Patagonia's founder Yvon Chouinard creates a 501(c)4 to give away his money : The Indicator from Planet Money Surf's up with the IRS! Patagonia's founder Yvon Chouinard recently gave his company and billionaire status away. But how he did so entails a complex tale of trusts, exemptions and a whole lot of taxes.

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Patagonia's tax break, explained

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

ADRIAN MA, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Adrian Ma.

PADDY HIRSCH, HOST:

And I'm Paddy Hirsch. Last week, we saw something that we don't see that often in this country - or any country, for that matter. A billionaire gave all of his money away - like, all of it - well, the vast majority of it, anyway.

MA: Maybe we should say former billionaire. Anyway, his name is Yvon Chouinard, owner of the outdoor clothing and equipment retailer Patagonia. Now, it's a private company, so we don't know its exact value, but it is estimated at $3 billion. And because it's private, that makes, or I guess it made, Yvon a billionaire three times over.

HIRSCH: And this is a guy who really hated being called a billionaire. He's always said that all he ever wanted to do was climb and surf. He let people wear what they wanted in the Patagonia office and encouraged them to work flexible hours so that they could go climbing or biking or, I don't know, looking after their kids or whatever. Here he is talking with Guy Raz on the NPR podcast How I Built This.

(SOUNDBITE OF ARCHIVED NPR BROADCAST)

YVON CHOUINARD: I mean, I wrote a book called "Let My People Go Surfing," and it's all about, we have a policy that when the surf comes up, you drop work, and you go surfing. I don't care when you work, as long as the job gets done.

MA: Surf's up, right? Work can wait. That is Yvon. And so the people who followed his career, they weren't that surprised to hear that he rejected billionaire status and gave the company away. What they were surprised about, though, was how he did that.

HIRSCH: Yeah. He used something called a 501(c)(4). Now, this is not a pair of exploding jeans - 501(c)(4). Get it?

MA: Although that is a hot product idea. I think you may want to get a patent.

HIRSCH: (Laughter) The 501(c)(4) is a social welfare organization - kind of like a charity but not really - an entity that has in the past attracted a lot of attention, not all of it positive, for being a conduit for dark money in politics.

MA: So on today's show, we're going to shine a light on the 501(c)(4) - find out what it is, how it works, and why Yvon Chouinard chose to create one to give his company away to.

HIRSCH: Because sunlight is the best medicine.

(SOUNDBITE OF MUSIC)

MA: If you were going to compare the 501(c)(4) to a person, it would probably be kind of like Walter White - you know, the Albuquerque chemistry teacher who lives an ordinary, unremarkable life until, one day, he breaks bad and gets into the illegal drug business.

HIRSCH: Yeah. The 501(c)(4), aka social welfare organization, broke bad about midway through the Obama administration. Up until then, it had looked a lot like its cousin, the 501(c)(3), the charitable organization - you know, caring, supportive of education, science and religion.

MA: The difference was that a 501(c)(4) could use more of its funds for political causes. If you gave to it, you did not get a deduction on your taxes, but it was never entirely clear whether you had to pay a federal gift tax. That changed about a decade ago. Daniel Hemel, a professor of law at New York University, explains.

DANIEL HEMEL: In 2010, 2011, 2012, the IRS got a lot of applications for exempt status under 501(c)(4) from organizations with names that, like, had tea party or freedom or liberty or something like that that looked conservative. And they gave those extra scrutiny.

HIRSCH: Word got out that the IRS might be discriminating against right-leaning (c)(4)s, and the media exploded with the story. The Obama administration was deeply embarrassed and, when it came to passing legislation, kind of gave 501(c)(4)s some unusual latitude.

HEMEL: The overall gist of which was, IRS ease up on 501(c)(4)s, created a streamlined exemption process for 501(c)(4)s and, as an add-on, clarified that gifts to 501(c)(4)s wouldn't be subject to gift tax.

MA: What this meant was that people would be able to set up 501(c)(4)s more easily, and a whole lot more people would be able to donate to them, knowing they did not have to pay a federal gift tax. This was a big deal because, like we said, 501(c)(4)s are allowed to spend a lot of money on political causes.

HIRSCH: And you can see where this is going now, right? The once humble social welfare organization was now the (c)(4) - a political explosive, channeling funding into campaign groups and super PACs in the form of dark money.

HEMEL: Dark money refers to money flowing through these 501(c)(4) organizations to political efforts. And what makes it dark is the 501(c)(4) doesn't have to disclose its donors to the public, to the Federal Election Commission or even to the IRS.

MA: Daniel says all the political drama over the (c)(4) has given it kind of a bad rap, and that is not entirely fair.

HEMEL: Not all 501(c)(4)s are trying to influence politics. The Miss America Organization is a 501(c)(4). There are some, like, local sports leagues that are 501(c)(4)s. When I was living in Chicago, I looked at what 501(c)(4)s were in my neighborhood, and there was an ultimate Frisbee league that was a 501(c)(4).

HIRSCH: But it's precisely that ability to endorse political candidates in addition to conducting advocacy and outreach that may have attracted Yvon Chouinard when he was deciding what to do with Patagonia. After all, he made a point very early on in his business career of making Patagonia as environmentally friendly as possible, and he led a movement to convince many corporations to give 1% of their gross sales to help the planet. And now...

HEMEL: He took 98% of the stock, and he gave it to a newly created 501(c)(4) organization called the Hold Fast Collective. And that's going to do advocacy on behalf of the planet. And he engineered that in a way that involves no gift tax. And ultimately, the Patagonia profits will be able to go into the newly created organization income tax-free.

MA: And that is the big difference, right? Yvon could have sold Patagonia and given the proceeds to a charity that supports his climate goals, for instance, but then he would have to pay capital gains tax - like, more than $700 million.

HIRSCH: Ouch.

MA: That is a lot of surfboards, you know what I mean? So by using a (c)(4), Yvon gets to give away the company at no cost to himself or to the recipient. So it's kind of a big tax savings for everybody involved.

HIRSCH: Yeah. If he just wanted to give a bunch of money, he could have just let the (c)(4) sell the company. That's what another billionaire called Barre Seid allowed a (c)(4) to do with his company, Tripp Lite, earlier this year. The $1.65 billion that raised went to support conservative causes.

MA: But here's a difference. Patagonia will not be sold. The (c)(4) will continue to operate it and funnel the profits to organizations that support its climate goals. And while Yvon won't be running the company anymore, he has fixed it so that his family will.

HEMEL: He took 2% of his Patagonia stock and gave it to a family trust, and he paid $17 million of gift tax on that. And that 2% of Patagonia stock has 100% of the voting rights. So his family will get to continue to call the shots at Patagonia, decide what color the fleeces are, make sure workers are well-treated and that the company manages its environmental impact.

HIRSCH: Yvon Chouinard's 501(c)(4) allows him to have his cake and eat it too. He gets to offload his company and the title of billionaire, but he's ensured that Patagonia will not only remain intact but will continue to meet the environmental goals that he set for it.

MA: And his family stays in control. So this whole deal is obviously a big win for Yvon and, a lot of people would argue, for the planet. But is it a win for our political system if any billionaire, you know, however well-intentioned, can funnel this money tax-free into politics?

HEMEL: You can use some of your money for political campaigning as long as you're primarily promoting social welfare. So Chouinard can spend 51% on climate, education, climate research, and then 49% on electing Democratic candidates and be OK.

HIRSCH: I asked Daniel if this meant that Yvon Chouinard's gift counts as dark money. He says not.

HEMEL: They're using the organizational form of dark money, but they're announcing it to the world. So we know exactly where the Hold Fast Collective's money comes from. So it's not really dark.

HIRSCH: OK. Yvon Chouinard, saving the world and maybe even helping the 501(c)(4) to break good again.

MA: This episode was produced by Nicky Ouellet...

HIRSCH: ...With engineering by Maggie Luthar.

MA: It was fact-checked by Kathryn Yang.

HIRSCH: Viet Le is our senior producer.

MA: Kate Concannon edits the show.

HIRSCH: And THE INDICATOR's a production of N...

MA: ...P...

HIRSCH: ...R.

It's more like taking a marching band to go and give an anonymous donation.

MA: It's like putting a folded-up bill in the Salvation Army bucket and then, like, ringing the bell yourself.

HIRSCH: (Laughter).

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