Is Patagonia the Rabbit or the Duck: Why It's Okay to Answer “Both”

By: John A. Lanier
Sep 28, 2022 9:30 AM ET
Summary: 

John Lanier takes a deep-dive into exactly how Yvon Chouinard gave away his ownership of Patagonia earlier this month. As John notes, the details matter, and they show that Chouinard was both acting philanthropically and in a way that minimized his tax liability.

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Rabbit or duck? If you aren’t sure what I mean, click that link and look at the image. It’s a 130-year-old optical illusion, and the question is whether you see a rabbit or a duck first. Whichever you see, it’s not too hard to refocus on the image and see the opposite animal. In casual company, this image can spark some fun conversation, as there is no clear correlation between who will see what first.

There are other examples of this effect. A classic one is the My Wife and My Mother-in-Law illusion. You also have the Rubin vase. One of my favorites is the spinning ballerina. I always see her spinning to the right (or clockwise, if you will), but if I concentrate REALLY hard, I can make myself see her spinning the other way. What I find most interesting about all of these, though, is how we tend to frame them. Each one is presented as an “or” proposition. Duck or rabbit? Young woman or old? Vase or two faces? Spinning right or left? In truth, there is always a right answer - it’s both. But for some reason, we humans are wired to take sides.

Let me give you one more example. Is Yvon Chouinard a trailblazing climate philanthropist or a savvy tax dodger?

Earth is Now Patagonia’s Only Shareholder

I’ll start with the context. Yvon Chouinard is the founder of Patagonia, the outdoor clothing and gear company. For a long time now, they’ve been a financially successful enterprise (and full disclosure - I own multiple Patagonia products and love them). They have also long been outspoken about environmental issues and the negative impacts that come from our economic system and the businesses that comprise it. This stems from Chouinard’s own environmental ethos - he is an outdoorsman at heart, and protecting the planet he loves comes naturally to him (pun!).

On September 14, 2022, Chouinard made some big news. He and Patagonia announced that he was giving away ownership of the company. I’ll get into the nitty gritty weeds of the minutiae in a moment, but the way Chouinard framed it, Earth is now Patagonia’s only shareholder. He penned a thoughtful note to go along with the announcement, and it’s certainly worth a read. It’s his effort to explain the “why” of this news.

His action has not been met with universal acclaim, however. I’ve seen multiple reports that paint his decision as not much more than a tax dodge (here’s a Bloomberg article for a taste of that). These reports focus on the roughly $700 million in taxes that he would have paid had he instead sold the company rather than give it to nonprofit organizations. To me, the sides-taking here is rather akin to the optical illusions I shared above.

Into the Weeds: How Yvon Chouinard Structured His Gifts of Patagonia Stock

Here are those weeds I mentioned, and bear with me. The “how” which accompanies Chouinard’s “why” is really important, and so I’m going to have to delve into some corporate law and tax law here. Let’s begin with how things were structured before the ownership transfer. Legally, Patagonia was chartered under California state law as a benefit corporation (note: it is also a B Corp., which is a certification status for companies rather than any sort of legal structure). Benefit corporations are for-profit corporations that are legally permitted to pursue social and environmental benefits in addition to economic profitability. Like other types of corporations, benefit corporations issue stock, and the owners of the stock are the owners of the company. Patagonia has long been privately held (meaning its stock is not sold on an open market), and it has been Chouinard and his family that have owned the company’s stock.

Moreover, there are two types of Patagonia stock that they own: voting and non-voting. Owning voting stock means a person can both elect the board of directors that manages a company and share in the profits of the business. Non-voting stock shares in the same profits, but it lacks any ability to vote on board members. In Patagonia’s case, about 2% of total shares are voting stock, and the remaining 98% of shares are non-voting.

Okay, so now for what Chouinard did. First, he formed two new organizations: the Patagonia Purpose Trust and the Holdfast Collective. The former appears to be a business trust - basically, an entity responsible for managing the affairs of a business. The latter is a 501(c)(4) nonprofit organization. These nonprofits can do lots of things, such as give money to other nonprofit organizations. Lots of them also engage in politics by educating voters, lobbying for policies, and supporting or opposing candidates for elected office. For the Holdfast Collective, it will be specifically focused on environmental issues. After creating these organizations, Chouinard then gifted the voting stock to the Patagonia Purpose Trust and the non-voting stock to the Holdfast Collective. For the first gift, he had to pay about $17.5 million in what is called a gift tax (which is a somewhat rare type of taxation that is designed to make sure wealthy people can’t escape the estate tax at the end of their life by giving away all of their fortune to friends and family before they pass). From now on, the Trustees of the Patagonia Purpose Trust will oversee the management of Patagonia, and presumably Chouinard and his family will be those trustees. As a result, it is probably true that Chouinard is not giving away control of the company.

As for the gift of stock to the Holdfast Collective (valued at just shy of $3 billion), Chouinard has no tax liability. That’s because of how gifts to 501(c)(4) organizations are treated under the Internal Revenue Code. While he doesn’t get a tax deduction for the gift (gifts to 501(c)(4) organizations are not tax deductible like gifts to 501(c)(3) organizations are), he also does not have to recognize capital gains income on the unrealized gain in the stock. Stated in a less wonky way - his stock is worth a whole heck of a lot more now than when he founded the company, and he would have had to pay lots of income taxes if he had sold the company at a profit. By giving the stock to a 501(c)(4) though, the Internal Revenue Code says he never has to pay those taxes (which again, were estimated at about $700 million).

An Effective Use of Tax Policy for the Good of Our Planet

And for that, some people are raising an eyebrow at Chouinard. I don’t think that’s fair. One of the first things I learned in my income tax class in law school was that what a lot of people call a “tax loophole” is really just tax policy. That’s entirely the case here. When someone has an appreciated piece of property, the tax code gives them multiple legitimate options for disposing of it, like selling it and paying gains tax, giving it to a family member, donating it to a charity, or willing it to someone in their estate plan. The tax implications for each one are different by design. Just because Chouinard is a billionaire doesn’t mean he has any different choice. He didn’t “dodge the tax” so much as he took advantage of one of his legitimate options.

If that frustrates you or anyone else, I get it. $700 Million is a big potential tax bill that didn’t get paid. But then the issue that people have is less with Chouinard and more with our federal tax policy. If people don’t want contributions to 501(c)(4) organizations to qualify for gains tax exemption, then they should say that. I might even agree to an extent. So long as that is our tax policy though, I won’t criticize anyone for utilizing it.

Moreover, as someone well versed in the climate crisis, I have to applaud what Chouinard has done. Now 98% of every dollar of profit that Patagonia has will go to The Holdfast Collective. That will amount to massive sums of money that can make a meaningful impact on this issue. Sure, some of that impact will be in the political realm, but we won’t be able to solve the climate crisis if we don’t get our politics on it correct. So for my two cents, I’m just fine with Chouinard saving his 70 billion cents.

Are Yvon Chouinard and Patagonia the philanthropically-minded rabbit or the tax-savvy duck? I say both. And thank goodness for it.

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