Patagonia Founder's Big Donation Potentially Saves Him Over $1 Billion in Taxes - and Shows How the Rich Aren't Under the Same Rules as the Rest of Us

Patagonia Founder’s Big Donation Potentially Saves Him Over $1 Billion in Taxes – and Shows How the Rich Aren’t Under the Same Rules as the Rest of Us

  • Yvon Chouinard said on Wednesday he was donating Patagonia’s wealth to fight climate change.
  • Donations could save the Patagonia founder’s family more than $1 billion in taxes, experts have calculated.
  • It shows how wealthy people don’t pay taxes the same as everyone else, these experts say.

It was the business proclamation heard around the world: Patagonia founder Yvon Chouinard was donating his company’s wealth to fight climate change. What wasn’t advertised so loudly: He could save over a billion dollars in taxes by doing it.

“Instead of ‘going public,’ you could say we’re ‘moving forward,'” Chouinard said in a statement announcing the move. “Instead of extracting value from nature and turning it into wealth for investors, we will use the wealth created by Patagonia to protect the source of all wealth.”

Earlier this year, another businessman from another side of the political spectrum – Barry Seid from Chicago – used a similar structure to donate his $1.6 billion business to a nonprofit. who champions conservative causes, including restricting access to abortion and appointing conservative judges to the federal bench. , according to an article in the New York Times.

Seid was able to avoid paying taxes on the sale of his business, an electronics maker called Tripp Lite, by donating it to the nonprofit Marble Freedom Trust. And he needs to make sure his favorite causes are supported — just like Chouinard did with Patagonia’s donation to his own nonprofits that he says will champion climate change.

It was a huge move, and it instantly lit up the business world. It could also give Chouinard and his family a significant tax break, experts who monitor such large deals told Insider.

It’s because of the structure of the gift: Chouinard told The New York Times that the family’s voting shares – about 2% of all shares – were being transferred to a new trust run by family members. and advisors, called Patagonia Purpose Trust. The rest of the shares in the private company, which the family now owns, will go to a new non-profit organization called Holdfast Collective.

The Times reports that by transferring those shares to the trust, the Chouinards owe $17.5 million in gift tax. However, they will not pay any tax on the value that these shares have accumulated since they first acquired it – so-called capital gains taxes. Bloomberg estimates that the capital gains tax on the donation could have reached more than $700 million.

Similarly, massive amounts of stock for the 501(c)(4) non-profit organization are also tax-exempt. Justin Miller, national director of wealth planning at Evercore Wealth Management, estimates that if 98% of the $3 billion given had been subject to federal gift tax, it would have been up to $1.176 billion with the levy. by 40%.

A Patagonia spokesperson told Insider that the Chouinard family did not ask to create a corporate structure to avoid taxes.

“Patagonia pays its taxes,” the spokesperson said. “We have sometimes advocated for higher corporate tax rates to support climate initiatives. We have done this more recently as part of our support for the Build Back Better plan – we have said we would pay a higher corporate tax rate for stronger climate policies.”

Some experts say the structure Chouinard used to offload the company helps Patagonia’s founding family “opt out” of the tax system we’re all subject to — or at least those of us who aren’t billionaires.

The Chouinards’ giving structure is a quirk of U.S. tax law: Wealthy people don’t pay taxes the same way everyone else does.

“You can donate appreciated assets to a (c)(4) corporation and not have to pay capital gains tax. And that’s just the default,” Chuck Collins, director of the Inequality Program and the common good left-leaning Institute for Policy Studies, told Insider. “No matter how generous the donor, they shouldn’t be able to evade taxes entirely. It’s my point of view.

There are many mechanisms for the ultra-rich to move money around without having to pay a levy. When it comes to why Chouinard doesn’t pay a lot of taxes, “there’s a simple legal answer — because he doesn’t need to,” Tax Policy senior fellow Steve Rosenthal told Insider. Center.

The donation structure means the family won’t get a charitable tax deduction either, because they’re putting stock into a 501(c)(4) and not a 501(c)(3). When you donate to a 501(c)(4), they are generally not eligible for a charitable tax deduction on your federal income tax – and, due to legislation enacted under President Obama, such donations are not subject to federal income tax. gift tax. Non-billionaires who claim donations on their taxes are likely donating to a 501(c)(3) in order to get deductions.

Demand Fair Trade sticker seen in the window of the Patagonia store in Dublin

Demand Fair Trade sticker seen in the window of the Patagonia store in Dublin city center during the Level 5 Covid-19 lockdown. On Saturday, March 13, 2021, in Dublin, Ireland.

Artur Widak/NurPhoto via Getty Images

Miller said choosing a 501(c)(4) instead of a 501(c)(3) made sense: the family likely couldn’t have retained control of a 501(c)( 3). Russell James, director of graduate studies in personal financial planning at Texas Tech University, said the ultra-rich “usually can’t even use charitable income tax deductions.” This is because they work to ensure that their paper income is low.

“They tend to have high wealth and low income to declare and deductions are limited to a percentage of income,” James told Insider. “So if they donate even a small portion of their wealth, it completely exceeds their reportable income, meaning they’re already maxed out on their tax-advantaged donations. .”

In short, “these alternative structures make more sense because you have more control, you can spend it on politics, and you don’t really need the charitable tax deduction anyway,” James said. Meanwhile, a 501(c)(4) can spend their money on political causes — like fighting climate change; a 501(c)(3) usually cannot.

Tax law means people can do the same thing for much less valid reasons

While the Chouinards say they are investing their billions in fighting the climate crisis, other wealthy people may use the same kind of structures for causes that are dear to them too – and perhaps not so politically popular: perhaps be that an oil baron would want to use a similar structure to funnel profits into supporting carbon drilling.

“The argument for changing tax policy to implement a gift tax for 501(c)(4) is that not only can an individual make an unlimited gift, but they can continue to grow tax-free for generations,” Miller said. “So $3 billion today could easily be $9 billion in 20 years. Completely tax exempt and all used for political purposes.”

Current tax policy “allows individuals not only to influence policy during their lifetime, but for generations after they leave,” Miller said. At the end of the day, even if there is a “good” 501(c)(4) organization, “nothing prevents someone else from donating to another organization that you are not affiliated with. agreement – and these donations can have lasting effects”.

Yvon Chouinard, founder of Patagonia

Yvon Chouinard, founder of Patagonia

Al Seib/Los Angeles Times via Getty Images

“I oppose tax rules in this area because it seems to me that tax rules subsidize these political agendas,” Rosenthal said. “Everyone should be able to advance their political agendas as they see fit with their assets, but we should write the tax rules to exclude the benefits of using resources to advance an agenda.”

Notably, tax expert Harvey Bezozi said it was an unusual strategy and is unlikely to become mainstream. Indeed, with the 501(c)(4) in play, there will be no income tax deduction, and most families are unlikely to want to use their funds more for political purposes than for charitable purposes.

But Chouinard’s donations illustrate how the ultra-rich, even when championing great causes, escape the realm of taxation, which means the public treasury – the one that pays for roads and airports and health care subsidies healthcare – could be deprived of about a billion dollars in tax revenue, in the case of Patagonia.

“We applaud that kind of charitable impulse and desire,” Collins said. Still, Collins said, “some of that money should be used to pay the taxes the rest of us pay on our income and assets.”

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