TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, August 4, 2018

NY Times: How Tech Billionaires Hack Their Taxes With Donor-Advised Funds

New York Times, How Tech Billionaires Hack Their Taxes With a Philanthropic Loophole:

Late in 2014, Nicholas Woodman, the founder and chief executive of GoPro, announced what appeared to be an extraordinary act of generosity.

Mr. Woodman, then 39, had just taken his camera company public, and was suddenly worth about $3 billion. Now he was giving away much of that wealth — some $500 million worth of GoPro stock — to the Silicon Valley Community Foundation, an organization based in Mountain View, Calif., that would house the assets of the newly formed Jill and Nicholas Woodman Foundation. ... The executive basked in prestige and gratitude. ...

But four years on, there is almost no trace of the Woodman Foundation, or that $500 million. The foundation has no website and has not listed its areas of focus, and it is not known what — if any — significant grants it has made to nonprofits. ...

If the benefit to the needy is difficult to see, the benefit to Mr. Woodman is clear. After GoPro’s initial public offering, he faced an enormous tax bill in 2014. But by donating via the Silicon Valley Community Foundation, he eased his tax burden in two ways. First, Mr. Woodman avoided paying capital gains taxes on that $500 million worth of stock, a figure that most likely would have been in the tens of millions of dollars. He was also able to claim a charitable deduction that most likely saved millions of dollars more, and probably reduced his personal tax bill for years to come.

Mr. Woodman achieved this enticing combination of tax efficiency and secrecy by using a donor-advised fund — a sort of charitable checking account with serious tax benefits and little or no accountability.

Donor-advised funds, or D.A.F.s, allow wealthy individuals like Mr. Woodman to give assets — usually cash and stock, but also real estate, art and cryptocurrencies — to a sponsoring organization like the Silicon Valley Community Foundation, Fidelity Charitable or Vanguard Charitable. But while donors part ways with their money, they don’t give up control. The sponsoring organizations make grants to hospitals, schools and the like only at a donor’s request. So while donors enjoy immediate tax benefits, charities can wait for funds indefinitely, and maybe forever.

For these reasons and more, D.A.F.s have become one of the most controversial issues in the charitable world.

Proponents say D.A.F.s have democratized giving, because they are simple to create and the individuals who use them are more generous than those who establish family foundations. “It’s a win-win,” said Greg Avis, interim president of the Silicon Valley Community Foundation. “The donor has a tax benefit, and the beneficiaries are the nonprofits.”

But to critics, D.A.F.s represent the worst of philanthropy today — a system of guaranteed perks for the rich and uncertainty for the rest.

Unlike family foundations, which are required to distribute 5 percent of their assets each year and have historically been the way wealthy donors disbursed their philanthropic firepower, D.A.F.s have no distribution requirements, meaning that billions of dollars earmarked for charity can sit idle for decades. And because organizations that manage D.A.F.s are not required to report which funds give money to which causes, it is impossible to know how much money individual donors are giving away to nonprofit organizations.

Their rise is also part of a broader move by the wealthy and powerful to shield much of their giving from public scrutiny. Just last month, after lobbying by conservative groups and donors, the Trump administration said it would stop requiring certain nonprofit organizations to disclose the names of large donors, a change that will make it easier for some political groups to hide their funders. And many conservative donors, including the Mercer family, have used D.A.F.s to obscure their political activity.

“The world of philanthropy is becoming less transparent, and that’s not a good thing,” David Callahan, author of “The Givers,” a 2017 book about big philanthropy, wrote in a recent essay. “Recent years have seen the rapid growth of a shadow giving system that funnels billions of dollars in gifts in ways that leave no fingerprints.”

That D.A.F.s have become so popular with Silicon Valley billionaires has only added to their intrigue. Society is still reckoning with the dark sides of social media and online privacy, and there is concern that D.A.F.s — a dream vehicle for the overnight wealthy — may prove to be another instance of techno-optimists disrupting a system with unintended consequences.

“They’re a fraud on the American taxpayer,” said Ed Kleinbard, a tax professor at the University of Southern California. “They’re a way for the affluent to have their cake and eat it, too.” ...

“We’ve put this rule in place that says you get maximum tax benefits when you make a donation,” said Ray Madoff, a professor at the Boston College Law School and a vocal critic of donor-advised funds. “But you don’t have to do anything with it.”

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Is there any evidence that assets put into DAFs are not in turn being donated? Fidelity Charitable Gift Fund annual reports indicate that 15-20% of assets outstanding at the beginning of the year are donated. That doesn't mean there aren't accounts that make no donations in a given year but the payout ratio is far above that of the typical foundation.

Posted by: PaulB | Aug 4, 2018 8:40:34 AM

How odd. I bet I know 100 people with donor advised funds, but somehow don't know a single billionaire.

Posted by: Mike Petrik | Aug 4, 2018 10:54:32 AM

I expect this kind of crap from the NYT, but why is it on this website.
Are you turning into a SJW
Those darn rich people are the source of all our problems!

Posted by: Tim | Aug 4, 2018 1:26:12 PM

Mike, the people with nine figure DAFs use community foundations, not the brokerage ones. Or more commonly, they just set up their own foundations.

Posted by: PaulB | Aug 4, 2018 3:11:00 PM

Yes, PaulB, I know. But my admittedly obscure point was that the NYT's suggestion that DAFs are some exotic planning device chiefly available to billionaires is, as Tim points out, crap. Moreover, unlike financial institutions, community foundations actually have staff available to investigate and recommend grants. Until someone can point out self-dealing, then I don't see the problem. Private foundations are another matter given the lack of practical policing and ability to self-deal by employing family as staff.

Posted by: Mike Petrik | Aug 5, 2018 4:51:34 AM