Patagonia Billionaire Commits Company Stock to Trust/Nonprofit

Sept. 15, 2022

The NYTimes published an article yesterday describing how Yvon Chouinard and his family have transferred all ownership of Patagonia, the company they own to a Trust and to a nonprofit organization that is organized and operated as a social welfare organization exempt from tax under section 501(c)(4) of the Internal Revenue Code. The intent is described as "to combat climate change and protect undeveloped land around the globe."

Apparently, the family transferred two percent of shares to the Patagonia Purpose Trust, controlled by the family while they transferred 98 percent to an organization called Holdfast Collective that the story states is organized as a social welfare organization. 

I sure like conservation efforts, but have concerns about the way the NYTimes seems to treat this contribution less critically than it did a recent one by Barre Seid. It even compares the two. In that process, the author makes a number of claims that are off or sometimes wrong, at least in implication.

For instance, from the article: "Because the Holdfast Collective is a 501(c)(4), which allows it to make unlimited political contributions, the family received no tax benefit for its donation." They later compare the contribution by Barre Seid to a 501(c)(4) as well and claim the same.

It is incorrect that there is no tax benefit and it is also wrong to say that a section 501(c)(4) can make unlimited political contributions.

First, a clear tax benefit is that there is no gift tax owed on the transfer to a social welfare organization. The article properly noted that there was such a gift tax paid on the transfer to the family trust. Second, just like in Barre Seid, the transfer does not trigger a gain for income tax purposes on the contribution of highly appreciated assets - the Patagonia stock in this case. We don't know that appreciation, but given this is the founder, it is likely that the realized gain that no tax is paid upon here is large. Point is both Barre Seid and Chouinard obtained tax benefits. 

Second, while it is true that a social welfare organization is not prohibited from intervening in a political campaign as tax law prohibits of a charity, such activity does not further a social welfare purpose. The article seems to suggest that Holdfast could only support political campaigns, but it could not. It must engage primarily in social welfare activity. It is possible that the reporter was using that term loosely and intending to include lobbying within the conception of "political contributions". A social welfare organization can spend 100 percent on lobbying as long as that lobbying furthers its social welfare purpose.

Also, posting the breathless comments of the person who helped Chouinard set the transfer in motion uncritically is below what I would expect from the NYTimes. See for instance: "“There was a meaningful cost to them doing it, but it was a cost they were willing to bear to ensure that this company stays true to their principles,” said Dan Mosley, a partner at BDT & Co., a merchant bank that works with ultrawealthy individuals including Warren Buffett, and who helped Patagonia design the new structure. “And they didn’t get a charitable deduction for it. There is no tax benefit here whatsoever.” 

Again, that last statement is just not true.

It appears the difference that the reporter may be referring to between Seid and Chouinard is that in Seid, (1) Seid did not give all his fortune and (2) immediately upon the transfer of stock in Seid the social welfare organization sold the stock; Chouinard no longer personally holds Patagonia stock and the social welfare organization in this case is going to continue to hold the stock of Patgonia rather than selling it off. 

The difficulty in seeing the tax benefit here may be in that essential fact. It may be that some assume that as long as you haven't sold stock in some cash transaction there is no tax due. But that is not how things work. Any transfer of stock for any value can trigger tax. In fact, had Mr. Chouinard transferred the stock to a section 527 political organization, under section 84 of the Code, it would have had to pay tax on the difference between his basis and the stock's current FMV.  Many have argued that section 84 ought to be extended to contributions of appreciated assets to social welfare organizations. 

I think the case of the Chouinards suggests that section 84 should be so extended to a social welfare organization. Though Chouinard gave up a charitable contribution deduction, he also gains lots of ability to continue to control the use of that money as the article itself acknowledges. At the same time, he faces no gift tax and any sales of the stock will go without taxation. While there are some guard rails, they simply are nowhere near what would have happened had he transferred it to a charitable private foundation and face the rules under 501(c)(3) and 4940-4946. Thus, he can use these dollars earned at the nonprofit level tax free to accomplish purposes he and his family want to accomplish without any charitable limitations, including as the article notes political purposes. Note that Patagonia still is a for profit corporation that should still be paying tax at the corporate level.

Philip Hackney