Parents Involved in Recent College Admissions Bribery Scandal May be Facing Tax Fraud Charges
April 12, 2019
According to Bloomberg News, parents embroiled in the recent “Varsity Blues” college admissions scandal may now be facing serious tax consequences in addition to criminal charges and potential prison time.
The Varsity Blues Scandal- Some Background
In a federal indictment spanning multiple jurisdictions, approximately 50 individuals, mostly wealthy parents, were recently charged with conspiracy to commit mail fraud and honest services mail fraud, after it was discovered that they had bribed multiple universities to admit their children.
The scandal was unearthed by the FBI working in conjunction with the U.S. Attorney’s Office in Boston following an investigation dubbed “Operation Varsity Blues”.
Specifically, it is alleged that:
- parents paid William Rick Singer, an “admissions consultant” and founder of a college-prep company called The Key (and its related non-profit The Key Worldwide Foundation, or KWF), to bribe individuals at select schools to recruit students into elite university athletics programs, such as crew, water polo, and tennis, despite the students not previously participating in the sport. This included allegedly photoshopping photos of students participating in said sports;
- Singer bribed SAT and ACT moderators to correct student’s answers on those standardized tests, granting the students higher scores.
Collectively, the parents involved paid more than $25 million in bribes, via Singer, to a variety of individuals influential in the college admissions process at elite schools.
Singer himself pled guilty to:
- Conspiracy to racketeer: Singer and co-conspirators facilitated cheating on SAT and ACT entrance exams by having others take tests in lieu of the actual students or correcting student answers after the tests were completed (by bribing test officials). He also faked student involvement in sports, including creating fake athletic profiles;
- Conspiracy to launder money: Singer and co-conspirators conducted financial transactions with coaches, university administrators, and test administrators knowing that the money was related to unlawful activity and then attempted to conceal and disguise the “nature, location, source, ownership, and control” of the proceeds;
- Obstruction of justice: Singer gave advance warning to several co-conspirators about the investigation and told them to take certain action to “thwart its progress”.
He could be facing more than 60 years in prison and $1.25 million in fines.
Among the parents charged are well-known Hollywood actresses Lori Loughlin and Felicity Huffman, CEOs of large organization, and a co-chairman of an international law firm. Others charged include coaches at respected universities such as the University of Southern California (USC), Yale, Georgetown, and Stanford, and college test administrators.
Conspiracy to commit mail fraud and honest services fraud are both felony charges punishable by jail time (up to five years per charge) and fines.
Tax Implications of the Scandal
IRS Commissioner Chuck Rettig informed the Senate Finance Committee that he anticipates that a number of individuals will be charged with criminal tax violations due to their involvement in the Varsity Blues scandal and through making “donations” to KWF.
From a tax perspective, the structuring of KWF as a non-profit is the issue. This allowed parents who made payments to Singer to claim those payments as charitable contributions in order to obtain a tax deduction.
However, since KWF was not actually a non-profit, the actions of these parents (and of Singer) may result in charges of conspiracy to defraud the United States, or, in other words: tax fraud.
As a recognized not-for-profit KWF filed the requisite tax forms (in the case of a 501(c)(3) organization, a form 990). Based on previously filed form 990’s, the organization received almost $2 million in contributions and grants in 2015 and almost $4 million in 2016.
“Donations” were made to the following schools:
- $252,500 to University of Texas Athletics;
- $150,000 to Chapman University;
- $83,181 to NYU Athletics;
- $60,000 to University of Miami;
- $50,000 to DePaul University;
- $50,000 to the USC Women’s Athletics Board; and
- $25,000 to the USC soccer program.
Overall, between 2013 and 2016, KWF allegedly gave out more than $7 million in such donations.
To maintain the illusion that the organization was a not-for-profit, KWF employees sent acknowledgement letters falsely attesting that no goods or services were exchanged for the donations. This allowed the donations to be deducted as charitable contributions by the parents who made them.
Individuals charged with criminal tax violations could be required to pay back taxes (plus interest and penalties). Many tax crimes also carry minimum prison terms and fines of $100,000. It remains to be seen what kind of tax charges will be laid against those involved.
We will continue to follow developments in this matter as it unfolds and will provide updates as they become available.
In the meantime, if you have questions contact Feigenbaum Law.
With professional accounting designations from both Canada and the US, coupled with being admitted to the bar in the US and Canada, Mark Feigenbaum and his team are uniquely positioned to provide tax advice to clients on both sides of the border. Due to our vast knowledge of both U.S. and Canadian tax systems, professionals in both countries, such as lawyers, accountants, financial planners, agents, and business managers, frequently refer complicated tax matters to our firm. We have developed a reputation for finding creative solutions to seemingly unsolvable problems and for the exceptional quality of our work.