A Bleak Glimpse at Dark Money and Alternatives to Philanthropy
Since reading The Lever and ProPublica’s excellent and essential joint piece, by Andrew Perez, Andy Kroll & Justin Elliott this morning, I have been wrestling with the best way to write about Barre Seid’s $1.6B gift to “The Marble Freedom Trust.” The Trust, a 501(c)(4), will be run by Leonard Leo, the co-chair of the Federalist Society who advised on the prior administration’s disfiguration of the judicial branch and is dedicated to various conservative and theocratic causes.
I find the current state of affairs repugnant, and it is brutally depressing to see our country’s reactionary forces so thoroughly financed in perpetuity. So, rather than try to organize a blog post, I will just free-associate…
Wearing my “tax lawyer talking about a tax issue” hat, I will start by saying that this gift perfectly illustrates the potential of 501(c)(4)’s as an alternative to private foundations, which many exempt organization experts have been talking about for a long time.
Ever since Obama’s PATH Act enshrined the gift tax deduction for contributions to 501(c)(4)’s, and with our billionaire class successfully avoiding income tax without needing to make charitable contributions, we have been bracing for a shift from (heavily regulated) private charitable foundations to (very lightly regulated, opaque, and free to run roughshod in terms of political spending) private 501(c)(4)’s. And it has been happening, and on both sides, but largely in the shadows (it’s called “dark money” for a reason). This is just the largest public example we have had to study so far.
Gifts to 501(c)(4) social welfare organizations do not result in an income tax deduction, but they do offer the benefits that uber-wealthy donors typically care about even more: avoiding the income tax on built-in gain of donated assets. To oversimplify:
Sell your $1.6B electronics company —> pay hundreds of millions of income taxes (the article estimates $400M).
Sell Donate your $1.6B electronics company to a 501(c)(4) and have the 501(c)(4) sell it ——> pay hundreds of millions of no income taxes
The article focuses on approximately $400M in income tax savings, but, by giving to a 501(c)(4) instead of keeping the assets in his personal estate, Mr. Seid appears to have just avoided approximately $640M in gift or estate tax. (While subject to myriad planning tools to avoid taxation, assets are generally taxed at a 40% rate for estates or gifts in excess of ~$11.7M).
Once you add up those benefits, I think the article may only understate the tax savings of the gift. I’m not Mr. Seid’s accountant (and certainly not offering to be), but my calculator says that $400M in income tax savings plus over $600M in transfer tax savings equals more than $1B in taxes. Rather than be added to the Treasury and used in democratic fashion, they will be used… however Mr. Seid and Mr. Leo want them to be.
While Mr. Seid could have avoided gift or estate tax with a transfer to a 501(c)(3) foundation, that foundation (1) would pay a 1.39% investment income tax each year (~$20M on the initial sale alone, and additional amounts each year), and (2) be subject to many rules that Mr. Seid and Mr. Leo certainly want to avoid: self-dealing rules, limits on business holdings, 5% spending requirements, transparency as to donations, and, most of all, prohibitions on lobbying or partisan candidate activity. For a donor who wants to weaponize their fortune against civil rights, these are likely frustrating limitations. While I’m sure Mr. Leo could wreak all manner of havoc with $1.6B in a 501(c)(3), securing this level of funding in a 501(c)(4) is particularly disturbing.
But, of course, this isn’t just a tax issue. It’s a policy issue. With its lack of “mark-to-market” taxation, its extension of transfer tax benefits to 501(c)(4)’s, and its refusal to regulate or impose any transparency on those same organizations, our tax system effectively just made a $1B+ grant to Mr. Leo’s vision for the country. Mr. Seid may have donated the $1.6B company, but Congress has made policy choices that prevent the Treasury from claiming the $1B Mr. Seid would otherwise owe.
In other words, we have been forced to foot the majority of the bill for one billionaire’s ideological decision. That is antidemocratic enough on its own and should force us to reconsider how we look at philanthropy. But, this is not just any decision; it is a decision to attack voting rights and the teaching of history, to allow states to force people to give birth against their will, and to continue to reverse the course of American jurisprudence by nearly a century. This movement that many once hoped was only a fleeting resurgence of 19th-century ideals has just used the public’s money to secure its presence in our political conversation for decades to come.
And, at this point, one could and should say something like, “But isn’t the left doing this too?” Absolutely. But, setting the false equivalence aside, does anyone want this cold war? Is there any reason to believe that a country like ours will resemble a democracy after even a few generations of ideological war chests?
Make no mistake that this has already been happening and will continue to happen and accelerate as philanthropists shift their dollars to the battlefields that regulators have abandoned. The decisions it would take to reverse the current state of affairs (if still possible) would be undoubtedly unpopular, particularly among exempt organizations that benefit from the current system. But the last decade or so and stories like today’s have me wondering whether the progressive nonprofit sector needs to consider supporting dramatic reform and fast.
