Ray Dalio, founder of the world’s largest hedge fund, has one. The Koch family, sitting atop a $137 billion fortune, has at least two. Still another entity, with unknown backers, owns a big stake in one of Wall Street’s fastest-growing financial technology startups.

The vehicle, long deemed a dumping ground for nonprofits like low-income housing developers, Rotary International and even the AARP, drew controversy in the past decade as a “dark money” political giving tool. Now it’s attracting billionaires who realize it offers far more.

The most important quality of the so-called 501(c)(4) organization boils down to one word: control.

Control over their business. Control over political influence. Control over disclosure. Control over taxes. And, of course, control over the crucial soft power of charitable giving.

All in one place.

Gone are the days of steel baron Andrew Carnegie, who followed the tried-and-true path of minting a vast fortune, selling the business and then devoting time and energy to giving the money away. The key advantage of 501(c)(4)s (hereafter: C4s) — made clear earlier this year by Patagonia founder Yvon Chouinard — is the ability to tap the illiquid wealth of entrepreneurs and owners of private family businesses, without demanding that they step away.

Proponents of C4s argue they have the potential to break a philanthropic logjam among the world’s richest people. More than 100 US billionaires worth a collective $1 trillion have signed the Giving Pledge since 2010, promising to donate at least half their wealth to charity. Yet only a few have gifted enough to actually shrink their fortunes, frequently balking at the many rules and public disclosure requirements that come with traditional forms of charity.

Critics of C4 philanthropy include US Senator Sheldon Whitehouse, a Rhode Island Democrat who calls it an “increasingly powerful tool for mischief by the mega-rich.” Much of the backlash stems from giving billionaires a tax-advantaged way to exert secret influence over elected officials at the highest levels. C4s can spend unlimited amounts on political lobbying — and large sums on election campaigns.

Billionaires around the world are drawing scrutiny for the influence they hold. In some countries, it’s more explicit — the close ties between Russia’s business elite and Vladimir Putin were put in the spotlight after the invasion of Ukraine. In India, it’s well known that  Gautam Adani, whose meteoric surge in wealth briefly made him the world’s second-richest person this year, has close ties to Prime Minister Narendra Modi.

American billionaires, the world’s wealthiest, are unusually generous and powerful in more subtle ways. That’s in large part because US rules encourage them to donate huge sums to nonprofits by offering generous tax incentives.

The C4 structure drew widespread attention in September, when Patagonia’s Chouinard, 84, donated his company to create a new $3 billion environmental nonprofit that will exert influence long after his lifetime.

Dalio’s C4 organization, with $3.5 billion, hasn’t been previously reported, nor has a $265 million entity controlled by the Koch family. Meanwhile, Chase Koch, the 45-year-old son of Charles Koch, deployed the strategy to build up a $1.3 billion philanthropic warchest all his own.

As a debate begins over C4 philanthropy’s net benefit to society, advisers in the US are convinced that billionaires are just beginning to tap the strategy, which circumvents a vast number of rules that have governed donors’ giving for more than 50 years.

As far back as 2018, David Miller, a partner at Proskauer Rose LLP, called C4s “the ideal vehicle for grantmaking.”

“It’s definitely something I’m talking more about,” Marcum LLP national nonprofit tax leader Frank H. Smith said of C4s. “They have a lot of flexibility in what they can do.”

Dynastic Wealth
The origins of the C4 in its current form date back to an obscure 2015 tweak to the tax code. It made clear that transfers of assets into the structure weren’t subject to the 40% US gift tax. Since that levy is one of the only ways for the government to take a massive bite out of billionaire fortunes, dodging it is something of a prerequisite for dynastic wealth planning.

Chouinard was initially lauded for using a C4 because the transfer isn’t eligible for a charitable deduction on income taxes. But for many billionaires, that’s not really a factor because deductions are capped as a share of income. For many super-rich Americans, taxable incomes are minuscule relative to the size of their wealth.

Warren Buffett in 2021  figured he’d given away a cumulative total of $41 billion in Berkshire Hathaway stock, much of it to the Bill and Melinda Gates Foundation. But because he didn’t sell shares and rarely generated income in other ways, he said the deduction had only saved him 40 cents for every $1,000 in donations.

Far more valuable to the top 0.01%, including Chouinard, is avoiding capital gains taxes on the wealth they’ve earned. C4s do just that. Putting a $1 billion investment in a C4 rather than selling it can save $200 million in capital gains taxes and, if structured properly, $400 million or more in estate taxes when the donor dies.

“The point of the structure was never about tax efficiency,” Patagonia spokesperson Corley Kenna said. “It was to release more money to fight the climate and environmental crisis.”

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