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Comment by andrewla | Hacker News Reader

This article makes my head hurt, as do so many discussions of charitable giving. The only reason to give to charity is to benefit that charity.

Yes, donors get a deduction for charitable giving. But they are ALWAYS better off (in terms of money received in their bank account) by NOT GIVING TO CHARITY. There is no way to give money to charity in such a way that you end up with more money than if you had not given to charity.

The article points out that there can be some hedging; the assets donated can be managed and management fees paid to a manager before liquidation. And the particulars of the valuations mean that they can sometimes get a larger deduction than if they sold the asset and then donated the proceeds to charity. And there are loopholes that allow them to claim a larger deduction than the maximum deduction allowed in the tax code.

But no matter what, if they just sold the damn asset and kept the money, they would have more money at the end of the day than they would having gone through this rigmarole.

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This is not true for assets that change in value and illiquid/non-marketable assets.

Example:

Rich person buys asset for $10m. 3 years later gets it appraised for $75m, knowing full well that no one would actually buy it for that.

Rich person then donates the '$75m' asset to charity. Rich person made more money via charity rather than trying to sell the asset for $75m.

This is a very common strategy.

That is the dream.

But remember that the IRS doesnt care much about the 90%. They DO care about the 0.1%.

Doing something like that is a high risk way of getting audited.

There was just an article about how the IRS is doing fewer audits in recent years due to lack of resources and political cover.

Propublica: After Budget Cuts, the IRS’ Work Against Tax Cheats Is Facing “Collapse”

https://www.propublica.org/article/after-budget-cuts-the-irs...

But it's very hard to prove such fraud. If you artificially pump the value of an artist by a few well placed public auctions - the art might have been bought by a front man for the owner, then the IRS doesn't have a leg to stand on, as a "market value" for the artist has been established (my mother worked on auctions for a time and there were a lot of shady schemes to pump up value of collectibles).

The 0.1 have access to the very best tax advisors money can buy (and probably some IRS insider info as well).

Its not easy going after the super rich. They can, and do, hire the best and brightest.

Getting audited is bad, why? The point is: can the IRS make their case and prove that whatever behavior by a taxpayer is not actually sound and proper?

If you make a seemingly reasonable decision, even with an ultimate (very) beneficial tax outcome, there is not much that can be challenged if no laws have been broken.

Add to that the army of lawyers that on meaningful cases will keep pushing things out forever, and you should have an understanding as to why tax authorities around the world do not like to challenge the very wealthy that much. They often also control companies and assets that employ people, which can be used as leverage in negotiations.

But that's just fraud.

Very hard to prove fraud for the IRS, I guess. Nobody's saying these rich people are behaving ethically.

Is this something limited to art? What markets commonly have 7.5 times growth in 3 years? Also, it seems that getting an appraisal at a value that nobody would pay seems off to me. What is the appraiser basing the valuation off of if not other recent sales?

Not limited to art. It's easy to get a trusted appraiser for the wealthy. It is very difficult for the IRS to challenge.

Examples other than art: Company shares, real estate, time in certain contexts.

Edit: I'd like to point out GFischer's excellent summary on this https://news.ycombinator.com/item?id=18130720

Computing too. Epic Games decided to make certain assets for the Paragon game free for use (with a black-box valuation), and it wouldn't be surprising if companies like google put a valuation on open source software that they released and took a deduction.

https://www.unrealengine.com/en-US/blog/epic-games-releases-...

If you ask Trump, real estate

Not my experience with donating a car.

IRS rules are you don't get an "appraised" (or blue book) value for the car, you get whatever the charity is able to sell the car for or $500 (whichever is more).

The only time you might get the blue book value is when the charity is able to use the donation as is for itself (i.e. donate a car to meals on wheels and their volunteer uses the car to deliver the meals).

I think a charity would have a hard time justifying an "art" donation as something they are using as is.

your problem is being poor.

if you had opted to be born rich, your friend's charity would have bought your car over the appraised value and you would have made a profit! all with tax free dollars all around.

There are specific IRS rules for vehicles. I imagine that's because they depreciate over time.

They can always say they use the art as decoration for charity events if they need a "use as is" reason for why they accepted the excessive valuation.

The IRS made specific rules for vehicles because of a massive spate of “cars for xxx” charity donation scams. Basically, you could donate a junker car, the charity (more properly, the charity’s contract car donation service, a few companies did this for a large number of sponsor charities) would get you a massively padded appraisal, and then would crush the car and give the charity $50. You got a fat tax write-off, the charity got $50, and the service got the scrap value of the car, minus $50.

This is indeed a very common strategy. It is also very commonly caught and detected, and doing so is straightforward. At some point the asset get liquidated. If the appraisal was done in good faith, then the taxpayer has to pay the back taxes without penalties or prejudice. If the appraisal was deliberately manipulated, then there is a strong possibility of criminal charges and fines for evasion.

If the article genuinely depreciated in value, then the burden falls on the taxpayer to prove this, and in illiquid markets this is very difficult to establish.

The GOP already took care of that for them:

I.R.S. Tax Fraud Cases Plummet After Budget Cuts https://news.ycombinator.com/item?id=18115729

The rich got richer and suffocated IRS from being able to touch their $$$$

Something something we are all equal but some are more equal than others.

Look at the charts in your own link, spanning 2007-17. Audit rates were increasing under GWB, then plummeted over the course of the Obama administration into 2017.

The Republican congress got serious about attacking the IRS after the fake IRS Tea Party scandal.

Fake scandal? No, that's re-writing history. Obama suggested the IRS target his enemies, mostly conservative groups, and the IRS did exactly that. The only thing fake about it is the news reports calling the scandal "fake."

Do you have sources on Obama suggesting that?

Otherwise it's just a very baseless claim about an otherwise well documented problem about a few IRS bureaucrats. ( https://en.wikipedia.org/wiki/IRS_targeting_controversy )

No, I don't. I should have said Obama Administration, because I don't know from where the order came. That's a good call on your part. I'll see if I can edit. Edit: no I can't edit that post. Obama himself may be guilty only of not placing the best people at the IRS.

I argue we should know more about this but don't because "oh, it's fake." ... And because of the deleted evidence.

Obama appointees, yes, thanks to discovery pursued by Judicial Watch:

http://www.breitbart.com/irs/2017/03/13/fitton-obama-irs-sca...

Look at how the funds requested by Obama got denied by Congress again and again.

The decrease started after the Democrats took sole control of Congress in January 2007 and accelerated while they were still in total control of Congress and the Presidency.

Why bother getting money back out of charities ? What matters about money is not who owns it but who controls it. As long as the same person has control of the charity, what's the problem ?

(and that control is there or they would never be able to sell that illiquit painting)

Using art as an example of an illiquid market, a piece may be valued at an amount that cannot be realized for 5 years or more, but the current holder just does not want to hold it for that long. The theoretical value does not change even if you buy it for less than that.

So charities can and do hold art pieces for years, then sell them at auctions when they know a good buyer is available and interested in benefiting the charity.

It may even sell for higher than appraisal just because of competition for the piece, or competition to look as of you are giving the most to charity. After all, no one goes to charity auctions for a good deal.

> gets it appraised for $75m, knowing full well that no one would actually buy it for that

This is a very good way to trigger an IRS audit. Contrary to popular perception, those investigators weren't born yesterday.

> This is a very common strategy.

You are saying this based on what data? Are you a CPA or a tax planner?

Donors are not always better off not giving to charity. There are many ways to corrupt the "charity" by designating it for purposes that solely benefit the donor or their tribe, in which case the "charity" simply ends up being a vehicle used to obtain a tax subsidy (the taxes not paid by the donor) for the donor's causes, which may not benefit society.

A 501(c)(3) that uses tax-deductible donations for commercial purposes is illegally violating its charter and is subject to enforcement action by the IRS.

Note that a 501(c)(3) non-profit charity is different from 501(c)(6) non-profit business league. Donations to a 501(c)(6) are not tax-deductible, so how they are spent is not restricted -- and thus 501(c)(6) organizations are more subject to influence by their donors.

The angle may ideological rather than commercial.

When there's no enforcement, the rules don't matter.

A particularly timely example would be to look at what Donald Trump's 501c3 has been up to over the last several years.

Donor advised funds don't have a requirement on any cash outflows and charitable outcomes at any particular time, just that the funds eventually have to be allocated to charitable causes.

They can also pay management fees on their capital.

You can own the investment fund that is managing its capital. You can then bleed money out through those management fees while only paying capital gains on money when you take a specific amount out as carried interest, avoiding the majority of your capital gains liability on most transactions with most of your capital.

I forget where I originally heard this from, but they claimed to have this setup and claimed it was common, and I have since ran it by multiple CPAs and have not yet gotten back an argument for specifically how this would be illegal.

I work with lots of donors and their DAFs. Most people who use DAFs (from my experience) are just trying to smooth out their charitable giving so that they don't have to pay taxes during windfall years. They want all the money to go to charity but don't want to donate a huge amount all at once, especially given that many smaller charities are not capable of absorbing/utilizing windfall amounts, or they want to do research on charities before donating.

I don’t believe that you, as the donor, could maintain control of the DAF - in other words, contributing to a fund from which you derived management fees.

I have never heard of this being done, most DAF’s are run by independent foundations or by special wings of investment funds.

So, it’s not that the donors are getting kickbacks in the form of management fees. It’s simply that people are upset that money is going into these funds and isn’t instantly available to charities. Never mind that many large charities like hospitals and universities run their own endowments that invest contributions.

You answered the point yourself: some of those "charities" are just tax loopholes.

Especially those related to art: there's a loophole where the deduction is exponentially higher than the value of the donated art (on the article it's spelled out: If instead that asset is contributed to a DAF, an appraiser determines its fair market value before it’s donated. That yields a bigger deduction,), and even worse, the donor doesn't lose access to art, since he donates it to his private "museum" that's only open a few times a month or a year.

https://www.nytimes.com/2015/01/11/business/art-collectors-g...

http://law.siu.edu/_common/documents/law-journal/articles-20...

And, as the article says, * their financial advisers may be allowed to direct how the money is invested and earn management fees.* , so they can still pump money into the companies they need to and extract wealth (very useful when pumping a private equity debt-laden corporation).

And that's without getting started on how they have access to all the "charity's" assets, so they can use buildings, vehicles, even private jets on the "charity's" dime - see Ingvar Kamprad and IKEA:

https://www.fastcompany.com/3035734/ikea-is-a-nonprofit-and-...

So I don't agree that they're always better off not giving to charity. There are some legitimate charities, but there are also a lot of tax loophole charities.

In your zeal to make a political point, you have selectively quoted from the article and the journal note. For starters, while a valuation firm can appraise art for more than the taxpayer acquired it, that valuation is subject to audit and the IRS can (and frequently does) disagree. As the deduction is a % of the value of the art donated, the deduction could never be higher than the value of the art, let alone "exponentially."

Second, while private museums are a thing, the rules that a private museum must satisfy to qualify for non-profit status are fairly rigorous, and the scenario you describe would not qualify. Thus, a "donation" to the "museum" in your hypothetical would not yield a deduction. A donation to a DAF that loaned the artwork to that museum would likely violate self-dealing rules and lead to various sanctions, including potentially prison.

IKEA isn't a US charity, so none of the rules we're discussing apply.

Well, the New York times itself made the point about private museums.

About the valuation, as I mentioned elsewhere, my mother used to work on collectibles auctions, and it is a VERY opaque world, with several ways to inflate price - using frontmen to buy other pieces by the same artist would be one way.

I'm not a 0.1% and I'm not even from the U.S. :) , I just wanted to point out that in my experience such loopholes are exploited. In my country we get examples of charities being subverted very often. I do hope most charities are indeed that, charities.

Let's say you're a wealthy individual who loves the outdoors. You could donate or start a land trust that let's you and your friends have exclusive access to a natural area. You could also write the donation of your taxes.

And....how is that a bad thing? If that money goes towards creating, maintaining and protecting natural land in its original state, then how is it bad?

because you have just bought yourself a private park at a heavy discount because it is for "charity". Yet it is for your own exclusive use.

Honestly it is a bit of a stretch to call that a bad outcome for anyone. It seems pretty obvious that in this example there will be a lot of benefit to society in a generation or two. The preservation benefits of the local wildlife alone sound like a win.

The tax deduction seems pretty reasonable for giving up control of a large chunk of land. On the one hand, maybe our hypothetical wealthy person get special access. On the other hand, they have given up the right to change their mind and have the land logged and then strip-mined.

The giving-up-of-an-economic-resource aspect is significant enough that a reasonable government could compensate the individual for it, the long term benefits seem to be present and our wealthy friend has committed himself to a course of action.

A potential benefit being that it is preserved for the future and public funds are not used to preserve it. Yes, in the short term, someone gets a tax incentive. In the long term, that land is preserved.

But if the alternative is no park at all, then surely an outcome where someone spends their own money to protect some land is again, a good thing.

you’re arguing from imagination

They're giving a hypothetical example of when "The only reason to give to charity is to benefit that charity" would not be true. In this situation, the reason to donate is to buy yourself a private park and get a tax break off of it.

> start a land trust that let's you and your friends have exclusive access

One of the IRS requirements for land trust is that it has a public benefit.

I am not a tax lawyer, but public benefit doesn't just have to mean it's open for the public to hike through. I would imagine one could argue it's acting as a wildlife preserve, protecting views, etc. Even if the IRS came back and said the public must be granted access one could argue that they need to make improvements to the park to make it suitable for public use, and then drag their feet making said improvements. Once the improvements have actually been done they can do things like have the park only open weekdays 10am-4pm, charge for hiking permits, etc.

This older article suggests that while all of such things are possible, they attract higher level of interest from the IRS

https://www.journalofaccountancy.com/issues/2011/nov/2010360...

"From 2003 through 2007 approximately 3,000 tax returns per year contained a charitable deduction for donation of a qualified conservation contribution. During this time and since, the IRS has continued to scrutinize deductions for contributions of conservation easements, often challenging them on issues including the quality of the appraiser and/or appraisal, the appraisal technique employed, failure to comply with substantiation requirements or protection of the conservation purpose. Tax practitioners need to be aware of the rules and procedures to successfully support these transactions and their tax treatment. They must be able to select a qualified appraiser and assess an appraisal for compliance with procedural and substantiation requirements. Then they must be able to structure and document these transactions appropriately and correctly calculate the deduction."

Yep, Propublica had an amazing piece on this specific thing:

https://www.propublica.org/article/conservation-easements-th...

Sort of. But considering that they are diverting a ton of tax revenue into charities, and the fact hat being a large donor to various charities and endowments can create large status and influence gains, especially for their legacy heirs, I think it's completely fair to ask whether this is truly charity or rich people setting themselves, their families, and their pet causes to be better off in the future instead of paying their fair share of taxes that could be used in a more direct way for the betterment of all in society (I know that's a contentious statement given our current government/politics, but we shouldn't write policy to allow diverting taxes for personal gain just because the government can be corrupt/inefficient)

> But no matter what, if they just sold the damn asset and kept the money, they would have more money at the end of the day than they would having gone through this rigmarole.

Yes, that's true, but that ignores the personal benefits derived from giving to charity. (In theory, "personal benefit" portion can't be deducted - in reality, it can be).

For instance, in the highest tax bracket in CA, donating $0 basis stock could result in your taxes being reduced by ~80% of the fair market value; i.e. you can donate $X by only paying 20% of X. As long as you derive more than 20% personal benefit from the charitable gift (and that's a low enough threshold it isn't that noticeable), giving to charity might beat selling that stock.

The highest tax bracket in CA is nowhere near 80%. More like 50% (40% federal + 10% state). And appreciated stock held long-term is taxed at the Federal cap gains rate of 20%, so the max is closer to 30%.

Highest bracket for ordinary investment income is 54.1%. 37% federal income, 13.3% state, 3.8% federal net investment.

California uses same tax rate for long term cap gains. So highest long term rate is 37% (20% federal, 13.3% California, 3.8% net investment).

If you sell and keep proceeds of $0 basis stock, you get $0.63 per $1.

If you donate $1 of said stock, you get up to a $0.54 tax deduction.

In this extreme example, there's only a 16% gain by selling vs donating.

I get what you are saying, but if the charity is for a thing that you want to see grow then you are essentially spending money on yourself. These people probably have so much money that funding a new public building in the spot of their choosing could be like buying a new car.

> But they are ALWAYS better off (in terms of money received in their bank account) by NOT GIVING TO CHARITY. There is no way to give money to charity in such a way that you end up with more money than if you had not given to charity.

No not necessarily, the charity's purpose itself can be to perpetuate and buoy a particular asset. It can be to develop the market for the asset.

Lets say you own a housing community and benefit from the demand and price of that housing community. You can donate cash you have, borrowed cash, an underdeveloped property, a whole house, or even shares of the housing community project.

In all of these circumstances you get a tax deduction, and yes that is moved off of your balance sheet. The charity could be formed for the purpose of building out the housing community and now it is funded and can do whatever necessary to make your housing community attractive, raising the value of all the rest of your assets. The charity isn't trying to make money (as revenues) so its doesn't encroach on commercial purposes.

As the charity spends it gets no tax deductions aside from its exemption to taxes in general. But your benefit is still long term capital gains. Therefore when you are an individual, the benefit isn't that clear because couldn't you just get the deductions from your own expensable efforts? Typically you wouldn't be the only entity donating to this charity. Other people in your industry would be using it for the same purpose, letting it be an autonomous entity fulfilling its narrow purpose. So then the benefit becomes more clear.

There's soft power gained by effective and selective charitable giving. Donating to specific major charities and organizations that operate at a metropolitan level can provide access and influence with other organizations and donors that can't be bought by any other avenue.

Dollars and cents, you're absolutely right. But at a certain point, money isn't that valuable to the wealthy.

> There is no way to give money to charity in such a way that you end up with more money than if you had not given to charity

You note that the particulars of valuations can allow people to claim a larger deduction than if they sold the asset and donated the proceeds. But that's precisely the point. If you have a $10 million tax bill, and you're looking to keep as much of that $10 million as possible, then donating an asset to charity with an optimistic valuation puts more money in your pocket compared to selling it for actual market value (especially since you would pay further taxes on the sale). The fact that you never see any of the money, because you took it as a deduction instead of a check, is irrelevant. At the end of the day, after your tax bill is settled, you have more money in the bank compared to selling, and that's all that matters.

> The only reason to give to charity is to benefit that charity.

It also denies money from the government financed programs which you may not agree with, whilst allowing you to get your name on a building.

The choice of how to distribute your tax outgoings is a simply a terrible idea.

> Yes, donors get a deduction for charitable giving. But they are ALWAYS better off (in terms of money received in their bank account) by NOT GIVING TO CHARITY.

If that was actually true, giving to charity would be an aberration; in fact, giving to charity is done because it is seen to be advancing the giver’s interests, meaning they are, from an experienced utility standpoint (the only meaningful one), better off, not worse.

In some country, there is a cap where if you have more than X wealth/income, it will bump your tax rates by several percent. It use to be the case in France.

With those kind of "for the super rich" taxes, it can be (depending on the implementation) more interesting to give enough of your wealth to charity to be under the cap.

"On the night that he won the Palm Tree Award for his philanthropy, Trump may have actually made money. The gala was held at his Mar-a-Lago Club in Palm Beach, and the police foundation paid to rent the room. It’s unclear how much was paid in 2010, but the police foundation reported in its tax filings that it rented Mar-a-Lago in 2014 for $276,463."

https://www.washingtonpost.com/politics/how-donald-trump-ret...

That doesn't really relate to donating. It's more of a lucky "coincidence". Trump owned the building and he rented it to people to host some party, that's where his profit came from.

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