Tech Billionaires Hack Their Taxes with a Philanthropic Loophole
nytimes.com
nytimes.com
> When it comes to D.A.F.s, the United States tax code rewards the promise of good intentions. Wealthy donors — including many of the Silicon Valley billionaires who have asked the public to trust them with their digital lives — pledge to distribute their funds to charity once they get their tax break.
A contribution to a donor advised fund is irreversible. Once the donor has given that contribution, it is no longer "their funds." The NYTimes makes it sound like the donor could make a gift and then later spend that money on themselves. That's not how it works. They have the ability to advise the DAF where the grants go, but the grants must go to charities recognized by the IRS.
Giving money to a donor advised fund is giving money to charity. You don't get it back. It's not a promise to give later. It's a charitable donation.
I'm bewildered by the tone of this article. If the author wants to take a donor to task for giving to charity X instead of charity Y, that seems fair even if I disagree. But asserting that someone who gives hundreds of millions of dollars to a DAF -- an irreversible charitable gift -- is "Hacking Their Taxes" and somehow cheating is just disingenuous.
It's a propaganda article that intentionally lies about what's occuring. It's very unlikely that the NY Times writer simply didn't understand anything about what they were writing on. The most plausible argument is that they're pushing an agenda and are willing to lie to do it. It's at least semi-widely believed that large foundation giving by eg Gates or Buffett (or any other billionaires), is a tax dodging scheme for their own benefit (as though they can freely spend billions in foundation money on themselves). You'll see those comments by the droves across forums when this topic comes up, despite the anti-logic, anti-factual nature of the claims. It's a sort of 'the rich are evil, even in charity' dog whistle for people that buy into that ideology (the Times writer is pitching to their base here).
One issue mentioned by NYT is using DAFs to "obscure their political activity" since donations don't have to be made public and non-profits don't have to disclose donors.
Another issue is that the tax savings felt by the donors is tied to the original contribution's valuation and not the valuation at the time the money is used. So in the case of GoPro's Nicholas Woodman, he got a tax break based on $500 mil, but the shares have dropped around 93% so if they're used for charity now it's like he only donated a fraction of that amount.
NYT also reports that the fees for some of these DAFs can be significant and so a portion of these donations are going to e.g. Goldman Sachs, Fidelity, and similar firms.
Sure, but the reverse is true as well - the contribution could increase in value, which benefits the charity. And if that happens, he doesn't get to claim the difference as a deduction.
Furthermore, he gets the tax deduction based on $500 million because that's the amount he's giving up at the moment he makes the (irrevocable) decision to divert the funds to charity. (The alternative is for him to liquidate and hold onto the $500 million himself; he's getting a tax deduction for not doing that).
I think it'd be fair for donors to get a tax break according to how much the stock is worth when it's given to charity.
In the most common scenario, that would mean people could receive deductions on a larger tax basis than the value they actually donated. If they waited long enough, they could even receive a tax break that was greater than 100% of the amount they donated.
An admittedly brief review of the news articles about this event seem to contradict that. The author of this article interpreted the drop that way in order to better make their case, because...well...they have no case.
Below I have listed a few articles from the front page of Google results for this subject. Not a single article that I could find mentions investor worries that the donation was driven by the CEO's lack of confidence in the company. Rather, investors were upset because JP Morgan allowed these shares to be released from a lockup agreement with virtually no advance notice to shareholders. They were worried that the shares could potentially be sold by the charity almost immediately, which would have flooded the market with insider shares far earlier than investors expected.
https://www.inc.com/associated-press/gopro-shares-fall-as-ce...
https://money.cnn.com/2014/10/02/investing/gopro-charity-sha...
http://fortune.com/2014/10/02/gopro-shares-woodman-charity-l...
https://www.wsj.com/articles/gopro-ceos-foundation-doesnt-in...
There are also other issues like the dollar tax benefits aligned to the high stock prices even though the stock today may be worth a fraction of its initial value, and the lack of transparency in disbursements which means funds can just be moved around with little accountability.
Yes, you can get it back. All the donor has to do is find a recipient who agrees to buy goods or services from his/her company for above-market prices, in exchange for receiving the donation. It's called a quid-pro-quo arrangement.
The fact that the donor directed the donation is hidden from public, which allows this kind of abuse to occur.
There's power in controlling money even when you can't spend it on yourself. The donor can use it to own securities and control corporations.
> Unlike family foundations, which are required to distribute 5 percent of their assets each year and have historically been the way wealthy donors disbursed their philanthropic firepower, D.A.F.s have no distribution requirements, meaning that billions of dollars earmarked for charity can sit idle for decades.
That 5% per annum distribution requirement is the check on transferring this power from one generation to the next and is completely absent from D.A.F.s. There are better arguments for raising that minimum % than for removing it.
Indeed, when you have that much money, buying yet another luxury brings nothing. What's really important is power. And with this system you still have it.
E.g: the gates foundation invest the majority of its money (https://mobile.agoravox.fr/tribune-libre/article/bill-gates-...) and the gates family has the control of it.
Unless i'm missing something, they still eventually have to spend it on charity, right? So, whether they do that today or twenty years from now after accumulating interest seems kind of irrelevant to me. It'd be one thing if the NYT had done some reporting that showed these guys were exploiting some loophole to spend the money on themselves without paying taxes. That'd be a big story, and worthy of criticism. But as it is, I don't really see it. Am I missing something here? Anyone who disagrees care to tell me why i'm wrong?
The only problem is if the "charity" isn't really a charity in that case the "pastors" of mega churches who have multiple private jets need to be looked at first.
Charity can be used to cover a lot of things: dinners, galas, trips, vehicles, lucrative jobs, etc.
Another issue is that the tax savings felt by the donors is tied to the original contribution's valuation and not the valuation at the time the money is used. So in the case of GoPro's Nicholas Woodman, he got a tax break based on $500 mil, but the shares have dropped around 93% so if they're used for charity now it's like he only donated a fraction of that amount.
NYT also reports that the fees for some of these DAFs can be significant and so a portion of these donations are going to e.g. Goldman Sachs, Fidelity, and similar firms.
Ya, that part seems legit. But if that's the lede, why not be more explicit about it?
> Another issue is that the tax savings felt by the donors is tied to the original contribution's valuation and not the valuation at the time the money is used. So in the case of GoPro's Nicholas Woodman, he got a tax break based on $500 mil, but the shares have dropped around 93% so if they're used for charity now it's like he only donated a fraction of that amount.
I'm not sure that's a fair criticism. I think that you should get the tax deduction for the value at the time of donation. Anything else would be pretty crazy.
> NYT also reports that the fees for some of these DAFs can be significant and so a portion of these donations are going to e.g. Goldman Sachs, Fidelity, and similar firms.
Ya, that's sort of a real issue. But it's not at all specific to DAFs as far as I can tell, and it's not an instance of the "tech billionaires" screwing people over. If anything it's a criticism of these wall street banks.
I know when I donated stock to my DAF, it was liquidated and invested in the set of funds that the DAF supports
It's definitely a "tax hack" as it's often done to (hopefully) minimizing taxes, but it's legal and the charitable contributions are 100% real and you can't spend that money any other way other than on charity. It's like claiming people who are contributing to 401ks are "hacking their taxes." It's not nefarious as this author it making it out to be.
I was intending to set one up myself during the years when I was itemizing deductions, because I don't plan on having enough deductions to itemize for the rest of my life and I'd like to give to charity throughout the years. Then the tax reform passed very suddenly, I'm going to claim the standard deduction this year, so I missed my window to save thousands on taxes. Oh well.
From the title I was expecting the article to be more nefarious, like "donating" to a charity that pays obscene salaries to friends & family for cushy jobs or something.
From the parent commenter:
> And further, this article is basically calling out a person in particular for putting $500M into a fund for the purpose of philanthropy (sooner or later) and then not having made enough donations (it would better if he had to donate 5%/year -- again, why?).
From the article:
> But four years on, there is almost no trace of the Woodman Foundation, or that $500 million. The foundation has no website and has not listed its areas of focus, and it is not known what — if any — significant grants it has made to nonprofits...If the benefit to the needy is difficult to see, the benefit to Mr. Woodman is clear. After GoPro’s initial public offering, he faced an enormous tax bill in 2014. But by donating via the Silicon Valley Community Foundation, he eased his tax burden in two ways. First, Mr. Woodman avoided paying capital gains taxes on that $500 million worth of stock, a figure that most likely would have been in the tens of millions of dollars. He was also able to claim a charitable deduction that most likely saved millions of dollars more, and probably reduced his personal tax bill for years to come.
The parent commenter goes on to sum up the article as thus:
> Evidently people are so angry at successful people at this point, they are [now] going after their charity too, again not clear on why.
The article asserts early on that the problem is lack of transparency:
> Mr. Woodman achieved this enticing combination of tax efficiency and secrecy by using a donor-advised fund — a sort of charitable checking account with serious tax benefits and little or no accountability...So while donors enjoy immediate tax benefits, charities can wait for funds indefinitely, and maybe forever.
Why is the time lag such a cause for concern? Say I donate money towards an effort that takes 10 years to get tangible results, so what?
If there's some shady behavior later to try to illegally claw back charity donations, then sure, that's messed up. But just delaying it N years? So? It still goes to charity at the end.
By the same logic, do people get super upset when someone doesn't donate to charity during their life and instead just donated the vast majority of their estate on death? It has nearly the same effect.
Maybe people do get upset about that, I dunno.
It's not a cause for concern. It just makes for nice clickbait headlines, and stories full of innuendo with zero proof of actual wrongdoing. In this case, they don't even really make a clear accusation of wrongdoing. This way, they won't get sued over this drivel, but they will get clicks, and those clicks will cause ad impressions.
And transparency is vital. Any time there are dark corners, people find a way to fester in them. See every society, ever.
Finally, there's really just a degree of gided-age wealth-fatigue. You have to expect it at a certain point - humans are exquisitely attuned to status differences; it is just how they're wired.
They are also not required to disclose how the charitable dollars are spent.
You don't see the problem here? How do we, as taxpayers, know the money is even being spent for real charitable purposes?
See for example this story: https://www.telegraph.co.uk/news/2018/06/14/new-york-attorne...
How is this any different from a person directly donating $X dollars other than the ability to sit and wait and think about it? Do I get to see what a private citizen donates to directly unless that organization that receives the money discloses who donated how much?
You have to disclose the recipient of the donation to IRS. That's the difference. These "Donor Advised Funds" apparently don't have to report disbursements.
> And because organizations that manage D.A.F.s are not required to report which funds give money to which causes, it is impossible to know how much money individual donors are giving away to nonprofit organizations.
That doesn't mean the donor advised fund isn't required to report the givings the fund makes, it means it isn't required to report who gave to whom.
I would be shocked if the DAF managers aren't required to report spending/giving, because they are also 501c3 themselves.
While you are unable to audit any given donor, you are able to audit most DAF program providers by reading their 990 tax form. Here is an example for Charles Schwab, mentioned in the article. https://www.guidestar.org/profile/31-1640316
Even if the 990 is not publicly published, it is required by the IRS and can be audited.
>See for example this story: https://www.telegraph.co.uk/news/2018/06/14/new-york-attorne....
This is less likely to happen with a DAF program because they are managed by 3rd parties with reputations to protect. A properly ran DAF program will research and vet all grantee organizations prior to making a gift, and can (and will) reject donor grant requests if they are found to violate the law/DAF mission.
i.e., the donor could make an arrangement such as, "I'll direct my DAF to donate $X million to you if you then use that money towards buying $4X worth of services from my company."
"...[Mr. Woodman] was giving away much of that wealth — some $500 million worth of GoPro stock — to the Silicon Valley Community Foundation...Mr. Woodman avoided paying capital gains taxes on that $500 million worth of stock, a figure that most likely would have been in the tens of millions of dollars..."
Of course he avoided capital gains on the stock he gave away - he couldn't sell it anymore because it was no longer his. The entire section about Nick Woodman strives to imply that something improper has occurred, but all I see is a successful entrepreneur that gave away a large part of his fortune. Regardless of how long it takes for that money to be distributed by the charitable fund, the money is forever no longer his.
Of course the main reason for that is other parts of the tax code, not DAFs. But I think DAFs get targeted for criticism because they make it a lot easier to exploit these kinds of flaws.
I'm not entirely sure you can, based on my reading of 26 CFR 1.170A-1(c)(3) [1]:
> (3) If a donor makes a charitable contribution of property, such as stock in trade, at a time when he could not reasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is the amount for which the quantity of property contributed would have been sold by the donor at the time of the contribution.
So yes, in this case, it didn't work out for the general public. That indicates no intention of wrongdoing, nor does it indicate that the system is broken. Equity values on the whole tend to rise over time, which means that charitable stock gifts overall (especially those that are held for long periods of time) are actually better for the public than cash donations.
It's not about wanting the stock to do poorly; as the chief executive, he knows where he plans to go with the company, and if he doesn't see it going far, then at least he can save some money. The fact that investors interpreted the move this way indicates that it's not about hindsight, but a poor forecast.
Your point about values rising on average is a good one though - it means that though some of the rich may be getting away with more money, overall donations are still going to balance that. There are still some other issues though.
Investors appear not to have interpreted it that way. That interpretation was disingenuously rendered by this article’s author in support of his premise for it. See [1].
Because "successful" people are laughably just capitalists whose only success is extracting wealth from people who actually work for a living. Capitalism isn't a system that benefits the vast majority of people and being a "successful" capitalist is bad for our planet and society.
This is the Labor Theory of Value, which is regularly debunked. Capitalists create value, they don't take it from others. (You can see this on the balance sheet - the business is worth more than its "book value".)
> Capitalism isn't a system that benefits the vast majority of people
The vast majority of immigrants arrived in the US with little more than a suitcase, yet capitalism made them wealthy.
> bad for our planet and society
Non-capitalist societies are far more destructive to the planet.
2. I'm not interested in myths. Look up statistics on immigrant poverty under capitalism and let me know whether you'd like to continue this line of reasoning.
3. Some, yes. All? Of course not.
I can't think of any. Do you have any examples?
It absolutely does, because it decides where to allocate scarce resources.
And backing up, I feel like we don't often question the idea of giving nearly unlimited tax breaks for charitable donations. The Economist did a very good job explaining the history, pros, and cons of this practice in 2012: https://www.economist.com/briefing/2012/06/09/sweetened-char...
For what it's worth I donate a good amount every year to causes I care about and I am certainly motivated by the tax break. While that's rational, I do sometimes wonder about the ethical side.
After all, I am basically saying that I should get to self-direct a large chunk of my own taxes. The govt has an idea of what it would do with my income taxes but I can donate them to a cause of my choosing. And there's very little vetting about what causes count, as long as they're not for profit. I could be giving thousands to a charity that wants to give citizenship to dolphins, and depriving some good state and federal programs of those funds.
I do think that there's a good reason to give some limited deductions for charitable giving. After all the world is probably better when people give to each other, no matter the cause. But allowing someone to get a billion dollar windfall and use this tax break to redirect many millions to a cause of their choosing rather than the public is probably taking it too far.
Where I'm currently resident we simply get to deduct it from income, iirc you can deduct up to 20% of your yearly income. That might avoid the ethical concern about not paying tax.
I set up a DAF when Google went public in 2004. I've spent 25-50% of it in the intervening 13 years, despite best intentions. I sure took that full tax break in 2004 though and have compounded the value of that annually. So in my case the DAF has not worked as a great way to funnel money to actual charities. It just sits idle, compounding. The tax break I got seems to outweigh the public benefit.
The psychology of having the DAF is funny. I sort of feel the virtue of having donated to charity every single year, just looking at the balance. When I do make a grant from the DAF I don't really feel like I'm doing anything more worthwhile. Also it's a bit impersonal because you have to recommend the grant then wait several days for the DAF to actually allocate. OTOH it's nice having a pile of money I've already "spent" that I can use to give to things at a whim.
I think the solution is to require DAFs spend some large portion of their balance every single year. Charitable foundations are required to distribute something like 5%, but I think 10% or more makes more sense for an individual's DAF. There's also a strong argument that charitable donations shouldn't be tax deductible at all, remove this whole tax gimmick and economic distortion. I'm not sure I fully buy it (and the transition would be brutal) but it is worth reading: https://www.economist.com/briefing/2012/06/09/sweetened-char...
Update (August 2018): since writing that comment I felt guilty and have made more grants. Current events had something to do with it too, turns out there's a lot of immigrant legal aid charities that need the money right now.
There's also an issue with how these sorts charities are privately incorporated which aids in hiding them from public scrutiny regarding how and when funds are spent. For example, a 501(c)3 Organization requires tax forms to be disclosed and available to be audited in order to see all associated expenses. The cost of filing and completing the yearly form is minimal enough not to inhibit any undue stress in record-keeping to follow GAAP, even such that no outside advisors would need to hired in order to file.
- $500m of GoPro stock was donated at about $95 per share, but actually sold by the fund at $18 per share (or so the article implies).
- Assuming the highest marginal tax rate (39.6%), the $500m tax-deductible donation would produce a net gain of $198m from reduced income taxes over the next 5 years.
- Selling all the stock at $18 per share would have produced a net gain of $76m ($94m minus $19m in 20% capital gains taxes).
So by 'donating' the large block of stock at its highest price point, the donor profited an extra $122m over what the stock was ever actually worth, in addition to the positive publicity associated with generously donating $500m (that was actually only worth $94m).
My reading of this is that the 'loophole' in this example has less to do with the particular recipient of the donation, and more to do with the supposed misrepresentation of the 'fair market value' of the stock donation, which the article implies was closer to $94m than $500m.
However, there appears to be a law specifically prohibiting this kind of inflated misrepresentation of stock value based on current selling price, 26 CFR 1.170A-1(c)(3) [1]:
> (3) If a donor makes a charitable contribution of property, such as stock in trade, at a time when he could not reasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is the amount for which the quantity of property contributed would have been sold by the donor at the time of the contribution.
So the so-called 'loophole' implied by the $500 million example doesn't actually exist. Assuming the full $500 million was actually deducted at its full value seems to be either fuzzy speculation on the part of the author, or something that will undoubtedly be heavily scrutinized/challenged in a future IRS audit based on the legal definition of 'value' of a charitable contribution.
https://www.irs.gov/publications/p561#idm140501157972816
> determining the value of large blocks of stock usually requires the help of experts specializing in underwriting large quantities of securities, or in trading in the securities of the industry of which the particular company is a part
i.e. it's not just "(market price) x (number of shares)"
Although when I looked at the article it seems that they do not actually claim that he was able to deduct $500 million. They strongly imply it by saying that "his tax savings were pegged to the shares’ all-time high" but in terms of the actual deduction they just write that he "likely saved millions of dollars" which is accurate.
This is exactly the kind of self serving 'financial engineering' wall street has become infamous for, and now they get to suck their fees from the charity sector too.
Their fees are a parasitical tax on funds that should have gone to charity and used today given the tax breaks have already been given. The fact that the banking sector can still successfully lobby and get bills passed to operate in secrecy without accountability reflects how badly broken the financial system has become.
Meanwhile all that money was managed by some hedge fund and was making 30% returns (this was '08, right before the Great Recession)
He owned the most expensive house in the Hamptons and had a private jet and complained about all the sycophants
We did get catered lunches by his personal chef every day at work, so I'm not complaining...
If the charity was making 30% returns, how is that a bad thing? Those gains don't flow back to the donor.
A Who's Who of Apple executives exploit this to build mansions on nearby "ranches":
https://www.sccassessor.org/index.php/tax-savings/tax-reduct...
1) With the tax changes going down, the benefit this year would be greater than any future year
2) with the changes increasing the standard deduction and limiting the SALT deduction, even if I would itemize in the future, it be less valuable.
i.e. it's just for billionaires (or even millionaires)