Congress Should End Tax Breaks For Gifts To Non-Profits With Political Agendas

This month, The New York Times reported that California businessman Yvon Chouinard, the founder of Patagonia, contributed 98 percent of his $3 billion business, tax free, to the Holdfast Collective, a tax-exempt organization formed to combat climate change. Mr. Chouinard gave the remaining interest to a family trust, which will manage the business in perpetuity. Last month, the Times reported that Chicago businessman Barre Seid 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 other conservative causes.

Democrats and Republicans have gotten more aggressive with both tax and campaign finance laws since the US Supreme Court’s 2010 Citizen’s United decision. But these multi-billion dollar gifts stand out—and expose tax flaws in the system. Fortunately, there are easy ways for Congress to fix the problem.

Although Mr. Chouinard’s and Mr. Seid’s gifts promote opposite political agendas, they benefit from the same tax rules. They both founded their businesses many decades ago, and their basis in their stock presumably was close to zero. If they had sold their stock instead of transferring ownership to a non-profit, they would have owed hundreds of millions in Federal capital gain taxes (at a 23.8 percent rate), leaving less to donate.

If they had given their stock to somebody other a tax-exempt organization, they would have paid a 40 percent gift tax on the value of the stock. Similarly, if they had held their stock until death, their estate would owe a 40 percent estate tax on the value of the stock. Under either circumstance, they would have less to give away.

But Mr. Chouinard and Mr. Seid paid no income, gift, or estate taxes when they gave their stock to the non-profits, which are “social welfare” organization that are tax-exempt under Code section 501(c)(4) (these organizations do not pay tax on capital gains, dividends or other investment income). The Holdfast Collective will keep Mr. Chouinard’s stock, and can spend the dividends on its political agenda (projected at $100 million a year). The Marble Freedom Trust sold Mr. Seid’s stock, and can spend the sales proceeds on its political agenda.

As a result, these organizations can use their resources on political activities, almost without restriction. They can, for example, make unlimited expenditures for lobbying, ballot initiatives, and similar activities and devote almost half their expenditures to political campaigns. And they need not disclose the names of their donors. They can’t directly contribute to federal candidates, but could create a political action committee to circumvent these restrictions.

Mr. Chouinard and Mr. Seid also could have avoided gift and income taxes by giving their stock to a 501(c)(3) charitable organization. But the political activities of those organizations are strictly circumscribed. Had they given their stock to a political organization that is exempt under section 501(c)(27), they would have had to pay capital gains tax on the appreciation of his stock, though that donation would still be exempt from the federal gift tax.

But thanks to clever tax planning, Mr. Chouinard and Mr. Seid got the best of both worlds: no taxes and virtually no limits on the political activities of the nonprofits. Effectively, the tax law helped them maximize their political gift.

There are two simple solutions to this problem. Congress could extend to social welfare organizations the special tax rule that treats a gift of appreciated property to political organizations as a sale and subject to capital gains taxes (at 23.8 percent).

Alternatively, Congress could impose gift taxes on property given to social welfare or political organizations. Before 2015, gifts to social 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 to both forms of organization. But, better yet, Congress now could keep the playing field level by applying the gift tax to both types of organizations (at 40 percent).

There is no reason taxpayers should be subsidizing gifts to explicitly political organizations. And Congress can easily limit Federal tax benefits for these gifts.