Sep 17, 2022 - Economy & Business

The ultimate billionaire tax dodge

Illustration of a shoe kicking the IRS logo.
Illustration: Shoshana Gordon/Axios

Entrepreneurs tend to hate paying taxes, and they love supporting pet causes. Now it's becoming clearer how they can pass entire billion-dollar companies through a charitable loophole.

Why it matters: The tax code has incentives for owners to give their companies to non-profits. For the time being, such transactions remain relatively rare — but they seem certain to accelerate.

Driving the news: In the past year, at least two billion-dollar companies have been donated to obscure 501(c)(4) nonprofits — Tripp Lite, which makes electrical devices, and then, this week, Patagonia, which makes outdoor gear.

  • In both cases, the founders avoided paying any kind of capital gains or income tax on billions of dollars of value that they controlled and helped to create.
  • They also avoided paying gift tax — the tax that is normally payable whenever anybody makes gifts exceeding a lifetime limit of $12 million.

Details: Tripp Lite was donated by its founder, Barre Seid, to a group called the Marble Freedom Trust that immediately sold the company to Eaton Corporation for $1.6 billion, in a series of transactions documented by ProPublica and the NYT.

  • Patagonia was donated by its founder, Yvon Chouinard, to an entity he founded called the Holdfast Collective, designed to receive and spend the company's profits in perpetuity.
  • Neither Marble Freedom Trust nor Holdfast Collective will ever pay any taxes on the billions they receive from Tripp Lite and Patagonia respectively.

How it works: The richest people in America tend to get that way not by earning money but by owning very large stakes in companies. When those stakes rise in value, no tax is payable unless and until they are sold.

  • If the stake is not sold at all but instead is given away charitably, then no tax is payable ever. Warren Buffett, for instance, has donated some $33 billion in Berkshire Hathaway shares to the Gates Foundation — shares that would generate billions of dollars in capital gains tax if he sold them himself, but that are not taxable when they're first donated to a nonprofit and then sold.

The big picture: Hundreds of billionaires have signed the Giving Pledge, promising to give most of their wealth to charity. Until recently, it's been very unclear how that is likely to work, in practice. But now there are models that can be replicated.

  • Mike Bloomberg, for instance, one of the signatories, could create a 501(c)(4) organization, working hand-in-hand with the existing Bloomberg Philanthropies, and donate Bloomberg LP to it, much as Chouinard did with Patagonia.
  • Even 501(c)(3) organizations are now allowed to own for-profit companies, under what's known as The Newman’s Own Exception.

The impact: Patagonia and Tripp Lite will continue to pay corporate income taxes, unlike the many hospitals and universities that are run as businesses and control billions of dollars but that bask in tax-exempt status. But the U.S. government will never get a take of any of their massive decades-long increase in value.

  • Meanwhile: The fortunate recipients of Seid's and Chouinard's largesse are 501(c)(4)s — a set of organizations often known as dark-money groups. Unlike the more common 501(c)(3)s, 501(c)(4)s can get involved directly in electoral politics, giving money to candidates and campaigning for or against them.

Marble Freedom Trust and Holdfast Collective are at opposite ends of the political spectrum, but have similarly outsized ambitions.

  • Marble Freedom Trust is run by Leonard Leo, who helped to construct the Supreme Court’s 6-3 conservative supermajority as Donald Trump’s adviser on judicial nominations. It's expected to "supercharge efforts to further shift American politics to the right," per ProPublica.
  • Details are scarce for who is running Holdfast Collective, but Axios Pro's Megan Hernbroth reports that it "could remake the climate philanthropy space for decades."

Between the lines: Both U.S. entrepreneurs were able to choose or even found nonprofits that were entirely aligned with their own visions. For the foreseeable future, the money will get spent in exactly the way that the billionaires wanted it to be spent.

What to watch: While Marble Freedom Trust is the more explicitly political of the two, the only way that Holdfast is going to be able to achieve its goals is by getting governments on board. Both organizations are ultimately in the business of spending money to try to bend democratic institutions to their will.

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