
Tech Billionaires Hack Their Taxes with a Philanthropic Loophole - ingve
https://www.nytimes.com/2018/08/03/business/donor-advised-funds-tech-tax.html
======
rmoxley
This article is fundamentally misleading here:

> _When it comes to D.A.F.s, the United States tax code rewards the promise of
> good intentions. Wealthy donors — including many of the Silicon Valley
> billionaires who have asked the public to trust them with their digital
> lives — pledge to distribute their funds to charity once they get their tax
> break._

A contribution to a donor advised fund is irreversible. Once the donor has
given that contribution, it is no longer "their funds." The NYTimes makes it
sound like the donor could make a gift and then later spend that money on
themselves. That's not how it works. They have the ability to advise the DAF
where the grants go, but the grants must go to charities recognized by the
IRS.

Giving money to a donor advised fund is giving money to charity. You don't get
it back. It's not a promise to give later. It's a charitable donation.

I'm bewildered by the tone of this article. If the author wants to take a
donor to task for giving to charity X instead of charity Y, that seems fair
even if I disagree. But asserting that someone who gives hundreds of millions
of dollars to a DAF -- an irreversible charitable gift -- is "Hacking Their
Taxes" and somehow cheating is just disingenuous.

~~~
petilon
>> _You don 't get it back._

Yes, you can get it back. All the donor has to do is find a recipient who
agrees to buy goods or services from his/her company for above-market prices,
in exchange for receiving the donation. It's called a quid-pro-quo
arrangement.

~~~
TomMarius
Is that common with IRS-approved charities?

~~~
petilon
The charity in this case is Silicon Valley Community Foundation. They may not
be aware of any secret deals made between the donor and the recipient. The
charity just gives money to whoever the donor directs them to give to.

The fact that the donor directed the donation is hidden from public, which
allows this kind of abuse to occur.

------
darawk
I don't really understand the criticism here. The NYT is acting like they are
evading taxes, but as far as I can tell, they can't use this money on
themselves personally. So, maybe it's just sitting in the DAF accumulating
interest, and I guess that's not productive...but it doesn't really seem like
tax evasion?

Unless i'm missing something, they still _eventually_ have to spend it on
charity, right? So, whether they do that today or twenty years from now after
accumulating interest seems kind of irrelevant to me. It'd be one thing if the
NYT had done some reporting that showed these guys were exploiting some
loophole to spend the money on themselves without paying taxes. That'd be a
big story, and worthy of criticism. But as it is, I don't really see it. Am I
missing something here? Anyone who disagrees care to tell me why i'm wrong?

~~~
Woberto
One issue mentioned by NYT is using DAFs to "obscure their political activity"
since donations don't have to be made public and non-profits don't have to
disclose donors.

Another issue is that the tax savings felt by the donors is tied to the
original contribution's valuation and not the valuation at the time the money
is used. So in the case of GoPro's Nicholas Woodman, he got a tax break based
on $500 mil, but the shares have dropped around 93% so if they're used for
charity now it's like he only donated a fraction of that amount.

NYT also reports that the fees for some of these DAFs can be significant and
so a portion of these donations are going to e.g. Goldman Sachs, Fidelity, and
similar firms.

~~~
khuey
That knife cuts both ways though. If you put $500M in the DAF and then it goes
up 10x before you distribute it to charity you don't get to take a $5B
deduction.

~~~
Woberto
Maybe you should though. The people receiving the increased donations would
probably support that - you did well and increased the value of your donation,
so you can be rewarded for that.

~~~
darawk
The point of the donation is that you've given up control. If I give you 1
share of Facebook, it is now yours to hold or sell. So, you are responsible
for any gains or losses on that asset from that point forward, which is why
the value at the time of the donation is used.

------
astura
The article makes it seem like donor advised funds are only for millionaires
but your average Joe can set one up online in a few minutes at Fidelity or
Vanguard. Last I checked Fidelity's minimum investment to set up a donor
advised fund was only $5,000. If you're going to give even only a few hundred
to charity over the next 10 years it might make sense to set up one during a
year when your tax bracket is high (like a year you have a windfall) or you
already have a lot of deductions.

It's definitely a "tax hack" as it's often done to (hopefully) minimizing
taxes, but it's legal and the charitable contributions are 100% real and you
can't spend that money any other way other than on charity. It's like claiming
people who are contributing to 401ks are "hacking their taxes." It's not
nefarious as this author it making it out to be.

I was intending to set one up myself during the years when I was itemizing
deductions, because I don't plan on having enough deductions to itemize for
the rest of my life and I'd like to give to charity throughout the years. Then
the tax reform passed very suddenly, I'm going to claim the standard deduction
this year, so I missed my window to save thousands on taxes. Oh well.

------
cm2187
Maybe I misunderstood, but isn’t the tax reduction for charitable donations
effectively allowing you to donate based on pre-tax revenues as opposed to
post tax. If you really donate these assets/income, you are still left with
less money than if you hadn’t done the donation. So the tax deductibility
isn’t really in question. What it is question is donating an asset of which
you still enjoy the usage. Right?

~~~
ghufran_syed
But I think the only “usage” you can have is to choose where to donate it -
and you can’t just donate it to your family or business associates , it has to
be a registered charity subject to the usual rules.

------
nbisfuor
So essentially Donor Advised Funds are better in every way for the donor,
including but not limited to being more private, way less arbitrary
restrictions (donate 5% a year -- why?) and allowing them control of where
they donate. And this is competition for non-profits of other kinds, that are
mostly just a way for people to pay themselves giant base salaries, relative
to a donor-controlled fund. And further, this article is basically calling out
a person in particular for putting $500M into a fund for the purpose of
philanthropy (sooner or later) and then not having made enough donations (it
would better if he had to donate 5%/year -- again, why?). Then goes on to
quote a professor calling it fraud, despite it still being legitimately a way
for people to donate assets like stock to charity in a one-way vehicle that
they control, as if that is bad somehow. Evidently people are so angry at
successful people at this point, they are not going after their charity too,
again not clear on why.

~~~
petilon
> _allowing them control of where they donate_

They are also not required to disclose how the charitable dollars are spent.

You don't see the problem here? How do we, as taxpayers, know the money is
even being spent for real charitable purposes?

See for example this story: [https://www.telegraph.co.uk/news/2018/06/14/new-
york-attorne...](https://www.telegraph.co.uk/news/2018/06/14/new-york-
attorney-general-sues-close-trump-foundation-misuse/)

~~~
kharms
>You don't see the problem here? How do we, as taxpayers, know the money is
even being spent for real charitable purposes?

While you are unable to audit any given donor, you are able to audit most DAF
program providers by reading their 990 tax form. Here is an example for
Charles Schwab, mentioned in the article.
[https://www.guidestar.org/profile/31-1640316](https://www.guidestar.org/profile/31-1640316)

Even if the 990 is not publicly published, it is required by the IRS and can
be audited.

>See for example this story: [https://www.telegraph.co.uk/news/2018/06/14/new-
york-attorne...](https://www.telegraph.co.uk/news/2018/06/14/new-york-
attorne..).

This is less likely to happen with a DAF program because they are managed by
3rd parties with reputations to protect. A properly ran DAF program will
research and vet all grantee organizations prior to making a gift, and can
(and will) reject donor grant requests if they are found to violate the
law/DAF mission.

~~~
petilon
If the donor's identity is kept hidden then abuses such as "quid pro quo"
donations become possible (See [https://www.classy.org/blog/what-you-need-to-
know-about-quid...](https://www.classy.org/blog/what-you-need-to-know-about-
quid-pro-quo-donations/) )

i.e., the donor could make an arrangement such as, "I'll direct my DAF to
donate $X million to you if you then use that money towards buying $4X worth
of services from my company."

------
habosa
This is a pretty poorly presented article. There are good points for and
against DAFs but they're hard to find in here.

And backing up, I feel like we don't often question the idea of giving nearly
unlimited tax breaks for charitable donations. The Economist did a very good
job explaining the history, pros, and cons of this practice in 2012:
[https://www.economist.com/briefing/2012/06/09/sweetened-
char...](https://www.economist.com/briefing/2012/06/09/sweetened-charity)

For what it's worth I donate a good amount every year to causes I care about
and I am certainly motivated by the tax break. While that's rational, I do
sometimes wonder about the ethical side.

After all, I am basically saying that I should get to self-direct a large
chunk of my own taxes. The govt has an idea of what it would do with my income
taxes but I can donate them to a cause of my choosing. And there's very little
vetting about what causes count, as long as they're not for profit. I could be
giving thousands to a charity that wants to give citizenship to dolphins, and
depriving some good state and federal programs of those funds.

I do think that there's a good reason to give some limited deductions for
charitable giving. After all the world is probably better when people give to
each other, no matter the cause. But allowing someone to get a billion dollar
windfall and use this tax break to redirect many millions to a cause of their
choosing rather than the public is probably taking it too far.

~~~
tonfa
Do I get it right that in the US charity donations are a tax credit, with no
limits?

Where I'm currently resident we simply get to deduct it from income, iirc you
can deduct up to 20% of your yearly income. That might avoid the ethical
concern about not paying tax.

~~~
perl4ever
In my experience (as a US taxpayer not a tax advisor) charitable donations in
the US are a deduction from income, not a credit, up to a limit of 50% of your
income, or less. However, if you donate more than 50% of your income you can
carry it over for a limited number of years. It eventually vanishes, though,
unlike capital gains losses.

------
NelsonMinar
I'm going to repost a comment I made last time we talked about DAFs (three
months ago)

I set up a DAF when Google went public in 2004. I've spent 25-50% of it in the
intervening 13 years, despite best intentions. I sure took that full tax break
in 2004 though and have compounded the value of that annually. So in my case
the DAF has not worked as a great way to funnel money to actual charities. It
just sits idle, compounding. The tax break I got seems to outweigh the public
benefit.

The psychology of having the DAF is funny. I sort of feel the virtue of having
donated to charity every single year, just looking at the balance. When I do
make a grant from the DAF I don't really feel like I'm doing anything more
worthwhile. Also it's a bit impersonal because you have to recommend the grant
then wait several days for the DAF to actually allocate. OTOH it's nice having
a pile of money I've already "spent" that I can use to give to things at a
whim.

I think the solution is to require DAFs spend some large portion of their
balance every single year. Charitable foundations are required to distribute
something like 5%, but I think 10% or more makes more sense for an
individual's DAF. There's also a strong argument that charitable donations
shouldn't be tax deductible at all, remove this whole tax gimmick and economic
distortion. I'm not sure I fully buy it (and the transition would be brutal)
but it is worth reading:
[https://www.economist.com/briefing/2012/06/09/sweetened-
char...](https://www.economist.com/briefing/2012/06/09/sweetened-charity)

Update (August 2018): since writing that comment I felt guilty and have made
more grants. Current events had something to do with it too, turns out there's
a lot of immigrant legal aid charities that need the money right now.

------
kregasaurusrex
How does tiered voting stock donated to these companies operate? Does the
owner of said stock still retain voting control even though the stock is now
owned by the DAF?

There's also an issue with how these sorts charities are privately
incorporated which aids in hiding them from public scrutiny regarding how and
when funds are spent. For example, a 501(c)3 Organization requires tax forms
to be disclosed and available to be audited in order to see all associated
expenses. The cost of filing and completing the yearly form is minimal enough
not to inhibit any undue stress in record-keeping to follow GAAP, even such
that no outside advisors would need to hired in order to file.

------
wgjordan
Let's read the GoPro example closely:

\- $500m of GoPro stock was donated at about $95 per share, but actually sold
by the fund at $18 per share (or so the article implies).

\- Assuming the highest marginal tax rate (39.6%), the $500m tax-deductible
donation would produce a net gain of $198m from reduced income taxes over the
next 5 years.

\- Selling all the stock at $18 per share would have produced a net gain of
$76m ($94m minus $19m in 20% capital gains taxes).

So by 'donating' the large block of stock at its highest price point, the
donor profited an extra $122m over what the stock was ever actually worth, in
addition to the positive publicity associated with generously donating $500m
(that was actually only worth $94m).

My reading of this is that the 'loophole' in this example has less to do with
the particular recipient of the donation, and more to do with the supposed
misrepresentation of the 'fair market value' of the stock donation, which the
article implies was closer to $94m than $500m.

However, there appears to be a law specifically prohibiting this kind of
inflated misrepresentation of stock value based on current selling price, 26
CFR 1.170A-1(c)(3) [1]:

> (3) If a donor makes a charitable contribution of property, such as stock in
> trade, at a time when he could not reasonably have been expected to realize
> its usual selling price, the value of the gift is not the usual selling
> price but is the amount for which the quantity of property contributed would
> have been sold by the donor at the time of the contribution.

So the so-called 'loophole' implied by the $500 million example doesn't
actually exist. Assuming the full $500 million was actually deducted at its
full value seems to be either fuzzy speculation on the part of the author, or
something that will undoubtedly be heavily scrutinized/challenged in a future
IRS audit based on the legal definition of 'value' of a charitable
contribution.

[1]
[https://www.law.cornell.edu/cfr/text/26/1.170A-1](https://www.law.cornell.edu/cfr/text/26/1.170A-1)

~~~
hundt
Oh, good catch. The IRS instructions on valuing charitable gifts of stock
supports your interpretation:

[https://www.irs.gov/publications/p561#idm140501157972816](https://www.irs.gov/publications/p561#idm140501157972816)

> determining the value of large blocks of stock usually requires the help of
> experts specializing in underwriting large quantities of securities, or in
> trading in the securities of the industry of which the particular company is
> a part

i.e. it's not just "(market price) x (number of shares)"

Although when I looked at the article it seems that they do not actually claim
that he was able to deduct $500 million. They strongly imply it by saying that
"his tax savings were pegged to the shares’ all-time high" but in terms of the
actual deduction they just write that he "likely saved millions of dollars"
which is accurate.

------
throw2016
You should get a tax break when you donate to charity, not when putting it
into an intermediary vehicle that holds the funds. This is just asking for
abuse.

This is exactly the kind of self serving 'financial engineering' wall street
has become infamous for, and now they get to suck their fees from the charity
sector too.

Their fees are a parasitical tax on funds that should have gone to charity and
used today given the tax breaks have already been given. The fact that the
banking sector can still successfully lobby and get bills passed to operate in
secrecy without accountability reflects how badly broken the financial system
has become.

------
elchief
Ya my old boss did this (the family foundation style). He was worth about
$500M at the time I knew him. And ran his little "charity" that gave away 5% a
year

Meanwhile all that money was managed by some hedge fund and was making 30%
returns (this was '08, right before the Great Recession)

He owned the most expensive house in the Hamptons and had a private jet and
complained about all the sycophants

We did get catered lunches by his personal chef every day at work, so I'm not
complaining...

~~~
downandout
_Meanwhile all that money was managed by some hedge fund and was making 30%
returns (this was '08, right before the Great Recession)_

If the _charity_ was making 30% returns, how is that a bad thing? Those gains
don't flow back to the donor.

~~~
elchief
I wouldn't say it's a bad thing. Just contrasting it to the 5% outflow

~~~
throwaway76543
Your objection is that he earned a 30% return and only donated 5%?

------
captain_perl
Just wait until you find out about the The California Land Conservation Act,
commonly known as the Williamson Act.

A Who's Who of Apple executives exploit this to build mansions on nearby
"ranches":

[https://www.sccassessor.org/index.php/tax-savings/tax-
reduct...](https://www.sccassessor.org/index.php/tax-savings/tax-
reductions/farmers-and-ranchers)

------
compsciphd
I created a donor advised fund at the end of 2017. Looked at my assets and
basically said, I'll put away 4-5 years worth of charitable donations.

1) With the tax changes going down, the benefit this year would be greater
than any future year

2) with the changes increasing the standard deduction and limiting the SALT
deduction, even if I would itemize in the future, it be less valuable.

i.e. it's just for billionaires (or even millionaires)

------
dan-robertson
Is this particularly related to tech, or even new? Isn’t giving to charity (or
things that claim to be charity) quite a common thing for the rich to do to
reduce their taxes? And something that’s been done for decades too?

------
dang
Also about this, from two months ago:
[https://news.ycombinator.com/item?id=17126875](https://news.ycombinator.com/item?id=17126875).

------
AdamM12
You are always giving away more money than you receive in tax benefits. People
forget that.

------
crb002
Issue is that charity should come after tax.

