College admissions scandal and taxes

Remember when I said this? Don't use bribes disguised as charitable contributions as a tax deduction.

Forbes is now discussing this:

A number of parents were charged with conspiracy to commit mail fraud and honest services mail fraud. Prison time is certainly possible. But the tax elements of the case are now getting some press. This week, U.S. Senate Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) called on the IRS Commissioner in this letter to fully enforce the tax laws against those involved. Perhaps Republicans and Democrats can agree on something after all. They outline several types of transactions between parents and the Key Worldwide Foundation to facilitate the illicit payments. These include payments made from private foundations and from businesses for what appear to be personal, illicit benefit, as well as donations of stock arranged to appear as charitable donations. The tax angles are huge, and the potential taxes, penalties and interest seem serious. Criminal tax charges are possible, and they could be serious in themselves. 

The tax law is clear that you can’t write off a charitable contribution if it wasn’t really a charitable contribution. One way it might not be is if you were paying for services. Another way would be if the charitable entity wasn’t really charitable. Still another might be linked to where the money you contributed came from originally. The Senate Finance letter points out that several of the parents involved in the scandal may have misappropriated funds from private foundations over which they have financial control in order to make illicit payments to the Key Worldwide Foundation. There are tight tax law controls over how private foundations spend money, with special restrictions on so-called self-dealing transactions.

But the tax issues don’t stop there. An Affidavit in the case alleges that some of the parents paid bribes and other payments from accounts associated with their businesses. For example, the Affidavit describes one defendant father asking the scandal's ringleader, "What are the options for the payment? Can we make it for consulting or whatever from the [K]ey so that I can pay it from the corporate account? [Ringleader] replied that he could make the invoice for business consulting fees, so that [father] could 'write off as an expense.' [Father] replied, 'Awesome!'"

 Meanwhile, a second parent, wealthy lawyer Gordon Caplan, has said he will plead guilty for paying $75,000 for someone to take the SAT's for his daughter.