Patagonia, Nonprofits, and the Tax Code
A sweet story gets a wee bit more complicated.
A half century after founding the outdoor apparel maker Patagonia, Yvon Chouinard, the eccentric rock climber who became a reluctant billionaire with his unconventional spin on capitalism, has given the company away.
Rather than selling the company or taking it public, Mr. Chouinard, his wife and two adult children have transferred their ownership of Patagonia, valued at about $3 billion, to a specially designed trust and a nonprofit organization. They were created to preserve the company’s independence and ensure that all of its profits — some $100 million a year — are used to combat climate change and protect undeveloped land around the globe.
The unusual move comes at a moment of growing scrutiny for billionaires and corporations, whose rhetoric about making the world a better place is often overshadowed by their contributions to the very problems they claim to want to solve.
At the same time, Mr. Chouinard’s relinquishment of the family fortune is in keeping with his longstanding disregard for business norms, and his lifelong love for the environment.
“Hopefully this will influence a new form of capitalism that doesn’t end up with a few rich people and a bunch of poor people,” Mr. Chouinard, 83, said in an exclusive interview. “We are going to give away the maximum amount of money to people who are actively working on saving this planet.”
The report also notes,
The trust, which will be overseen by members of the family and their closest advisers, is intended to ensure that Patagonia makes good on its commitment to run a socially responsible business and give away its profits. Because the Chouinards donated their shares to a trust, the family will pay about $17.5 million in taxes on the gift.
The Chouinards then donated the other 98 percent of Patagonia, its common shares, to a newly established nonprofit organization called the Holdfast Collective, which will now be the recipient of all the company’s profits and use the funds to combat climate change. Because the Holdfast Collective is a 501(c)(4), which allows it to make unlimited political contributions, the family received no tax benefit for its donation.
“There was a meaningful cost to them doing it, but it was a cost they were willing to bear to ensure that this company stays true to their principles,” said Dan Mosley, a partner at BDT & Co., a merchant bank that works with ultrawealthy individuals including Warren Buffett, and who helped Patagonia design the new structure. “And they didn’t get a charitable deduction for it. There is no tax benefit here whatsoever.”
Somewhat confused by the whole thing, I mused that it was “An interesting if odd way to do philanthropy.”
A follow-up report from Bloomberg News (“Patagonia Billionaire Who Gave Up Company Skirts $700 Million Tax Hit“) makes it all much clearer. Rather than an act of extraordinary philanthropy at great personal cost, it portrays something far more calculated.
Patagonia founder Yvon Chouinard described his decision to give away the outdoor apparel-maker as his last-ditch effort to do all he could to protect the planet.
The deal is structured in ways that also bring the billionaire other perks, by letting him and his family keep control of Patagonia while shielding them from tax bills that could have totaled hundreds of millions of dollars.
By donating most of the company, which is valued at $3 billion according to the New York Times, Chouinard is at the fore of a small-but-growing movement among the ultra-wealthy to use nonprofits to exert political influence long past their lifetimes.
Wait a minute. He didn’t actually give away the company?
While many billionaires make living donations with tax and estate planning as the primary considerations, Chouinard seems to have structured his Patagonia transfer with at least a few purposes in mind. Holdfast is a 501(c)(4), a nonprofit that can make unlimited political donations — unlike its cousin, the 501(c)(3). For that reason, any giving to a 501(c)(4) isn’t eligible for income-tax deductions. In addition, the Patagonia founder will owe $17.5 million in gift taxes for the shares he transferred to the trust.
Still, the moves mean Chouinard won’t have to pay the federal capital gains taxes he would have owed had he sold the company, an option he said was under consideration. On a $3 billion sale, that bill could be more than $700 million. It also helps Chouinard avoid the US estate and gift tax, which is a 40% levy on large fortunes when they’re transferred to heirs.
And, rather than generously absorbing a $17.5 million tax hit for something it didn’t actually give away, the family is actually saving $700 million in estate taxes! That makes more sense.
His nonprofit is still going to spend a lot of money in service of a good cause, albeit perhaps through political intervention rather than scientific discovery. So that’s good at least.
“We are letting people opt out of supporting all the expenses of government to do whatever they want with their money,” said Ray Madoff, a professor at Boston College Law School. ”This is highly problematic from the point of view of democracy, and it can mean a higher tax burden for the rest of Americans.”
Let’s address the second point first: it doesn’t really work that way. Our tax system is overly complicated and has too many loopholes and giveaways. But it’s not like we decide what to spend and then divvy up the costs. Or even that we were counting on Chouinard kicking the bucket so that we could rake in that sweet $700 mil.
As to the first, yes, there’s something rather odd at the Bill Gateses of the world having massive fortunes in so-called nonprofit entities that allow them to rather profoundly shape public policy. While there’s an argument that they’re more efficient than any government bureaucracy would be, it’s also perfectly reasonable to argue that the people’s elected representatives should make decisions about how scarce resources are allocated against the various problems we face as a country, much less as a planet.