Today, Explained - Is Patagonia fleecing the IRS?

Episode Date: September 20, 2022

The billionaire founder of Patagonia is giving away his company to fight climate change. He’s also getting a giant tax break. This episode was produced by Victoria Chamberlin, fact-checked by Laura Bullard, engineered by Paul Robert Mounsey, and edited by Sean Rameswaram, who also hosted. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Maybe you saw the news a few days ago that the owner of Patagonia was going to give away his fortune. The stunning announcement from the founder of Patagonia, sharing that he's giving away, giving away the $3 billion company. Not only just give it away, give it away, give it away now, but bequeath it to one particular cause, the climate. It's not gonna be owned by a trust and a group of nonprofit organizations, which will then use all the profits not reinvested into the business to protect the planet. On Today Explained, we're gonna try and figure out if this was philanthropy, tax avoidance, or a cunning combination of the two.

The way I've been thinking about it is it might be both things at the same time. I don't want the fact that they are potentially receiving a big tax advantage to necessarily detract from the reality of what they're doing, which is also pretty radical. This NFL season, get in on all the hard-hitting action with FanDuel, North America's number one sportsbook. You can bet on anything from money lines to spreads and player props, or combine your bets in a same-game parlay for a shot at an even bigger payout.

Plus, with super-simple live betting, lightning-fast bet settlement, and instant withdrawals, FanDuel makes betting on the NFL easier than ever before. So make the most of this football season and download FanDuel today. 19-plus and physically located in Ontario. Gambling problem? Call 1-866-531-2600 or visit connectsontario.ca. Do you now or have you ever owned any clothing from Patagonia? I do own some Patagonia clothing, but not Patagonia stock because it's a privately

held company. David Gellis writes about the climate for the New York Times, but he also writes about Patagonia, the company. You know, I actually have known the Chouinard family through my reporting and known the company for almost 10 years now. David broke some very big news about Patagonia last week. I would sort of start with the conundrum that the Chouinard family and the board were wrestling with, which is what happens to the company after Yvonne dies. He's 83 years old now. The company was still entirely held by the four members of the family, Yvonne, his wife Melinda, and their two children, and they needed to figure out what was going to happen to the company.

They spent years exhausting all the different options that you could imagine, selling the company to a values-aligned buyer, taking it public, making it employee-owned, turning it into a nonprofit, using a SPAC, and they were really short on any good options that satisfied their key requirements as they described them, which was to really ensure that the purpose of the company not be lost, that it could still operate with the sort of same ethos

that it has been for so long. And also that the profits from the company not go to just benefit their family, but were really put to work preserving the natural environment and trying to protect the world, the land, and the climate, which is the thing that they, for decades, have cared most about. You know, when the scientists say that we're going to lose all the big animals first, we're a big animal. Why shouldn't we be worried about ourselves like that? It's not that nature's over

there and we're over here, but we're all in it together. They landed on this most unusual structure where they have donated 2% of the company to a trust, that's the voting chairs, and the other 98% of the company, the common chairs, to a 501c4 nonprofit. And the trust is now essentially a new governing board for the company and will instruct the corporation, which remains a private for-profit company based in Venture California, that's going to still make all the Patagonia stuff we know, to give all of its profits, $100 million a year or more, to this new 501c4, which will then use that money to fight climate change and protect the natural world. You write in your article about how this feels sort of aligned with the way this company's been run from the word go. Tell us about the origins of this

company. Let's take a step back and just talk about where Patagonia came from. Not Patagonia. Not Patagonia at all. I mean, this is a California company. And it really got started when Yvon Chouinard, who was what he called self-described dirtbag rock climber in the 1960s. And it takes the juvenile delinquent to have the creativity and the will to go against everything that people say you have to do. Really living out of his car, eating, no joke, tins of cat food that were damaged for sustenance. He was truly broke. All he cared about was rock climbing. And he was part of this pioneering group of guys that started like scaling Half Dome and El Capitan. And what happened was he realized that the gear they were using for their rock climbing was actually damaging the rock wall. And so he

started trying to make better gear that was less destructive for the rocks that they kept climbing. That led them to a small rock climbing business where they're making that equipment. And in time, that turned into Patagonia the company. Now, the whole time, this guy, Ivan, he has no interest in being a businessman. But the business itself, Patagonia, just sort of takes on a life of its own and gets going. So they start giving away 1% of their profits to nonprofits pretty much from the get-go. Before it's in vogue, they start using organic cotton. Melinda, his wife, says, you can run your company, but we are going to have childcare on-site for all workers because we need to let people take care of their families if

they're going to work for us. So over and over, this company is going against the grain of what we think of as the way business is supposed to operate. I don't want to be cynical here because the childcare thing sounds great. But when you say, you know, this guy didn't want to really be in this kind of business, how does it end up happening? I don't understand. producing essentially trash and essentially more carbon when you're, you know, essentially a climate activist who doesn't want to damage rocks. Yeah, this is the central dilemma that he and his closest advisors have wrestled with. I've spent years and years talking to him, and these aren't the kind of conversations I have with most other CEOs, but the degree to which they are truly sort

of self-reflective and truly uncomfortable with the tension you just described, I think is what makes the company so unique. I've had several times in my life when I woke up and I realized I was part of the problem and that I should do something about that. And I don't think they're a perfect company by any measure, and no doubt about it. They make lots of waste. What makes them unusual is the fact that they're willing to have that conversation, right? They have tried to tell their consumers to buy less of their stuff. You know, you've heard of recycle and reuse, stuff like that. You also have to consider refuse.

Refuse to buy something just because, you know, if you don't need it, don't buy it. And they've actually deliberately slowed the growth of the company and pulled out of certain markets where they felt like their clothing was being used for the wrong purposes and bought by their own sorts of people. And so this tension is exactly what it is. But the reason they keep going is because the Chouinard family individually, and now the company through this elaborate structure, has been using the profits to try to protect undeveloped lands around the world. Okay, so this sort of brings us back to where we started, this immense giveaway of the Chouinard

fortune of the entire company. Tell us again how exactly it's going to work. Patagonia was 100% held by the four members of the Chouinard family, Ivan, Melinda, and his two children. We don't know exactly which family members owned how much stock, but the stock had been distributed to all four of them over the years. Last month, they donated 2% of the shares, the voting stock, to a newly established trust called the Patagonia Purpose Trust. Because they donated stock

to a trust, they expect to pay about $17.5 million on that gift. The other 98% of the company, the common shares, which don't have voting rights, was donated to a newly established 501c4 nonprofit organization called the Holdfast Collective. And because it's a 501c4 and not a 501c3, which is a traditional nonprofit, they were not able to claim a tax deduction against their income, as most people do if you donate to the World Wildlife Fund, for example. Now that the stock is in those two companies, the trust essentially, as the owner of the voting chairs, is going to serve as an additional sort of board overseeing the corporation itself, which remains a private for-profit corporation based in California. But it will instruct the company to distribute all of its excess profits after it pays its bills and

pays its employees and reinvest in the company, which is still about $100 million a year, to distribute that money to this newly established Holdfast Collective, which will then use that money for climate action, largely in the form of preserving lands, picking legal fights over development that they don't want to see, and supporting things like regenerative agriculture. Okay, so that's a lot for people who aren't familiar with corporate finance. But I think essentially what you're saying is the family of four has found a way to essentially give away the entire company while maintaining control of it and creating this incredible fund for a political cause they really care about, the environment. Is that right? 100% right.

Let's talk about the conversations people are having about whether this is just the most benevolent giveaway in the history of American business, or if this is another way of avoiding paying taxes. If the Chouinards had decided to transfer this business in any number of other ways, including selling it, they would have paid way more taxes than the $17.5 million you mentioned, yeah? Yeah, and I think the way I've been thinking about it is it might be both things at the same time. I don't want the fact that they are potentially receiving a big tax advantage to necessarily detract from the reality of what they're doing, which is also pretty radical. But I think it's absolutely important to understand that if they had pursued other paths,

for example, leaving the company to the children entirely, there would have likely been estate taxes there. Again, we don't know exactly how much equity the children have. So it's hard to calculate that exactly. Yeah. You've mentioned the kids a few times, the Chouinard kids. And one thing that stuck out to me in your article, which broke this news, was this nugget you have in there that says that, you know, the kids view all billionaires as policy failures. And this is the kind of thing you hear from the Bernie Sanders of the world, that we shouldn't even have billionaires. And there's no way to become a billionaire without hurting other people. I wonder what the Chouinard parents make of their kids' belief that they themselves are a strong aversion to excessive material wealth. Like they don't want jets and

boats and nice houses everywhere. Yvonne still sort of wears pretty raggedy old clothes, doesn't have a computer or a cell phone and drives a beat up old Subaru. And the children, I don't know exactly how, but also seem to inherit their family's ethos about some of these things. And that was reflected in their agreement, their willingness to essentially forfeit the family fortune. You know, the children, Fletcher and Claire, effectively renounced their claims to billions in inheritance. My grandpa gave my inheritance to Greenpeace. And that, you know, by just about any measure, I think is pretty unique.

And neither of the children, I should add, would speak with me. I asked many times over the course of more than a month. Both of them just adamantly denied. But both of them, at the end of the day, finally sent me brief notes. And if I may, I'll just tell you what Fletcher Chinard, who's again, one of the, he's their only son, who's in his forties and with his sister, Claire,

works at the company. He wrote to me, generational succession is a risky continuity plan for any business. And it does little to assure that the company's values will remain intact into the far future. This, meaning the structure they've created. This is the first truly durable option. It brings a sense of relief for Patagonia, my family, and I'm also just happy to stop talking about death and get back to work. So that's sort of where they're at. I think one of the reasons people are sort of gut checking it and rightly pushing on it hard is because it's so unusual. You know, like I've been covering business for 10 years and most executives, most workers I meet are motivated by the same thing, which is that they want to get ahead. And this family, from the time I've spent with them and

many people who know them well, just operate on a different wavelength. And they've sort of been doing it for 50 years, which makes last week's announcement surprising, but not at all out of keeping with all the signals they've been giving for a half century now. You can find the news David Gellis broke about Patagonia a few days ago over at the Times of New York. This whole giveaway is great, so long as you agree with the politics of the person doing the giving. More on that in a minute on Today Explained. Support for Today Explained comes from Aura. Aura believes that sharing pictures is a great way to keep up with family.

And Aura says it's never been easier thanks to their digital picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an aura frame as a gift, you can personalize it. You can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an aura frame for himself. So setup was super simple. In my case, we were celebrating my grandmother's birthday.

And she's very fortunate. She's got 10 grandkids. And so we wanted to surprise her with the AuraFrame. And because she's a little bit older, it was just easier for us to source all the images together and have them uploaded to the frame itself. And because we're all connected over text message, it was just so easy to send a link to everybody. You can save on the perfect gift by visiting AuraFrames.com to get $35 off Aura's best-selling Carvermat frames with promo code EXPLAINED at checkout. That's A-U-R-A frames.com promo code EXPLAINED. This deal is exclusive to listeners and available just in

time for the holidays. Terms and conditions do apply. My grandpa gave my inheritance to me. Today, Explained, Sean Ramos from here with Daniel Hemel. I'm a professor at New York University School of Law. Great, and what do you focus on over there at NYU? Tax and nonprofit organizations. We reached out to Daniel to better understand Patagonia's taxes because they have some pretty interesting implications for our politics here in the United States. He's managing to give away $3 billion while paying $17 million in gift tax. Normally, if you gave away $3 billion, you would pay $1.2 billion in gift tax. So he's cut his gift tax bill by 98%. And he's also managing to avoid

any income tax on the huge appreciation of his Patagonia stock. I see. So if you were to give away $3 billion, very relatable, this would be the most ideal way to do it without having to pay an insane amount of tax. If you were going to give $3 billion to your daughter or son, you would pay the $1.2 billion in gift tax. We allow you to give to charity without paying gift tax. Before we get to the politics, we asked Daniel how this particular giveaway compares to some other high-profile ones we've seen in recent years,

like Bill and Melinda and their wealthy buddy Warren. The Gates Foundation is a 501c3 organization. It is a particular type of 501c3 organization called a private foundation. So how does this differ? The Chouinards are not getting an income tax deduction for the gift to the 501c4 that they're creating. Warren Buffett and Bill Gates were getting an income tax deduction for their contributions to the Gates Foundation. It didn't really matter to them because they'd already figured out a way to almost zero out their income tax liability. So the Chouinards are giving up that extra benefit.

They're also getting a benefit that the Gates Foundation isn't getting. So the Gates Foundation would run into a big tax problem if it owned more than 20% of Microsoft stock or it owned more than 20% of Berkshire Hathaway stock. Lawyers are making sure that that does not happen. They would be hit with an excise tax that would ultimately force them to divest. So the big distinction here with the Patagonia people is that they're giving away their fortune while retaining control of their company. I asked Daniel if they deserved any extra credit for that. I give extra credit to the Buffetts and the Gateses and the Chouinards.

Huh. They're giving away their wealth to good causes. There are different good causes. The Chouinards are trying to save the planet frominards. They're giving away their wealth to good causes. They're different good causes. The Chouinards are trying to save the planet from climate change. The Gates Foundation is trying to eradicate malaria. I'm not sure which of those two is a better cause, but those would be like number one and number two on my list of really, really, really good causes. That said, they're doing this in a way that minimizes their federal tax liabilities, earning billions of dollars and then directing those billions of dollars themselves without it going through a democratic process. And we might think that that's OK in the Chouinard's case and the Gates's case and Warren Buffett's case because they're doing really, really good things with their money. But we probably don't want to write our tax laws on the assumption that everyone will be as altruistic as the Chouinards and the Gateses and the Buffetts. And this is where the seemingly great philanthropic environmental spending started

to feel less potentially great. These kinds of giveaways can benefit the political causes you hold near and dear to your heart, but also all the other ones. 501c4 doesn't just exempt people who are pursuing causes that I happen to agree with. If you wanted to do the same move, but use your money to advance a deregulatory agenda, then you can do that. And that's basically what Barry Saeed is doing with the money that he got from selling Triplight. Who donated the stock of his entire company, the Triplight Company of Chicago, to Marble Freedom Trust, which turned around and sold it for $1.6 billion. His donation will leave behind a dark money political legacy that could last decades. Or you could use this move to fund organizations like Miss America

that are not making the world a better place or a significantly worse place, but probably don't deserve a huge federal tax subsidy. Tax law allowed the Chouinards to go from wealth of approximately zero to three billion dollars without paying much tax along the way. In our ideal world, he would have paid tax on these gains as they accumulated. The fact that we allow you to amass a lot of wealth without paying taxes also allows Elon Musk to do the same thing and not give his money to charity, but instead use it to fly to space or harass Twitter or whatever he wants to do with it. You can use the tax advantages of Section 501c4 status for good or evil. The Chouinards are using it for really, really, really good. How did the law come to be that you could essentially avoid paying taxes until you were

bowing out or retiring or thinking about the end of your life if you were someone this wealthy? The Obama administration ran into a problem in 2013 where an IRS official admitted that the IRS had been targeting applications for 501c4 status from organizations with Tea Party in their name for extra review. And this led to uproar. That caused Congress to push on the Obama administration to lighten up on regulation of 501c4s. And at the end of 2015, Congress passed a bill called the Protecting Americans Against Tax Hikes Act or the PATH Act, which did a bunch of things to 501c4s, one of which was to streamline the application process. Another was to state that contributions to a 501c4 would be exempt from gift taxes. The Chouinards are sort of side beneficiaries of this tea party, Tempest in a teapot. So now they can give their Patagonia stock to their 501c4. They don't pay gift tax there. The 501c4 can then take out dividends from

Patagonia. They don't pay income tax there. And the 501c4 can then spend on political campaigns. And as long as a reminder that if Peter Thiel retires in a couple of years and wants to give all his money away, he can do the same thing, but perhaps in a way that you won't be so excited about. Peter Thiel's an exceptional case because he's got most of his wealth packed into a Roth IRA. Yes, which we've covered before on the show. He can take it out and buy a private island. He doesn't have to do anything even quasi-charitable in order to get the money out tax-free. Climate change is a threat to the planet,

so we should be happy that the Chouinards are doing this. We also need to clean up our tax code. I spent a lot more of my life thinking about the tax side than the climate side, but I recognize that these are not equivalent problems. Climate change is an existential threat to humanity. The tax loophole for 501c4s is not an existential threat to humanity. It's something that we probably ought to fix, but we're not going to die if we don't. Daniel Hemel, NYU.

Our show today was brought to you by Victoria Chamberlain, Fox. She had help from Laura Bullard and Paul Mounsey. It's today explained.