DAFs Help The Rich Get Richer. Is that a Problem or No?

February 6, 2024

Why the Rich Get Richer and the Poor Get Poorer - YouTube

The big philanthropic news last week was that Netflix co-founder Reed Hastings made a $1.1 billion dollar charitable contribution comprising Netflix stock the appreciation of which has never been taxed. All quite legal. He received a full fair market value deduction even as he maintained spending control over the donation. He has supported progressive causes, including historically black colleges and universities like the one I work at. I am visiting at UConn Law this semester though and some days its colder than a witch’s . . . big toe, I’ll tell you that. This ain’t Orlando, Florida.

The Wall Street Journal reports that the donation was made to a donor advised fund to which other billionaires have donated. No telling when the donation will be disbursed and actually used for charity. But the particular DAF is apparently sufficiently obedient to donor “advice” that it is one of the biggest in the country. So there are two problems. First, the richest get a donation for the never-taxed valued of astronomical appreciation in stock. Its like a transfer tax bailout. Who thought of that, I wonder? And then, of course, they maintain control over the money indefinitely. Hell might freeze over before the donation is used for charity, let’s just be honest.

But should we fix that or is that just the price we pay to divert some of their wealth to public good? Billionaires have more wealth than most nations in the world. If nothing was ever legislated about deducting untaxed wealth (fundamentally, the deduction should be limited to basis because that is the amount of previously taxed wealth that is not used for personal consumption) or requiring a date certain for DAF payouts, are we worse off than we would be if DAFs didn’t exist? What if, without the “rich get very much richer” tax benefit, billionaires just kept their dynastic wealth and never contributed any of it to the public good?

As a young Army JAG, I once had a drug distributing client who rolled on everybody. I mean everybody! A lot of wayward soldiers went to Ft. Leavenworth Disciplinary Barracks on the strength of her testimony. And when it came time for her sentencing I basically argued that she should get off with a slap on the wrist for her cooperation. Trial Counsel argued indignantly that she was a drug dealing rat just like the rest (implying she was even worse for ratting) and should not be rewarded. The Military Judge replied, “yeah, that’s how it works. She tells on everybody and she gets a pass even if she was involved and has unclean hands. That’s just how it works.” Something like that. She got a “big chicken dinner” (a BCD, or bad conduct discharge) but she walked with no jail time. The public has to give something to a few to get a whole lot more from many.

That is just about what is happening with billionaire charitable contributions to DAFs. They are already rich like God, almost, and we give them more riches via the tax code. The idea is that without the incentives, the public good would not be achieved. If there were no outlandish deductions for untaxed appreciation given to a donor advised fund over which the billionaire donor still has practical control, would billionaires just spend or eat their wealth instead of giving some of it to HBCUs or other things we want to support? I don’t know, but that’s probably why I can acknowledge that DAF’s are a fundamental inconsistency in tax policy making rich folk even richer and still not be all that bothered by it. Here is some of the article:

Netflix co-founder Reed Hastings donated $1.1 billion worth of his stake in the streaming company to a California-based charity that is popular with technology founders because it gives them tax breaks and privacy. The Netflix executive chairman gave the shares to Silicon Valley Community Foundation, which had more than $10 billion in assets at the end of 2022. Previous donors have included Facebook co-founder Mark Zuckerberg, who gave more than $1 billion worth of Facebook stock a decade ago.

Hastings’s gift accounts for about 40% of his direct ownership stake in Netflix and comes after the stock surged following a strong earnings report. He has previously donated money for educational purposes and to historically Black colleges. A spokeswoman for Netflix confirmed the donation went to the Silicon Valley charity but declined to comment further. The foundation, formed in 2007, was created to help wealthy Silicon Valley executives channel charitable contributions. It offers donor-advised funds that allow individuals to place a portion of their wealth and then advise how the assets are used for specific charitable purposes.

The donors get an immediate tax benefit and more privacy than through some other philanthropic efforts. Silicon Valley Charitable Foundation has to disclose ultimately where its funds go but not where the money came from or who advised it to go there. It reported 1,060 donor-advised funds at the end of 2022, the latest filings available. Those funds held more than $9.4 billion of the $10.1 billion in total assets, including $2.3 billion contributed that year. A spokeswoman for the charity said it wouldn’t comment on donors’ philanthropic activity.

Donor-advised funds have come under criticism because giving to them can generate an immediate tax deduction, while the donated funds can sit for years. By contrast, private foundations—another charitable vehicle often used by the wealthy—are required to distribute funds over time and must disclose details about donations and charitable operations. Hastings’s gift of two million shares on Jan. 24 amounted to about 40% of the executive’s stockholdings, according to Verity, which analyzes stock transactions by corporate insiders. Hastings also holds options on about 2.5 million shares, with strike prices ranging from $49 to $680 a share, said Ben Silverman, Verity’s vice president of research.

Hastings’s gift came as the Netflix shares reached a two-year high. Netflix closed Monday at $575.79, up almost 1%. Big donations of stock offer executives significant tax benefits: They generate a deduction against current income—often worth as much as 30%, depending on the donor’s tax rate—and allow the donor to avoid capital-gains tax on the shares’ appreciation. The tax deduction is calculated based on the price when donated. In all, contributing to a donor-advised fund sponsor can generate savings of 50%, said Ray Madoff, a Boston College law professor who specializes in philanthropy, taxes and estate planning. “By taking your property instead of cash, they’re maximizing your tax benefits,” Madoff said.

darryll k. jones