A Dubious Varsity Blues Postmortem Boils Down to a Faulty Charitable Contribution Deduction

Varsity Blues was the scandal involving wealthy parents making faux donations to big schools or a fake 501(c)(3) set up by the mastermind, Rick Singer.  Faux donations and fake charities were the means to launder bribes parents paid to get their kids admitted to very selective universities.  The typically non-athletic students were admitted through athletic department “side doors” in exchange for payments described as charitable contributions.  Thus, the conspirators used IRC 170 and 501 to launder dirty money, essentially.  There is an even a docudrama and a made-for-TV film about it.      

The Tax Code has always provided a convenient way to catch criminals who were otherwise skillful enough to avoid criminal codes.  But in one case, according to an engaging opinon in the WSJ last week, the prosecutors employed the Tax Code for the final ruination of an innocent father who raised academically accomplished world-class athletes, but who also made ill-timed entirely innocent donations:

John Wilson’s facts were different from the others’. His children were highly qualified on their athletic and academic merits. His twin daughters got top scores on the ACT. His son scored in the top 93% and played on multiple nationally ranked water polo teams. His son’s nationally recognized high-school coach testified that he called the University of Southern California to recommend the boy. Unlike any other Varsity Blues family, his son played on the USC team.

Mr. Wilson’s donations went to USC’s Trojan Athletic Fund and Mr. Singer’s IRS-certified foundation, not to individuals. USC gave Mr. Wilson a receipt and kept his money. Giving donor families, legacies, political VIPs, faculty children and others preference in admissions is a longstanding practice that may seem unfair but has never been illegal.

The right to a fair trial is the bedrock of our legal system. The judge excluded almost all of the defendant’s proffered evidence. The prosecutors were improperly allowed to inundate the jury with the unethical acts of other, unrelated parents. Eleven former U.S. attorneys from across the country, appointed by Democratic and Republican presidents, wrote a supporting appeals brief stating “John Wilson did not receive a fair trial.”

A three-judge panel of the First Circuit agreed and unanimously reversed almost all of Mr. Wilson’s convictions. Prosecutors dropped those charges rather than retry the case.  Mr. Wilson was left with a single conviction—for making a false statement on a tax return. This false statement was for deducting his donations to USC using the invoice from Mr. Singer’s company instead of the receipt he had received from USC. The difference in taxes owed was $1,425. Mr. Wilson overpaid his taxes that year by far more than that.

The Wilsons went through five years of hell. Mr. Wilson spent his life savings on legal costs and lost his job and reputation. He remains radioactive to employers. Ensnaring someone with a felony conviction for a $1,425 error on a tax return is the type of abuse that should cease.

We previously blogged about poor old Mr. Wilson.  It is only fair to say that the First Circuit rejected Wilson’s assertion that his kids were good enough to play sports at any of the schools to which they were admitted, largely on the basis of emails and wire taps in which Wilson admitted they weren’t.  But Wilson was an obvious pragmatist, credibly asserting that a donation was expected in exchange for preferential admission.  That is just how things work.  That doesn’t make it a bribe.  And he’s got a point, we all know it.  We call it “legacy.”  People do it all time and tax law pretends otherwise. Wilson’s daughters never even played. But Wilson coincidentally “donated” $1 million to Harvard and Stanford and got one each admitted through the athletic department side doors at those institutions. The First Circuit reversed all but the tax conviction, holding that evidentiary mistakes resulted in Wilson being found guilty by association. It also found the donation or bribe, as the case may be, cost the government more than $1400 because Wilson improperly deducted a lot more of his payment as trade or business expenses.     

So its not entirely clear that Wilson was so innocent that prosecutors should not have used the Tax Code to secure a modicum of justice otherwise unavailable through the Criminal Code. A few commenters to the WSJ article argue instead that the Tax Code provided the only measure of justice.  History shows the Tax Code worked correctly against Al Capone.  It sounds like it worked correctly against John Wilson too.

darryll k. jones