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--:-- Sean Rameswaram: Welcome to Today Explained. I'm Sean Rameswaram.
--:-- Sean Rameswaram: 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, but bequeath it to one particular cause, the climate.
--:-- Sean Rameswaram: It's not going to be owned by a trust and a group of non-profit organizations, which will then use all the profits not reinvested into the business to protect the planet. On Today Explained, we're going to try and figure out if this was philanthropy, tax avoidance, or a cunning combination of the two.
--:-- Sean Rameswaram: 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.
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--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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 Ivan dies. He's 83 years old now.
--:-- Sean Rameswaram: The company was still entirely held by the four members of the family, Ivan, his wife Melinda, and their two children. And they needed to figure out what was going to happen to the company.
--:-- Sean Rameswaram: 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 non-profit. using a SPAC, and they were really short on any good options that satisfied their key requirements, as they described them.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: They landed on this most unusual structure where they have donated 2% of the company to a trust, that's the voting shares, and the other 98% of the company, the common shares, to a 501c4 nonprofit.
--:-- Sean Rameswaram: 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 Venturic, 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.
--:-- Sean Rameswaram: So 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: And it really got started when Yvon Chouinard, who was what he called a 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.
--:-- Sean Rameswaram: 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 scaling Half Dome and El Capitan.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: That led them to a small rock climbing business where they're making that equipment. And in time, that turned into Patagonia, the company.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: But when you say you know this guy didn't really want to really be in this kind of business how does it end up happening? I don't understand. How do you end up producing essentially trash and essentially more carbon when you're, you know, essentially a climate activist who doesn't want to damage rocks?
--:-- Sean Rameswaram: Yeah, this is the central dilemma that he and his closest advisors have wrestled with. I've spent years and years talking to them. And these aren't the kind of conversations I have with most other CEOs.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: Patagonia was 100% held by the four members of the Chouinard family, Yvonne, 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: Now that the stock is in those two companies, the trust essentially, as the owner of the voting shares, is going to serve as an additional sort of board overseeing the corporation itself, which remains a private for-profit corporation based in California.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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 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.
--:-- Sean Rameswaram: Is that right? 100% right. Let's talk about the conversations people are having about whether this is just the most, you know, benevolent giveaway in the history of American business, or if this is another way of avoiding paying taxes.
--:-- Sean Rameswaram: 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?
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: I wonder what the Chouinard parents make of their kids' belief that they themselves are a failure of American policy.
--:-- Sean Rameswaram: I think they're proud of it. I think that's why they gave it away. This family is sort of one of one as far as I've encountered them in my many years of business reporting.
--:-- Sean Rameswaram: They really have a strong aversion to excessive material wealth. Like they don't want jets and boats and nice houses everywhere.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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
--:-- Sean Rameswaram: You know the children Fletcher and Claire effectively renounced their claims to billions in inheritance.
--:-- Sean Rameswaram: My grandpa gave my inheritance to Greenpeace. And that, you know, by just about any measure, I think is pretty unique.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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 Chouinard, who's, again, one of the, he's their only son, who's in his 40s and with his sister Claire, works at the company.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: 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.
--:-- Sean Rameswaram: You can find the news David Gellis broke about Patagonia a few days ago over at the Times of New York.
--:-- Sean Rameswaram: 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.
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--:-- Sean Rameswaram: That's strawberry.me slash unstuck. My grandpa gave my inheritance to me. Today Explained, Sean Ramos from here with Daniel Hemel.
--:-- Daniel Hemel: I'm a professor at New York University School of Law. Great. And what do you focus on over there at NYU?
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: He's managing to give away $3 billion while paying $17 million in gift tax. normally if you gave away three billion dollars you would pay 1.2 billion dollars 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
--:-- Daniel Hemel: I see so if you were to give away three billion dollars very relatable this would be the most ideal way to do it without having to pay an insane amount of tax
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: The Gates Foundation is a 501c3 organization. It is a particular type of 501c3 organization called a private foundation. So how does this differ?
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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 percent of Microsoft stock or it owned more than 20 percent of Berkshire Hathaway stock
--:-- Daniel Hemel: Lawyers are making sure that that does not happen They would be hit with an excise tax that would ultimately force them to divest
--:-- Daniel Hemel: So the big distinction here with the Patagonia people is that they're giving away their fortune while retaining control of their company.
--:-- Daniel Hemel: I asked Daniel if they deserved any extra credit for that. I give extra credit to the Buffetts and the Gateses and the Chouinards.
--:-- Daniel Hemel: Huh. they're giving away their wealth to good causes. There are different good causes. The Chouinards are trying to save the planet from climate change. The Gates Foundation is trying to eradicate malaria.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: And we might think that that's OK in the Chouinards case and the Gates's case and Warren Buffett's case because they're doing really, really good things with their money.
--:-- Daniel Hemel: 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 Gates's and the Buffett's.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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 could do that.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: You can use the tax advantages of Section 501c4 status for good or evil. The Chouinards are using it for really, really, really good.
--:-- Daniel Hemel: 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?
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: And the 501c4 can then spend on political campaigns. And as long as the political campaign expenditures are less than 50% of the total budget of the 501c4, then they're fine.
--:-- Daniel Hemel: So if you're an environmentalist out there, this is at once cause for celebration, as well 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: 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.
--:-- Daniel Hemel: It's something that we probably ought to fix. But we're not going to die if we don't. Sean Rameswaram: Our show today was brought to you by Victoria Chamberlain, Fox. She had help from Laura Bullard and Paul Mounsey. It's Today Explained. Thank you.
