GRIFFIN SHUFELDT – NOVEMBER 10TH, 2022
EDITOR: PALLAVI MURTHY
Introduction
In September of this year, almost the entirety of a multibillion-dollar company was given away. In an unprecedented move, Yvon Chouinard, the owner of Patagonia, donated 98% of shares in the company with the express purpose of fighting climate change with mixed-to-positive reactions from the public. The shares will go to the Holdfast Collective, a nonprofit organization founded by Chouinard. He explains the reasons behind this somewhat unusual approach, saying: “one option was to sell Patagonia and donate all the money. But we couldn’t be sure a new owner would maintain our values.”
He also considered taking the company public, but feared that pressure from investors would put too much emphasis on short term profit rather than a sustainable, long term vision. While this seems like a somewhat straightforward act of charity and altruism, there’s more happening under the hood, and it is representative of a larger trend in philanthropy. Chouinard’s donation will without a doubt work towards his stated goal of fixing climate change–and that’s a good thing–but the logistics of the donation reflect a side of American tax policy that needs to be scrutinized further.
The Holdfast Collective
The new nonprofit organization draws attention to the fact that there are indeed innovations in the field of philanthropy. The Holdfast Collective, where the majority of shares are going, is a 501(c)(4) non-profit which can make political donations which it will contribute to its stated purpose of combating climate change. As long as the donations are in-line with the organization’s goal, there are no limits to how much or how often it can make political contributions, according to the IRS. This includes efforts to impact political races, specific legislation, and more. For the Holdfast Collective, this means a projected 100 million being invested each year into environmental political projects. From the IRS’s page on political contributions, (c)4s and similar organizations cannot have this type of activity, particularly intervention in elections, be its primary focus, which means the collective will have to engage in other types of activism. This raises the question of what exactly the collective will do, since preventing climate change is a very broad concern. However, the ability to make flexible political donations is what makes this option desirable.
Why is this maneuver worth looking at? Other than the lobbying implications, it allows the Chouinard family to avoid millions of dollars in taxes. While the vast majority of the equity will go to the Holdfast Collective, the remaining 2% is going to the Patagonia Purpose Trust. These shares are the only ones that are subject to tax, leaving the other 98% untaxed. If the entirety of the shares had been subject to taxation, Chouinard would have paid 1.2 billion–particularly through capital gains, rather than the 17 million dollar gift tax they’re paying now. In addition, the 2% of the shares that are being kept through the Purpose Trust are all the voting shares, in order for the family to still make major decisions about the company. Patagonia itself will continue to be a B Corporation, a certificate for a company engaging in for-profit, social or environmental work. As such, Patagonia will continue to reinvest profits as a dividend to the Holdfast Collective.
Alternatively, the non profit status of a 501(c)(3) could have also been used to save even more in taxes. But the American tax code makes it tricky for 501(c)(3) organizations to acquire and own private corporations, making it a less popular and feasible option for Chouinard’s goal. With Patagonia specifically, the Holdfast Collective represents the Chouinard legacy, which will exist far longer than its founders. This feature, for owners or otherwise influential business leader’s ideas and goals to stick around after they’re gone, is a big part of why this type of giving is becoming much more popular among philanthropists.
The Trend
Chouinard’s donation is something that has been praised in environmentalist circles, and not for arbitrary reasons. The philanthropy is significant, and it’s for a noble cause. However, other recent examples of billionaires using the same tactic show how it can be used for different, perhaps less sympathetic causes. One common comparison to Chouinard is Barre Seid, another prominent philanthropist. Instead of focusing on climate change, his donations are for the purpose of enacting and furthering support for more conservative political issues regarding women’s rights. While Chouinard and Seid’s contributions have very different reactions, as NYU Law Professor Daniel Hemel pointed out, they’re substantively similar. Other billionaires also take advantage of the 501(c)(4) and 501(c)(3) in their own ways, regardless of how charitable the purpose may be. Hemel outlines this critique further, explaining: “I think it makes sense for the government to subsidize charitable giving. It doesn’t make sense to subsidize it in this way”. He mentions that this tax advantaged nonprofit designation is not being strictly used for charitable or philanthropic purposes, and instead can just be another way to avoid capital gains taxes on realized assets.
Conclusion
Looking at the specific case of Patagonia, and the logistics of the 501(c)(4) in general, shows the nuances of charitable giving. The philanthropy represents both a positive trend in climate awareness and action, but also a use of a policy that allows for mass tax avoidance. While it may be easy to see that taxing 501(c)(4)’s should be handled differently to mitigate tax avoidance, Patagonia itself agrees. A more interesting implication and question concerning political legacies still exists. It makes us consider to what extent figures should be able to leave behind their political legacy, particularly through philanthropy, long after they’re gone. This is also paired with the question of how effective exactly Patagonia and others will be in these endeavors and by what means, even if it does reflect a positive move towards taking climate change more seriously.
Featured Image Source: Patagonia
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