Nonprofit Grants Hollywood, Tuition-Free Admission To… Jail
This week, primetime news relished covering the FBI in Hollywood. As the public took over the internet in “Aunt Becky Goes to Jail” memes this week, tax professionals would have been excited by a single fact in all the news – William Singer
filtered the bribes to facilitate the admission of several high-profile celebrities’ children into various universities and private schools via “donations” to a nonprofit he founded. Does this mean, Lori Loughlin, Felicity Huffman, Joe Montana, the late Steve Jobs, and the other 45 or so people from Big Law and Big Co. got nice deductions for their “donations?” The least interesting read, William “Rick” Singer’s nonprofit, Key Worldwide Foundation’s, 2016 Form 990 (tax return), is one of the most enlightening. As of today, Publication 78 (IRS’ listing of 501(c)(3) public charities), Key Worldwide is listed as a public charity – i.e. tax-exempt organization for which donors can take a deduction.
The latest form available on the IRS Publication 78 webpage is the 2016 Form 990, and that will suffice to shed some light into this scandal. Rick Singer is the founder and President of Key Worldwide Foundation, a California 501(c)(3), public charity (i.e. supposed to further charitable endeavors FOR THE PUBLIC) received its tax-exemption “blessing” from the IRS in 2013. As of December 31, 2016, the foundation had revenues exceeding $7 million. 2016 was a particularly lucrative year, with “contributions, gifts, and grants” of over $3.7 million. Notably, the foundation generated no revenues from fundraising, membership dues, or government grants. Of course, there is no indication that it engaged in any activities that would support revenues from those sources. Collecting funds from individual contributions and funneling them to various schools in exchange for guaranteed admissions for specific individuals cost a mere $180,000, namely, nonprofit expenses. In its charitable endeavors, the foundation allegedly ran a development program at a cost of $83,000 and spent a measly $8,000 for tutoring expenses. Perhaps, the foundation should have considered using the funds it collected for actually providing tutoring to actual disadvantaged children instead of using them as bribes.
Federal law only allows a deduction for charitable donations if they are qualified charities, that is, they either must have tax exemption or be operated such that would qualify. In this case, the foundation received tax exempt status. Additionally, the amount of any donation taken as a deduction has to be reduced by the value (fair market value usually if under-priced) received. What is the value of the school or athletic program admission here? Is it the actual cost of admission or the cost of the bribe. Signs point to the latter because that’s the value necessary to garner admission for these specific purportedly unqualified students. Therefore, if the famous donors reported a deduction for the contributions to the foundation at a value greater than zero, they would likely be subject to penalties and interest.
Juicy facts for an investigation into tax fraud. The IRS will likely issue a retroactive revocation of Key Worldwide’s tax-exempt status very soon, if it hasn’t already. And that creates another issue, which is that even if some of the donations were not part of the bribes and were used for the minimal charitable activities by the foundation, donors’ deductions would still be void – because they would be deducting funds paid to a non tax-exempt organization. A nonprofit that loses its recognition for tax exemption retroactively has to file corporate tax returns and pay taxes on its profits (net income with adjustments essentially). More importantly, as the funds were paid to several universities which are themselves, considered tax-exempt educational organizations, the universities would have unrelated business income tax (because it is highly doubtful the IRS will consider the funds they received as bribes as furthering their nonexempt purpose). Charitable organizations are required to refrain from self-dealing, substantial commercial or non-charitable activities, among other stringent requirements. Grant-funding is even more stringent and parameters have to be set for selecting participants, paying grants, and tracking use in such manner as to truly serve a charitable purpose. The foundation fails on all of these grounds. The minimal use of a token amount of funding for charitable purposes is no relief from the grander commercial, albeit illegal, activities of Key Worldwide Foundation.
Read more from the IRS HERE.
Read the Insider article HERE.