Time to separate philanthropy and politics

Sep 20, 2022

Here are four serious proposals to separate “charitable” and “political” giving.

Barre Seid’s and Yvon Chouinard’s recent billion-dollar-plus contributions to §501(c)(4) organizations have set off a stream of commentary, much of it sharply critical in Seid’s case. Most of this criticism focused on the fact that a conservative organization was the beneficiary of his largesse, while ignoring the billions of dollars that have gone to liberal and left-wing (c)(4)s from some of America’s most-famous billionaires, like Chouinard. However, in the cases of both Seid and Chouinard, some commentators raised important questions about how these types of gifts and other donations are indirectly subsidized by taxpayers through laws and regulations that make it possible for the wealthy to obtain tax benefits for which they would be ineligible if they simply wrote the group they support a check. Should current and future taxpayers be on the hook for forgone revenue from rich tax-players?  

Generally, the purpose of these favorable tax rules is ostensibly to encourage giving to charity. Yet for the past 50 years, the boundary between the charitable and political worlds has become increasingly fuzzy. Smart donors with smart advisers have unfortunately discovered multiple ways of getting the tax benefits of charitable giving while pursuing political agendas and partisan ends. Now would be a good time to have a broad debate about how that boundary can become sharper and less permeable.

Short of getting rid of the tax deduction for charitable giving—which everyone believes is a political non-starter—solutions to this complicated challenge are not obvious. Nor is it obvious that the merits of such a simple solution would outweigh the drawbacks, in terms of reduced giving to genuinely apolitical and charitable enterprises such as food banks and senior services.

Nevertheless, there are some avenues worth exploring at the intersection of the privacy of donations and the tax treatment such gifts receive. In brief, my argument here is that donors should be able to have either confidentiality or favorable tax treatment—but not both. In addition, the lax culture of enforcement of the rules must give way to one in which bending rules to the breaking point will draw so much scrutiny that exploitation will be subject to a deterrent effect.

Let’s begin with a wealthy donor who wants to influence politics and policymaking. She can take the most-direct path, which is to contribute directly to a candidate, campaign fund, or lobbying effort that meets her ideological and political needs. In doing so, she will get no tax benefits, but she will have the satisfaction of knowing that she is playing the game straight and not asking her fellow citizens to underwrite her partisan interests.

Four paths

Now, maybe this person with substantial assets has a clever adviser who counsels her not to be a dupe and instead look for ways to get substantial tax benefits from her contributions. The wily lawyer or accountant outlines four paths that she can take.

The first would basically be to do what Seid and Chouinard did. Seid donated appreciated stock to a (c)(4) organization and, in doing so, avoided paying capital-gains taxes on the shares. The recipient can sell the shares at once without paying any tax on the proceeds. Groups with the (c)(4) designation can pursue charitable and political activities short of giving money directly to candidates. In this case, the donor avoids taxation and supports an organization aligned with her political beliefs. The avoidance of capital-gains taxes maximizes the size of the donation and, perhaps, enhances the stature and influence of the generous party. In any case, the recipient (c)(4) receives more money than it would have if capital-gains taxes had been paid on the stock.

Yvon Chouinard (YouTube)

The second approach would be to give the appreciated stock to a §501(c)(3) entity. In doing so, she will avoid paying capital-gains taxes on the shares and she will get a charitable deduction equal to the market value of the stock. Within limits, these (c)(3) groups can engage in voter-registration and get-out-the-vote (GOTV) activities and pay for issue-oriented advertising during election periods as long as the (c)(3) does not endorse a specific candidate. They can also lobby Congress and state legislatures on important issues of public policy within certain limits. Finally, they can transfer assets to (c)(4) groups for purposes linked to the mission of the (c)(3) group. This maneuver is the charitable equivalent of transubstantiation, or perhaps money-laundering. The donation enjoys all of the tax benefits of a charitable contribution, but gets moved to a politically motivated entity for use in support of the donor’s political cause.

The third is to give the appreciated stock to a donor-advised fund (DAF). Individuals or institutions contribute to them and take an immediate tax deduction, then direct at their discretion to whom and when the funds are to be dispersed. Investments held in DAFs accumulate tax-free and are likewise tax-free on distribution. DAFs are sponsored by big financial-advisory firms, like Fidelity and Schwab, and smaller ideological operations, like Donors Trust and Tides. Unlike private foundations, DAFs have no annual payout requirement, so the money can sit there forever. In the case of our hypothetical donor, she would avoid capital-gains taxes and get a charitable deduction. DAFs are not required to disclose the recipients of their funds, so she could anonymously direct the money to a (c)(3)—which, in turn, could give the money to a (c)(4). In the end, the donor can pursue political ends, receive substantial tax benefits, and do so with no transparency whatsoever. 

The fourth path for our donor is to create a foundation with the appreciated stock. In doing so, she will avoid paying capital-gains taxes on the shares and she will get a charitable deduction equal to the market value of the stock. However, the 1969 Tax Reform Act put restrictions on what foundations can do in relation to elections and lobbying.  A private foundation can support voter-registration and -mobilization efforts, and that is where many foundations concentrate their giving during election periods. They can also support issue-oriented media and, when an issue like abortion or climate change is hot, this can be a productive approach. Foundations can also support legal service groups, including those that are challenging elections and providing oversight of actual elections. Finally, foundations can give money to other entities—DAFs or (c)(3)s, which that can then transfer resources to (c)(4)s for both charitable ends and political ones short of directly supporting candidates.

What can be done?

During the past decade, the amount of money going to political purposes through these four channels has skyrocketed. One can start with Seid and his gift to the Marble Freedom Trust if one wishes, as many have, or one can look to Chouinard, George Soros, Tom Steyer, or Hansjörg Wyss, veteran players who have donated billions to groups aligned with their left-of-center politics. Alternatively, you can examine the millions given by major foundations to politically adjacent projects. The fact is that the system is broken. Taxpayers are underwriting the political agendas of billionaires and their philanthropic institutions as these tax-playersdescribe their activities as supporting democracy, rather than partisan or ideological campaigns. So, what can be done?

Sen. Sheldon Whitehouse of Rhode Island has introduced legislation called the DISCLOSE Act and has newly promoted its passage in the wake of the Seid gift. This legislation would require (c)(4) organizations to reveal most of their donors. While it is a fine piece of virtue-signaling about the evils of “dark money,” it would almost certainly be challenged as unconstitutional. Moreover, many groups on various points of the political spectrum oppose it because of its transparency provisions. Civil-rights organizations, pro-life and pro-choice groups, and many other entities believe, with justification, that their donors would have second thoughts about contributing if they knew that their names would be disclosed.

The issue of donor privacy is a major barrier to any legislation or regulations aimed at curbing the politicization of the nonprofit sector. The suggestions that follow acknowledge this concern and apply a simple rule: if the American taxpayer is not directly subsidizing a gift, the donor has the right to privacy. But if a donation is incentivized by avoiding capital-gains taxes or supported by a charitable deduction, we have every right to know the donors and the causes that we are subsidizing. After all, these actions will reduce federal revenue and put strains on current and future taxpayers who do not use these tactics. This expectation of transparency is especially strong if a wealthy donor wants us to subsidize a pet political charity.

Applying this principle to (c)(4) organizations would simply mean that contributions to these groups would have to be made in cash rather than the transfer of other assets. While the donation of stock to a (c)(4) does not provide the donor with a direct financial benefit, it does enhance the prestige of the donor. In addition to prohibiting the donation of appreciated shares, another positive step would be to prohibit DAFs and (c)(3) organizations from funding (c)(4) entities. This simple change would mean that donors could no longer launder their political money through charitable entities where no capital-gains taxes are levied and a charitable deduction is received. With these amendments to the current regulations governing (c)(4)s in place, donors can keep knowledge of their contributions to themselves and their recipients.

Over the past two decades, DAFs have grown tremendously. In the past, it was largely community foundations that supported these giving vehicles. Today, for many wealthy people, DAFs are much more appealing than establishing private foundations because there is no minimum annual distribution requirement and there is zero transparency in terms of how the money is disbursed. Critics of DAFs often focus on the fact that these entities can be used to warehouse money because they are not subject to the 5% payout requirement that applies to foundations. A bigger issue may be the lack of transparency. Donors can get all of the tax benefits of contributing to a (c)(3) organization and then direct the money anonymously to entities that further their political and policy interests. Moreover, the lack of disclosure also means that private foundations can give money to DAFs and then make secret gifts to specific causes and campaigns.  

The solutions are simple. First, as noted above, DAFs should not be allowed to fund (c)(4) groups. Second, there should be a requirement of full disclosure of all grants every quarter. This rule should also apply to private foundations, where publicly available lists of grants often appear only many months after the transfer of money. Finally, foundations and (c)(3) groups should not be allowed to funnel money into DAFs and thereby avoid any scrutiny of how this money is used.

What can be done? (II)

Arguably the toughest challenge, however, is how to limit the political and partisan advocacy work of (c)(3)s. The 1969 Tax Reform Act attempted to ensure that activities like voter-registration drives and GOTV campaigns were nonpartisan. Similarly, it also constrained the ability of (c)(3)s to lobby at the federal and state levels. In the beginning, these limits worked reasonably well—in part, because donors and recipients wanted to avoid the painful scrutiny they endured during the Congressional hearings leading up to the ’69 legislation. However, over the past five decades, these constraints have been softened and undermined by smart analysts and clever lawyers. Today, a small but well-funded group of (c)(3)s is actively involved in voter mobilization during election cycles and engaged in very aggressive lobbying campaigns on every side of every important issue facing the nation. Groups are rarely investigated or reprimanded by the Internal Revenue Service (IRS). While many critics have complained about the brazen extent to which the relevant regulations have been stretched, there is also a sense of frustration over the prospect of creating greater separation between the nonprofit world and the political one. Defining a strong boundary is complicated by concerns for free speech, civil rights, and other concerns. And even if a relatively impermeable boundary can be drawn, weak enforcement by the IRS might still allow the status quo to prevail.

What, then, can be done? Four steps might make a difference in separating the charitable from the political. First, nonprofit organizations that want to pursue activities related to lobbying and election-adjacent activities would be required to indicate that intent to the IRS and the public. Right now, (c)(3)s can choose the 501(h) election if they plan on doing serious lobbying. The organization has to file regular reports in this case, but is also allowed to spend up to 20% of its core budget on the lobbying. This proposal would make it mandatory for any group involved in lobbying and election-adjacent activities to file a statement of intent with the IRS and then provide regular reports on these activities.  Some might argue that a minimal level of electoral-related or lobbying activity should be allowed without filing such a statement of intent. However, by making the standard tough, it should also make the leadership and boards of nonprofits think twice before they undertake, say, a voter-education effort without notifying the IRS. A registration requirement would also highlight those groups that are entering a legally and politically complicated arena and make it easier for regulatory agencies and private oversight groups to know where they should be looking for possible boundary crossings.

Second, all (c)(3) organizations engaged in electoral and advocacy work should have to reveal all donors who contribute more $100,000 in one year, and the disclosure should be made within 60 days of exceeding that limit. By setting the limit at a relatively high level, the reporting burden on (c)(3)s is reduced. One argument against transparency is that donors to unpopular or controversial causes will be harassed or even attacked for their beliefs. Whether or not that risk is real, it is hard to imagine that the very wealthy have any reason to fear retribution. The Ford Foundation, the Bradley Foundation, George Soros, and the Mercer family all openly support controversial and divisive organizations and, while they do receive criticism, they do not face real threats.

Third, private contributions to public agencies involved in operating and overseeing the voting process should be prohibited as a violation of (c)(3) standards. This would put a crimp on the types of grants that Mark Zuckerberg made through the Chan Zuckerberg Initiative and other specific giving avenues, likely including a DAF, to about 2,500 local election boards and as many as 20 state election agencies in the 2020 campaign cycle. The “technical assistance” provided by the Center for Technology and Civic Life and the Center for Election Innovation and Research—the major (c)(3) distributors of the Zuckerberg largesse in this area—would still be possible, but local and state officials would have less incentive to accept this help if the “technical assistance” couldn’t be a condition of substantial grants from them.

Finally, overall, the political activities of (c)(3)s should be subject to more oversight and enforcement. One element would be to demand that the IRS do its duty and respond seriously to complaints about the misuse of charitable money. In addition, it is time for Congress to show more interest in the work of these tax-incentivized (c)(3)s. Legislative hearings in the 1960s and 1970s had the effect of making donors and recipients more careful when testing the boundaries between nonprofit programming and politics. It is encouraging that some current Senate candidates have expressed an interest in addressing the potential abuses of nonprofit entities.  And one can hope that Whitehouse, the scourge of “dark money” (c)(4)s, might also turn his attention to (c)(3)s in the near future.

Taken together, these proposals would begin the process of separating the political and charitable sectors. None of these changes would be retroactive, so the past funding of Soros and the recent Seid and Chouinard transactions would not be affected. They would still allow wealthy people to engage in electoral and lobbying activities of their choosing. However, these modest recommendations would close some glaring loopholes, like the contribution of appreciated stock to (c)(4) organizations, and would make the funding behind (c)(3) entities more transparent and easier to track. Yes, this would reduce the amount of privacy given to donors, but it would do so because these donors knowingly want to partake of tax subsidies. Taxpayers should know who the tax-players are. If donors are willing to forgo the subsidies, they can have all the privacy they want.

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