Universities as Middlemen for Appreciated Stock Sales. And a Donation Gone Bad
Bloomberg’s Matt Levine has column out this morning dissecting the tax consequences of Bill Ackman’s on again, off again stock donation to Harvard University. The column is behind a pay wall, unfortunately. If you are an academic your law school library probably has a subscription. Anyway, Ackman is threatening to pull a big donation unless Harvard fires its President because of her testimony before Congress last week. Levine suggests that Ackman is also angry about a prior donation of $10 million in stock that ended up costing him $75 million in unrealized appreciation. The underlying tax detail is interesting. Here is an exerpt:
One model of a charitable endowment is that [university] is in the business of selling appreciated assets on behalf of donors in order to maximize tax efficiency. Like:
1. A rich person owns some stock. She bought it for, say, $1 million, and it is worth $10 million now.
2. She could sell the stock for $10 million, pay taxes on her gains, and be left with something like $8 million. She could then donate that money to you and deduct $8 million from her income taxes for the year, saving $3 million or so.
3. Or she could give university the stock. Then she would not recognize any gains on the sale, and she’d get to deduct its full market value from her income taxes, saving almost $4 million. University gets a bigger gift ($10 million instead of $8 million), and she gets a bigger tax deduction. Better trade!
4. Then university sells the stock, for $10 million, and doesn’t pay any taxes, because university is a non-taxable charitable endowment.
This is a very well-known feature of US tax law; wealth managers will commonly tell you to donate appreciated stock rather than cash, and if you go to, like, Harvard University’s web page, they will tell you how to donate stock, because it comes up a lot.
In this process, Step 4 is not strictly essential. If you are a big charitable endowment, you are not spending all of your money every year. You are investing it for the long run. Maybe you want to keep this stock; maybe you think it has room to run and will be worth more in the long run.
But if you are a big charitable endowment, you have some plan. You sit down and think about how to construct your portfolio; you say “we should be 50% stocks and 5% bonds and 15% hedge funds and 20% private equity and 10% timberland” or whatever, and then you pick assets and managers within each category to get the portfolio that you think will best position you for the long run. And then if some big donor comes in and gives you $10 million in cash, you allocate it to that portfolio.
But lots of donors instead come to you with stock that has appreciated a lot (often stock in their own companies), they want to maximize their gifts and their deductions, and they know that the way to do that is by donating the stock. The stock doesn’t fit with your plan. You are not making an investment decision each time they donate the stock. You are, several times a year, getting a big concentrated position in some random stock that your big donors happen to own. An endowment with an investment portfolio consisting only of the stuff that its donors happened to have lying around would look crazy. You take the random stuff, you sell it, you buy index funds or timberland or whatever.
You are essentially a middleman: You have some target portfolio of assets you want to own, but your donations come largely in the form of other assets that your donors happen to own, and you are in a position to efficiently turn the donated assets into the target assets.
. . .
You can read Levine’s account of how the transaction went south below the fold:.
darryll k. jones
In 2017, Ackman wanted to give Harvard money to recruit economist Raj Chetty, but he “had no liquidity” due to a divorce. So:
Ackman’s solution was to give Harvard stock in Coupang Inc., at the time a speculative private venture-backed company.
The stock he was giving was valued at $10 million, but Ackman said he agreed with Harvard that if the value went below $10 million he would make up the difference. But if the company went public and the stock was worth more than $15 million, he would have the right “to allocate the excess realized value” above that amount to any Harvard-related initiative of his choice.
From Ackman’s long tweet on the matter:
In Wall Street speak, Harvard had a put to me at $10m, and I retained a call at $15m, with the right to allocate the excess value to the Harvard initiative of my choice.
In 2021, Coupang went public , and the shares he gave to Harvard were worth $85 million. He called Harvard with the good news, only to find out that Harvard had already dumped the stock. Paulden:
He was informed that Harvard Management Co., which oversees the $51 billion endowment, had sold the stock back to Coupang in a private transaction in March 2020. Ackman said no one from Harvard Management or the administration contacted him at the time to ask if he wanted to buy back the stock or to apologize after the fact for missing out on $75 million of potential gains.
Apparently the sale price was $10 million, the same as the valuation when he gave it. Ackman argues that this was a bad investing decision by Harvard:
Harvard had sold stock which it could have put to me for $10m at a massive discount to its value at that time. Coupang had made massive progress since my gift in December 2017 and the stock’s value had increased enormously.
And Harvard had never told me that they had sold the shares. I was never offered the opportunity to buy the shares back for $10m or a higher price, which I would happily have done, had I known the University needed liquidity.
And the notion that Harvard needed $10m of liquidity in the context of a $50 billion endowment is on its face absurd. Any sophisticated investor should also understand that when a private venture-backed company is buying back stock, it is a bad idea to sell.
Harvard sold the stock despite the fact that we had a contract which provided the University with downside protection at $10m while allowing it to retain 100% of the upside. It made no economic sense whatsoever for Harvard to have sold.