501(c)(4)s, DAFs, and Carried Interest: How Billionaires Exploit the Tax Code for Ill-Begotten Gains

Rajath Prabhakar, Sports Editor

“If a rich man wants to help the poor, he should pay his taxes gladly, not dole out money at a whim” (Clement Attlee, 1920). The past 15 years has seen numerous crises, from the 2008 Great Recession, to the opioid crisis, to the crisis in Flint Michigan. Over this same period, the amount of money charities have collectively received has increased, but the number of unique donors have constantly dropped at the same time. 30% of all charitable donations come from the top 0.5%, while just 8.8% of those donations reach communities of color. However, of the 15% of the population who live in poverty, communities of color make up nearly 80% of impoverished communities (2014 US Census Bureau). Billionaires use loopholes in the US Tax system to avoid paying their fair share in taxes.

“The precedent for charitable donations and foundations had been set with Andrew Carnegie with his ‘Gospel of Wealth’.” Social Studies teacher Mrs. Boyd said.

To understand how the ultra-rich and the plutocrats take advantage of the system, it is important to first understand the system itself. The US Tax Code provides three loopholes for avoiding taxes. One of these is carried interest. Put simply, carried interest is a share of a private equity or fund’s profits that serve as compensation for fund managers. One problem with this system is that it allows businesses to manipulate income in order to pay less taxes.  For example, a businessman can claim part of what is really salary income as capital gains instead, and pay approximately 20% less in taxes. This loophole costs the US around $1.5 billion per year (CWA), money that could be used to help working-class Americans recover from the 2008 Recession, mostly caused by low regulations on Wall Street.

LA Progressive
Dark money is a hot-button issue on the subject of electoral reform, further amplified by the landmark Citizens United Case.

The second loophole is the 501c4, which concerns social welfare organizations. According to the Internal Revenue Service, “an organization must not be organized for profit and must be operated exclusively to promote social welfare”. While the IRS says 501c4’s cannot be for-profit, the definition of “for-profit” is loosely defined. Furthermore, oversight of these organizations is inconsistent at best, as seen in the boom in 501c4 organizations over the last decade. Businesses can engage in unlimited lobbying, provided this is not its “primary objective”. It also allows so-called “dark-money” to permeate US politics because the donors (in this case, the businesses in question) are not required to disclose that they are donating, or where their money is coming from. This is further amplified by the Citizens United ruling in 2010, which said that corporate funding of independent political broadcasts in candidate elections cannot be limited. The ruling allowed corporations to be treated like normal citizens without them having the responsibility of said citizens. Political spending from outside interests and PACs (political action committee) rose exponentially from 2010 to 2018.

The third type of loophole is most relevant because it directly concerns charitable donations. Under DAF, or Donor-Advised Funds, a donor can make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. The problem: A donation given to a DAF can legally sit idle and continually be invested in perpetuity, without a single expenditure for charitable purposes.

Take the case of Nicholas Woodman. After making his camera company, GoPro, public, he was worth around $3 billion in 2014.

GoPro was worth around $400 billion in 2014

Naturally, he gave much of his wealth away, totaling around 500 million dollars, to the Silicon Valley Community Foundation. He enjoyed the subsequent praise and admiration, but 4 years later, the Woodman Foundation, along with the $500 million, disappeared. Nicholas Woodman avoided paying what would have been tens of millions of dollars in taxes through capital gains. Furthermore, the stock of GoPro dropped nearly $70 per share, further reducing the value of his donation. Woodman was able to exploit the flaws in the DAF loophole, and in doing so, avoid tens of millions of dollars in taxes.

Fortune Magazine
Billionaire Nicholas Woodman used charity to avoid paying some $500 million in taxes.

Said Mrs. Boyd on the Woodman case: ” It is interesting that his [Carnegie’s] intent was to give wealth towards organizations, such as scholarships and libraries, in order to help the disadvantaged lift themselves out of poverty (and probably to secure his image as a “Captain of Industry”) has now been manipulated into ways for entrepreneurs to actually hold on to more of their wealth. It’s a good thing we have a free press to investigate such abuses.”