Seid’s donation is just an extra-large illustration of an undeniable trend: The tax law’s dividing line between charitable activity and partisan politics — never easy to define or enforce — is breaking down.
There are also loopholes that let charitable organizations that receive tax-deductible donations — or 501(c)(3)s — fund officially nonpartisan voter registration drives, which, in practice, favor one party. Some of these charitable outfits transfer dollars to associated 501(c)(4)s, which are not allowed to collect tax-deductible contributions but have more latitude to spend on politics, including political advertising.
As Craig Kennedy argues in a provocative series of articles at the Philanthropy Daily website, it’s time for “a broad debate about how that boundary can become sharper and less permeable.”
A former president of Chicago’s Joyce Foundation and the German Marshall Fund of the United States, who also advised a Democratic mayor of Chicago during the 1990s, Kennedy knows nonprofits and politics. His proposals for new rules — and tougher enforcement of existing ones by the IRS — would not transform the system but could improve it.
After Seid’s mega-gift leaked to the Times, Democrats focused on the fact that the recipient was not legally required to disclose it, calling this further evidence of the corrosive political influence of “dark money.” They held a Senate vote last week on the Disclose Act, which would make 501(c)(4)s publicly identify donors of $10,000 or more. On a 49-49 party-line vote, Democrats failed to break a Republican filibuster, effectively killing the bill.
Democrats blamed the GOP for obstruction on behalf of wealthy individuals and corporations. In fact, pro-Democratic dark-money groups and mega-donors have gotten pretty good at this game, too; they outspent their Republican counterparts $1.5 billion to $900 million in 2020, according to the Times. There is always the risk that the Supreme Court would strike down the Disclose Act anyway; non-conservative organizations, notably the American Civil Liberties Union, have opposed it as a threat to the donor privacy that enables funding of sometimes unpopular speech.
Kennedy proposes an alternative policy principle: “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.”
A logical move would be to ban transfers from 501(c)(3) organizations, which raise money with the help of tax deductions, to 501(c)(4)s, which do not have to disclose donors. Kennedy tartly labels this widespread practice “the charitable equivalent of transubstantiation, or perhaps money-laundering.”
Another would be to abolish the current law that permits stock or other assets to be donated to a 501(c)(4) without capital gains or gift taxes.
This is the rule that facilitated Seid’s donation in 2020 of his company’s stock to the Marble Freedom Trust, a 501(c)(4) headed by Leonard Leo, best known for promoting conservative judicial nominations as co-chairman of the Federalist Society. The Marble Freedom Trust then sold the shares for $1.6 billion cash in 2021, also a non-taxable transaction because of the trust’s nonprofit status.
In short, while tax savings did not accrue personally to Seid, they greatly magnified the financial benefit to the recipient.
Under Kennedy’s rule, Seid would first have had to convert the assets to cash himself, pay $450 million in taxes (an estimate reported by the Wall Street Journal) and then donate.
Incidentally, Kennedy’s reform would have cost Patagonia’s left-leaning founder, Yvon Chouinard, $700 million in taxes, per estimates in the Journal, on top of the $17.5 million in gift levies his family did pay when he transferred 98 percent of his company, worth about $3 billion, to a 501(c)(4) focused on climate change.
(Making his own disclosure, Kennedy noted in Philanthropy Daily that one of his adult children works for an entity chaired by Leo.)
Since they would directly affect tax law but not campaign finance law, Kennedy’s ideas could obviate a constitutional challenge. By definition, they would leave in place most of the system that allows wealthy people to make huge donations to their pet causes; but at least taxpayers wouldn’t be subsidizing it anymore.