How Patagonia surfed around death and taxes

When 73-year-old adventurer Rick Ridgeway learned that his old pal Yvon Chouinard was donating outdoor goods retailer Patagonia to a nonprofit that will donate company profits to environmental work, he didn’t. wasn’t very surprised. Ridgeway has known Chouinard, the 83-year-old company founder, since the early 1970s, when the pair bonded on trips to climb and surf in remote places. Next, Ridgeway spent 15 years leading Patagonia’s environmental initiatives and public engagement. The company’s loyalty to green values, he said, was clear from the start.

“Patagonia has always been one step ahead, at the forefront of exploring new ways of doing things,” Ridgeway said. “The company has had this commitment since its beginnings 50 years ago.”

On September 14, Patagonia made headlines when Chouinard announced that he was transferring 98% of the family business – and all of its non-voting shares – to the nonprofit organization Holdfast Collective, a group of defense whose mission is to “address the environmental crisis, protect nature and biodiversity and support thriving communities.

The remaining 2%, plus the right to vote to guide the company, goes to the Patagonia Purpose Trust overseen by members of the Chouinard family. In the exuberant words of Patagonia: “Earth is now our sole shareholder.”

Patagonia projects that the Holdfast Collective will spend or donate $100 million each year, creating an overnight juggernaut among US environmental and philanthropic groups. Calling it “the biggest milestone in the company’s history”, Ridgeway estimated that the company’s current charitable donations would have increased tenfold. This is a major boon for the environmental movement. And it’s also a creative way to dodge two things that keep many aging founders awake at night: death and taxes.

While at Patagonia, Ridgeway witnessed the Chouinard family’s quest to secure the company’s legacy. “It was a real enigma,” he said. “Not just for the tax consequences. The conundrum at its highest level centered on how to instill into the corporate structure its core values, so that those values ​​would be preserved after the Chouinards died.

These core values ​​include a longstanding dedication to sustainability work. In 2002, Chouinard co-founded the 1% for the Planet charitable giving network, pledging that Patagonia would donate 1% of its annual sales to environmental nonprofits. (It will continue to do so.) A decade later, Patagonia became California’s first B-Corp, a certification for companies with environmental or social missions.

For entrepreneurs looking to cement such legacies, “there is a limited set of options,” said Stuart Hart, co-founder of the MBA program in sustainable innovation at the University of Vermont. Hart said that for years Patagonia explored many succession options. IPO and sale are two common routes. But each can mean losing control, Hart explained, adding that such a decision is painful for many leaders. “It was the option that ensured the longevity and sustainability of the mission for the company,” he said.

When news of the Patagonia transfer broke on the afternoon of September 14, the public reaction had a cheerful tone rarely associated with conversations about corporate restructuring. “BRB will have me covered from head to toe in Patagonia,” tweeted editor Lisa Lucas. Writer Rebecca Solnit tweeted that Chouinard was “destroyed as a billionaire; upgraded like a hero.

While they applauded the move as altruistic, some observers also noted that it would avoid massive tax liabilities for the Chouinard family. While the New York Times The article that first reported the Patagonia story quoted a company adviser saying it provided “no tax benefit” to the Chouinards, which is incorrect, said tax law expert Daniel Hemel and professor at New York University School of Law.

“The Chouinards got a huge tax advantage out of it,” Hemel said. By keeping control of just 2% of Patagonia, the family can contribute to proxy political campaigns and run the business while minimizing their tax liability on a $3 billion corporation, Hemel said. The nonprofit organization Holdfast Collective can use company money for advocacy work. Basically, its 501(c)(4) designation allows the collective to invest money in political campaigns, which a traditional 501(c)(3) charity is prohibited from.

“If I give you $3 billion, I’ll owe $1.2 billion in gift tax,” Hemel said. “They found a way to donate $3 billion, without giving it to a traditional charity, and instead of paying $1.2 billion in gift tax, they pay $17 million in tax. So they reduced their gift tax bill by more than 98%. »

This does not, Hemel pointed out, reduce the impact of the move. The Chouinard family abandons an immense fortune. Their tax savings translate into even more funding for environmental advocacy. The family both abides by the tax rules and strives to save the planet. Chouinard is known as a “reluctant billionaire” and he really wants to save the planet.

Yet by investing company profits in a nonprofit supporting political campaigns, the Chouinard family has drawn attention to a part of tax law that many experts find troubling. “The ability to give stock to a c-4 and then take the dividends and capital gains from the c-4 out of tax, which can be used for better or for worse,” Hemel said. Last month, The New York Times reported that financier Barre Seid used a similar move to donate $1.6 billion in company stock to the conservative Marble Freedom Trust run by black money guru Leonard Leo. Such donations divert government funds into the hands of powerful individuals. And they can provide a significant – and largely opaque – injection of liquidity into politics.

“I don’t think that’s an argument against what the Chouinards did. If I were the Chouinards, I hope I would be generous enough to do the same,” Hemel said. “He points out that there are issues with our tax code that we should address. But there are also threats to our climate that we should address.”

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