A Modest Proposal for You (a Billionaire) to Give Your Company to Our 501(c)(4)
Most of our blog posts are for the benefit of nonprofits and the legal and accounting community that serve them. This is not one of those posts.
At this point, if you are not a billionaire*, we ask that you stop reading. No hard feelings — there will be more posts on UBIT, lobbying, and other fun tax-exemption issues for you soon. Come on back then. This is just a very special post for a special audience.
*We try to be as inclusive as possible here at MLC, so if your net worth is not yet over $1B but is at least many millions of dollars and you’re feeling bullish, we welcome you to stick around.
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Are we alone now? Great.
I want to talk to you about a special opportunity we have. Namely, one where you give our 501(c)(4) affiliate the entirety of your company, save yourself hundreds of millions of dollars in taxes, and dominate our political system from the grave in perpetuity. And get yourself fawning and misleading (in your favor!) coverage in major publications.
Sound good? Excellent, let’s continue…
First off, I should acknowledge that I have been a bit skeptical of whether these sort of extremely tax-favored multi-billion dollar gifts to 501(c)(4) organizations are “good for the world” as opposed to “a catalyst to our nation falling into even greater depths of plutocracy.”
But I’ve seen the light; the error of my ways, and so on. It all came to me in a vision – or rather a memory. A memory that our firm has a not-yet-active 501(c)(4) affiliate, MLC Collective Fund, that is equally eligible for one of these gifts.*
*Given my previously expressed opinions and the title and tenor of this post, you may be under the gravely mistaken impression that this post is satirical. I want to be very clear that we really will gladly accept your stock, money, etc. – MLC team members are standing by the phone, waiting for your call. Tote bags await.
You see, when Mr. Seid made his $1.6B gift to a 501(c)(4) run by an archconservative, I was depressed about how the money would be used. When the Chouinards gave away $3B-ish worth of non-voting stock of Patagonia to a 501(c)(4) devoted to climate, I was happy for the cause, but sad for what it said about the state of our tax and political system. And disappointed in other progressives for failing to acknowledge the hypocrisy in condemning our broken system and how it subjects us to the whims of the uber-wealthy when we disagree with the donor’s goals, but then turning around and glorifying the same (yes, legal) tax avoidance as heroism when we agree with them.
BUT I realized what those gifts were both missing: me and the rest of our team getting access to all that money.
So, now that I’ve converted and you, a billionaire, are still reading, let me write out how I picture our conversation going.
Our Conversation:
Understanding What a 501(c)(4) Is
You: Wait, what is MLC Collective?
Me: It is a 501(c)(4) social welfare organization. That means it can do anything a 501(c)(3) can do plus some other stuff that’s sufficiently good for “social welfare” and unlimited lobbying. While it can’t do unlimited political candidate activity, it can do a whole lot of it. (49%? 40%? Don’t worry, with your money, we’ll get to do plenty!). Heard of “dark money” corrupting politics? Yeah, that kind of 501(c)(4).
You: Is that what you set up this organization for?
Me: Not at all. We were going to use it to conduct educational and advocacy activities that our employees cared about. Kind of like an employee-governed fiscal sponsor where we could set aside a large chunk of our firm’s profits for whatever nonprofit projects are employees wanted to work on or support that advance our mission. But that’s all in the past. Now, we’ve met you!
You: So, is it like a trust?
Me: Not quite, though a 501(c)(4) trust is an option for a new organization. MLC Collective, like most 501(c)(4)’s, is a nonprofit corporation, run by a Board (currently appointed by our employees), and the Board appoints officers to run the day-to-day. It is still true that no one owns it and it can only do certain non-profit things. The difference from the ones you usually hear about, is that it is organized for social welfare purposes, not charitable purposes.
You: So, what is “social welfare”?
Me: Who knows!?! Seriously though, it includes all charitable, educational, religious, and scientific activity, plus some other stuff that’s more nebulously good for society as a whole, as opposed to benefitting particular individuals. But it’s pretty broad and a bit vague – in fact, Congress even passed a law preventing the IRS from trying to explain how it intersects with political activity. Are you one of those tech billionaires? If so, you might call the vagueness a feature, not a bug. (If not, let’s just say that many 501(c)(4)s are quite pleased that there is little guidance on the things they are not supposed to do).
You: What else should I know about a social welfare organization?
Me: Having a social welfare organization not only lets us do more stuff. It also lets us deal with a whole lot less regulation. We do not even have to apply for tax-exempt status — we just get to tell the IRS that we are exempt as a 501(c)(4) (though we are working on applying anyway – just to show you how thorough we are). And, even if you end up being our only donor, we do not have to worry about the private foundation rules. Coincidentally, does your last name start with an M? That would make this an easier transition (and save us money on new business cards); but no worries if not, we are flexible.
So, no self-dealing rules (Your kids want a job or want to sell us some stuff? We’re listening.). No excess business holding rules (We can hold your company forever!). No 5% minimum distribution requirement. No 1.39% investment income taxes. Ask anyone who has a private foundation – not dealing with these rules is a big perk.
Also, because we are not a charity (and not incorporated under a statute that requires registration, like a CA nonprofit public benefit corporation), we do not even have to register with the Attorney General, at least in most states. So, we don’t have to talk to them about what we’re doing. And, if you’re feeling bashful, we don’t have to tell the IRS or pretty much anyone else that you gave to us! (If you do campaign stuff, we’ll have to talk a bit more – but that’s a conversation for another day with someone else).
Income Tax Stuff
You: Wow, that seems a lot better than if I gave all this to a 501(c)(3). So I could get a deduction for giving to this?
Me: No, that’s for 501(c)(3)’s. We can’t offer you that. But hey – income taxes are for people who still pay taxes, right? All of the cool billionaires are not paying income taxes – maybe check out what they’re doing. And with how much you’re giving us? Who knows if you could even use all that deduction – it’s complicated. Honestly, I have something even better to offer you in terms of income taxes than a silly deduction.
You: I’m listening.
Me: You know how you acquired the stock in your company for very little? And now it’s worth a lot? Why haven’t you sold some of it to cash in and enjoy your wealth?
You: Well, my accountant says if I do that I have to pay tax on it. But if I wait until I die then all of that untaxed gain goes away. And I can just use the stock to borrow as much money as I want until I die so I get to use the cash anyway. Seems too good to be true honestly.
Me: Doesn’t it? Anyway, that is all correct. But let’s say you’re ready to sell the company to someone else now and you don’t want to wait until you die. Well, if you give it to us and we sell it to someone else, then we have that gain, not you. And the thing about being tax-exempt: we don’t pay ANY tax on that.
You: No taxes – intriguing. So I can give it to you and require you to sell it?
Me: Hold on there. It’s really important that when you give it to us, we are not obligated to sell it to anyone. Otherwise, you pay tax on that gain. (It’s called ‘assignment of income’, let’s save it for our next call).
But look: a good benefactor-benefactee relationship is built on trust. Trust us, we’re not trying to hold onto your company if that’s not what you had in mind here (but if it is…hey, sounds good). And that person you want to sell it to? They seem great. Those terms you had in mind? Wow, what a deal.
You: Got it. So how big of an income tax benefit is this?
Me: Well, let’s say you gave us a modest gift, we’re not greedy… we’ll just call it $1B in stock. And let’s say you acquired that stock at no cost because you founded the company. So let’s say that full $1B is taxable capital gain. Well, if you combine federal and state income tax in a state like California, we could round that to a 42% tax rate. So, if you want to sell the company, you’d only have a mere $580M to play with. Tragic!
Compare that with what we’re offering. After we sell the company, our 501(c)(4) will have a full $1B to play with to carry out your vision. A clear $420M win on income taxes alone!
Transfer Tax Stuff
You: Hmm…but what if I want to give the company to my kids?
Me: I’m sure your kids are great. The children of billionaires are always completely well-adjusted and will no doubt be prudent and shrewd stewards of your wealth. We have all seen Succession.
But there’s a big thing to talk about if you want to do that: estate taxes. If you leave your company to your kids in your will or trust, there’s going to be a 40% estate tax. Try to avoid that by giving during life? Sorry, then there is going to be a 40% gift tax. One way or another, that is $400M going to the government. They might want to spend that money on fixing infrastructure, subsidizing healthcare, rebuilding the social safety net, or clean energy – obviously, we need to avoid all that sort of thing. Give it to us, and plan it right, and the government gets none of it.
You: But someone told me that there is no estate tax deduction for 501(c)(4)’s.
Me: That is true – very impressive knowledge of the intricacies of Internal Revenue Code Section 2055.
It is true that there is no estate tax deduction for gifts to 501(c)(4)’s. That means you do not want to leave assets to a 501(c)(4) in your will or trust. If you die holding those assets, you get taxed.
Critically, those assets also gets taxed even if you give to us IF (and only if) you also retain the right to decide who else will “enjoy or possess” the assets or die with certain control rights. This is all in Code Sections 2036(a)(2) and 2038 – you need to talk to a good estate planner if we are going to get creative on control rights. (Don’t worry, we’re happy to wait a couple of weeks if you need it.)
The good news is that there is a gift tax exception for gifts to 501(c)(4)’s. The gift tax tries to catch the transfers that the estate tax doesn’t. So, if we can avoid the gift tax and complete the gift, while avoiding, those “bad” powers, it won’t be in the estate to get taxed.
So, while there is no estate tax deduction, there are estate tax savings. In our example, you would be going from paying $400M in estate taxes if you die with this company. Compare that to paying no estate taxes on this asset if you die with our nonprofit owning this company. So, we’re up to $420M in income tax savings and another $400M in estate tax savings! Pretty good, right? Anyway, if you want to just go ahead and sign right here…
Control
You: OK. So, can I control your organization?
Me: Hey now… let’s talk about that.
Let’s start with our organization. So right now, we control our 501(c)(4) organization. That works well for us, but it also works well for you. You see, if you controlled our organization, in fact if you were even on our Board as I understand it (*cough* we are not your estate planner *cough*), all of the 501(c)(4) assets would be back in your estate for tax purposes. So you would be paying the 40% tax AND you would have given the assets away. Not ideal, right? So that’s a ‘no’ on controlling our organization if you want to do this right.
Let me reassure you though. We can’t give you control, but we love advice. Especially advice from people who give us billions of dollars. And, go talk to your estate planner, but I’ll just point out that hundreds of billions of dollars are flowing through donor-advised funds on the premise that advice is something different than control (even when that advice is almost always followed and the funds are only used in the manner advised by donors, and the charities talk about them like the donors get to control where the money goes…sorry, that’s another story…).
I’m not saying we are creating a donor-advised fund. We are going to use the funds on the issues you remind us are priorities, but we’ll control it and run the organization. I’m just saying if you have some new ideas about how you think the world should look or what causes or candidates could use some support, let us know. You seem really persuasive!
You: OK. I’m good with someone else running the 501(c)(4) and doing the advocacy and candidate spending. You seem fine. But what about the company? No offense, but I don’t want you making the decisions there.
Me: None taken! It’s a little more complicated but can I recommend that you hire the attorneys who did the structuring for the Patagonia founders?
If you dig in there, you will see that they actually did pay some gift tax. Why? Because not all of the company went to a 501(c)(4). Some of it, specifically voting stock that was stripped of most of its economic value, went to a special kind of trust known as a perpetual purpose trust. This is an irrevocable trust that is not tax-exempt but can have certain purpose restrictions and control provisions locked in. If done right, my guess is you could find a control structure that matches what you want, lock it in for all eternity, and make sure that someone or some group of people who is not us controls your company. All that while our 501(c)(4) holds almost all of the economic value. Because of that, we can start selling the stock and doing the work you want us to do (*cough* under our discretion and control *cough*) without you having to give up the company to third parties. Pretty great, right?
You: You have convinced me. Anything else I should know before making this transfer of my multi-billion-dollar company to your organization, a dormant nonprofit set up by a law firm that is barely a year old?
Me: One or two things. This is just a first conversation and we’ll have a lot to talk about. Stuff like how, we may not have a 5% distribution requirement, but we do need to start spending an amount that is “commensurate in scope” with our assets. So, we’ll want to get a start on dominating the political process with ungodly sums of money if that works for you. And there are some campaign finance rules to understand and rules on excess benefit transactions with insiders. But we’ll get there. Did I mention the hundreds of millions of dollars of tax savings and the power to influence our political system for generations?
You: You sure did. I am completely convinced. *Signs Gift Agreement*.
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I am sure you agree that this is exactly how our conversation would go. I look forward to having it with you.
At this point, it is possible that you might feel some sense of melancholy. Perhaps you are thinking “I’m concerned. If the above tactic became widespread among the wealthiest individuals, wouldn’t that entirely subvert not only our tax system (which is pretty broken to begin with) but also the nonprofit sector as we know it? And wouldn’t there just be an even greater arms race between billionaires on the left and right desperate to cancel each other out? In fact, couldn’t someone who disagrees with me just devote their fortune to undoing the things I care about? And how do traditional charitable organizations, with serious limits on political activity, compete for resources in this environment? And shouldn’t we being paying taxes at some point here? Especially since us billionaires, you know, increasingly have all of the money in the first place? Is it actually good to solve problems through the pet vehicles of billionaires instead of actually just paying taxes and empowering our democratically elected government to do the same? Also, if certain other billionaires continue to pour their money into 501(c)(4)’s on the other side, are we still going to have a democracy to speak of?”
I’ll just say that those seem like great questions. And I might say that, if we’re being honest, a lot of them apply to 501(c)(3) philanthropy, for which there are even more tax benefits and many billions of dollars already present. So you know, if you were giving this to any organization that we did not control, I would probably have serious concerns about the state of our country.
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But, you know, as long as this broken structure is, in this one instance, benefitting the stuff we like, it must be fine. Right?
