This month, The New York Times reported That California entrepreneur Yvonne Chouinard contributed 98 percent of his $3 billion business, tax-free, to the Holdfast Collective, a tax-exempt organization formed to fight climate change. Mr. Chouinard gave the remaining stake to the family fund which would run the company in perpetuity. Last month , times It reported that Chicago entrepreneur Barry Seid has contributed his entire $1.6 billion business, tax-free, to the Marble Freedom Trust, a tax-exempt organization that will question climate change and advocate for other conservative causes.
Democrats and Republicans have become more aggressive with tax laws and campaign finance since the US Supreme Court in 2010 Citizen United resolution. But these multi-billion dollar gifts stand out and reveal the tax flaws in the system. Fortunately, there are easy ways for Congress to fix the problem.
Although Mr. Chouinard and Mr. Said’s gifts promote opposite political agendas, they benefit from the same tax rules. They both established their businesses several decades ago, and presumably their bottom line in their equity was close to zero. If they had sold their stock instead of transferring ownership to a nonprofit, they would have owed hundreds of millions in federal capital gains taxes (at a rate of 23.8 percent), leaving less for the donation.
If they had given their stock to another tax-exempt organization, they would have paid a gift tax of 40 percent on the value of the stock. Likewise, if they held their shares to death, their estate would owe an estate tax of 40 percent on the value of the stock. Under either case, they will have little to give up.
But Mr. Chouinard and Mr. Syed did not pay any income, gift, or estate taxes when they gave their shares to the nonprofit, a “social welfare” organization that is tax-exempt under Section 501(c)(4) of the Act (these organizations do not pay tax on capital gains, dividends, or any other investment income). Holdfast Collective will keep Mr. Chouinard’s shares, and can spend the profits on its political agenda (expected to be $100 million annually). The Marble Freedom Trust has sold Mr. Syed’s shares, and can spend the proceeds from the sales on his political agenda.
As a result, these organizations can use their resources for political activities, almost without restrictions. They can, for example, incur unlimited expenditures for lobbying, ballot initiatives, and similar activities and allocate nearly half of their expenditures to political campaigns. They do not need to reveal the names of the donors. They cannot directly contribute to federal candidates, but they can create a political action committee to circumvent these restrictions.
Mr. Chouinard and Mr. Syd could have avoided gift and income taxes by donating their stock to a 501(c)(3) charitable organization. But the political activities of these organizations are strictly restricted. Had they handed over their shares to a political organization exempt under Section 501(c) (27), they would have had to pay capital gains tax on the appreciation of its stock, although that donation would still be exempt from the federal gift tax.
But thanks to clever tax planning, Mr. Chouinard and Mr. Said got the best of both worlds: no taxes and almost no restrictions on the political activities of nonprofits. Effectively, the tax code helped them maximize their political talent.
There are two simple solutions to this problem. Congress can extend to social welfare organizations a special tax base that treats the gift of assessed property to political organizations as a sale and is subject to capital gains taxes (at 23.8 percent).
Alternatively, Congress can tax gifts on property granted for welfare or political organizations. Prior to 2015, gifts to welfare organizations were subject to the gift tax, but contributions to political organizations were explicitly exempt. In 2015, Congress leveled the playing field by exempting gifts for both forms of regulation. But, even better, Congress can now keep the playing field up by applying a gift tax to both types of organizations (at 40 percent).
There is no reason why taxpayers should explicitly support gifts to political organizations. Congress can easily limit the federal tax benefits of these gifts.