Last week, Joe Patrice asked me if contributions to Professor Amy Wax’s legal defense fund were tax deductible. He pointed to a website called Amy Wax Legal Defense Fund (AWLDF). He said the funds were to be used to fight the University of Pennsylvania Law School administration, which is seeking “major sanctions” against him. And it says the contributions are tax deductible under Section 501(c)(3) of the Internal Revenue Code.
While I tweeted my initial thought, I want to take this opportunity to dig deeper. Let’s take a look at what current tax law says about whether contributions to legal defense funds are eligible for a tax deduction. Then let’s see if there are any workarounds in case the contributions are not tax deductible. Finally, I want to share some irregularities that I found on this website that make me wonder if it could be a scam.
Before continuing, I want to clarify that I have no animosity towards Wax. She was accused of making racist remarks towards minorities, including Asians. This kind of mentality and rhetoric has no place in modern society, especially from someone who has both medical and law degrees from top universities. However, I also understand that some people have a tendency to sensationalize stories and take quotes out of context, either to get moar clicks, to drive a certain narrative, to expose a larger societal issue (supposedly), because they have severe Republican Derangement Syndrome, or simply to get a blue checkmark next to their name hoping for corporate sponsorships at their next DEI retreat in the Bahamas. So their columns should be ignored or read with a high degree of disbelief and skepticism.
A 501(c)(3) organization is not only exempt from tax on its net income, but donors can also claim a deduction on their tax returns and reduce their income tax bill. Until recently, a donation was an itemized deduction, meaning your itemized deductions must exceed the standard deduction ($12,550 in 2021) before being deductible. But today, anyone can take advantage of a charitable deduction of up to $300, whether it’s an itemized deduction or a standard deduction.
To be a 501(c)(3) organization, it must follow certain rules. First, it must be set up for exempt purposes. Second, none of its earnings can be used to benefit any individual, even though that individual may need charitable assistance, such as expensive surgery, funding a documentary, or obtaining food and toys for the holidays. Finally, the organization may not engage in political activities in general.
The first question is therefore whether the AWLDF has an exempt object. The IRS states that exempt purposes include the advancement of education, the elimination of prejudice and discrimination, and the defense of human and civil rights guaranteed by law, among others. The IRS uses two tests to determine exempt status and both must be passed. The “organizational test” requires that the AWLDF’s articles of association indicate that it was organized exclusively for exempt purposes. The “operational criterion” requires that the main activities of the organization accomplish exempt objectives. We don’t have AWLDF’s Articles of Incorporation (assuming they exist), so we’ll look at the operational test.
Proponents of exemption status would argue that the defense fund would further the aforementioned exemption goals by preventing or deterring university administrators from taking action against faculty with conservative viewpoints, particularly when they are in the minority. and subjected to discrimination and intimidation by students, teachers, and administrators. Opponents would argue that granting 501(c)(3) status to people who openly make derogatory remarks about minorities would foster discrimination and bias that would run counter to exempt purposes as defined by the IRS.
Although I think it’s a toss up, the IRS would probably grant an exemption given that its tax exemption service was criticized a few years ago for arbitrarily denying exempt status to conservative groups.
Assuming the AWLDF has an exempt purpose, the next question is whether it benefits an individual. This seems pretty obvious given that the name of the organization itself suggests that the money will benefit Professor Wax. The website also states that she intends to fight for her job. On the other hand, since the money is used to pay legal fees and without legal representation, Wax could lose her titular status and even her job, it could be argued that she receives no financial benefit. Ultimately, based on the words on the website, this would fail the private benefit test as it appears that AWLDF’s main purpose is to pay Wax’s legal fees. The website does not indicate that the AWLDF will help teachers with similar problems. Additionally, even though Wax does not receive money from the fund, she benefits financially by not having to pay legal fees.
So, assuming the AWLDF is not eligible for 501(c)(3) status, are there any workarounds? Maybe. The simplest would be for a lawyer to take his case pro bono. Another is to ask an organization like the ACLU to take up your case.
Finally, there are some things that make it look like this website might be a phishing scam perpetrated by someone other than Wax. First, I was unable to locate the name AWLDF (or any derivative) on the IRS tax exemption verification website. Professor Sam Brunson Noted this website was owned by an entity that does not provide information about the true owner of the site. Additionally, Wax already has a GoFundMe page that has raised $178,215 so far and makes no mention of tax-deductible donations. So why need a second fundraising website when the first seems to be working just fine? There can be various reasons. The simplest is that someone takes advantage of this publicity to extort money from people who don’t know anything about it. Or someone could be doing this to get on top of search engine results and prevent donors from donating to the real website. In any case, people should be wary of monetary donations on the AWLDF website.
So donating to Wax’s defense fund probably won’t be tax deductible but, given the mostly small donations, I guess most people don’t care about the tax deduction. And it doesn’t look like Wax means it’s a 501(c)(3) anyway. But the website in question looks very sketchy, so those who want to donate to its cause should do so on the GoFundMe page instead.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolves tax disputes. He is also sympathetic to people who have large student loans. He can be contacted by email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.