has said that there are some 250,000 .XXX registrations, which include those 80,000 ten year blocks sold to trademark holders.

However if only 20,000 of those domains are actually in use by members of the adult community that would mean less than 10% of all .XXX domain names are owned by the members of the community, meaning that more than 90% of all .XXX registrations are defensive or owned not by members of the adult community.

If the $326,00 showing from IFFOR as being "deferred income" is for $10 fees paid to ICM but not yet paid in 2011 to IFFOR that would still mean that 50% of all active registration are not members of the adult community or defensive or taking into account the 10 year blocks then 50,000 out of 250,000 registrations are registered by members of the adult community and 200,000 are registered defensively but then wouldn't follow accounting principal for accrual based taxpayers

Either way IFFOR tax return raises a LOT of questions.

Remember .XXX is not a new gTLD or a TLD but a sTLD, approved by ICANN to represent the adult community.

Under ICM proposal to operate the .XXX registry IFFOR was always suppose to get $10 of each registration.

When and how did that change?

Why didn't IFFOR sue for the money it was owed and not paid?

Considering IFFOR was part of ICM application to ICANN to operate the .XXX registry what will ICANN say about this discrepancy in payment vs. funding?

With the funding of ICM to IFFOR based on IFFOR tax return is ICM in compliance with its contract with ICANN?

Where does it say that ICM only has to pay IFFOR $10 a registration for those registered by members of the adult community?

Most importantly as far as .XXX TLD is concerned are 90% of the 250K registration cited by Lawley or 75% (difference based on deferred income amount showing on IFFOR's return) .XXX registrations made by members not in the adult community and therefore defensive registration?

And if so, how can .XXX be said to represent the adult community?

By Michael Berkens, President of Worldwide Media, Inc.. Michael H. Berkens is a member of the Florida Bar, President of Worldwide Media, Inc. which owns over 75,000 domain name, a Director in RightoftheDot.com and writes a blog at TheDomains.com.

Related topics: Domain Names, Registry Services, Top-Level Domains

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Comments

Here's where things get more interesting. I George Kirikos  –  Feb 07, 2013 2:24 PM PDT

Here's where things get more interesting. I looked up the Form 990 statements of ASACP (Association of Sites Advocating Child Protection) for 2009, 2010, and 2011.

In 2009, ASACP's total revenues were $457,912 and Joan Irvine was paid $77,605 in "reportable compensation" and $21,956 of "other compensation from the organization and related organizations" for a total of $99,561. As CEO, she reported 60 hours of work per week. In that year, the president, treasurer, and 2 directors all were paid $0. Only $13,470 was spent on travel, and $14,541 for conferences.

In 2010, ASACP's total revenues were $392,901 and Joan Irvine was paid $91,250 total for 60 hours per week as CEO. Once again, the President, VP, Officer, Sec/Treasurer were all paid $0. $12,514 was paid for travel, and $20,387 for conferences.

In 2011, ASACP's total revenues were $381,113, and Joan Irvine was paid $35,417, presumably for the 4 months January through April (before she jumped to IFFOR) for 60 hours/week. Annualized, that would be $106,251. Once again, the CEO, VP, Officer and SEC/Treasurer all worked for free, and were paid $0. There was travel of $21,344 and conferences/tradeshows amounted to $44,791.

Obvious questions:

(1) Why is Joan Irvine suddenly worth $195,000/yr (annualized) at IFFOR, compared to earnings of roughly $100K/yr ($91,250 low in 2010, $99,561 in 2009, and $106,251 (annualized) for the first 4 months of 2011) at ASACP?? Indeed, the IFFOR form 990 says her average amount of work dropped to 40 hours/week, compared to the 60 hours/week at ASACP. So, roughly double the compensation, and 33% less hours worked.

(2) How is it ASACP can find directors/officers willing to work for free, but IFFOR pays them substantial amounts?

Remember, these are all non-profits, and if you compared the level of revenues, they seem comparable (i.e. if you include the "deferred" revenues from IFFOR's statement; if you don't include those, then IFFOR is even smaller).

If only there was some way we Kevin Murphy  –  Feb 07, 2013 4:51 PM PDT

If only there was some way we could find out the answers to these questions!

In a way, the silence from IFFOR George Kirikos  –  Feb 07, 2013 4:59 PM PDT

In a way, the silence from IFFOR is an answer.

Perhaps if the ANA manages to get ICANN brought before Congress for hearings again to discuss new gTLDs, the politicians might press ICANN (and other witnesses) for real answers....

Alternatively, ICM Registry and ICANN are involved in litigation with Manwin. During discovery, Manwin's lawyers can ask tough questions of those under oath.

KevinI got the same message from your Michael Berkens  –  Feb 07, 2013 7:07 PM PDT

Kevin

I got the same message from your buddy Andrew on my blog, I reached out to IFFOR over 6 months ago asking for revenue and expenditures numbers and they responded that they aren't going to release any of that info "other than required by law".

Not especially forthcoming.

Of course I chatted about Stuart about this many months ago, and got no information other than that ICM had nothing to do with IFFOR and if I needed to know anything about IFFOR, ask Clyde.

If you or Andrew can figure out how over 100K registrations at $10 per comes to only $208K then feel free to educate all of us.

Don't forget that I have owned several hundred .XXX domains and therefore have been forced to contribute $x,xxx to IFFOR so above and beyond my interest as a blogger I'm invested into IFFOR and .XXX.

Actually, I found another document that is George Kirikos  –  Feb 08, 2013 6:39 PM PDT

Actually, I found another document that is of interest. According to the ICM & IFFOR Responsibilities and Obligations, linked to from the page ICANN posted for due diligence on XXX, the very first obligation listed for ICM was:

"1. Fund, in advance, on a non-recourse basis, the sum of $250,000.00 to cover IFFOR's start-up costs. Pat (sic) to IFFOR $10.00 per Resolving name in the .XXX sTLD/Year.

The term is also listed directly in the Sponsoring Organization Agreement in paragraph 1.a.

Where's that $250K in IFFOR's annual return, which according to that document was supposed to have been paid in advance?

I just noticed another thing. The $20,886 George Kirikos  –  Feb 08, 2013 7:36 PM PDT

I just noticed another thing. The $20,886 spent on "Content Labeling" is exactly 10% of the $208,860 in revenues. Is that a coincidence, or did we just reverse-engineer the terms of the content labeling agreement? i.e. the content labeling agreement might be $1/domain/yr x 20,886 domains = $20,886.

KevinDoesn't look like Xbiz had any luck Michael Berkens  –  Feb 12, 2013 9:39 AM PDT

Kevin

Doesn't look like Xbiz had any luck getting any more details from ICM on how this got computed than we did.

http://www.xbiz.com/news/159259

Guess we have to go back to the numbers and use some logic to try to figure it out on our own

I assume IFFOR's not in the business Kevin Murphy  –  Feb 12, 2013 12:22 PM PDT

I assume IFFOR's not in the business of putting guesswork — predicting what future .xxx registration levels will be — in its tax returns.

That's presumably what would have to be happening to get to the "90% defensive" money quote. I can't see a good reason to ignore the deferred revenue. It must be based on actual sales, right?

I would add together the recognized revenue and the deferred revenue to get to the amount of revenue IFFOR earned in 2011 from .xxx registrations. That's roughly $535,000 from roughly 53,000 domain names.

IFFOR gets its ten bucks when a registrant activates his domain. We can therefore infer that at the end of December 2011 only about half of the 105,000 .xxx domains sold that month had been activated.

Ergo, defensives during the first month of .xxx's general availability were somewhere between 0% and 50%. I'd estimate it's closer to 50% but I can't get any more granular from IFFOR's numbers. Somewhere in the mix we also have registrants who for whatever reason (maybe they were domainers) who didn't feel a pressing need to activate their domains.

KevinThen why is the deferred revenue showing Michael Berkens  –  Feb 13, 2013 12:57 PM PDT

Kevin

Then why is the deferred revenue showing up as a liability rather than an asset?

Also why is only 20,800 paid out by IFFOR for content labeling $1 per domain, again reflecting only 20,800 resolving domains, they can't predict which domain will resolve if ICM can't us how many do resolve

I'm not an accountant by a long Kevin Murphy  –  Feb 13, 2013 1:29 PM PDT

I'm not an accountant by a long shot, but as far as I'm aware recording deferred revenue as a liability is standard accounting practice.

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