Getting the Vapors Over the Chan-Zuckerberg Initiative LLC

December 14, 2015

There’s been an awful lot of pearl clutching going on out there in the media about the Chan-Zuckerberg Initiative, now famously known to be organized as a Delaware Limited Liability Company (LLC – not limited liability corporation, media folks! And yes, it makes a difference.) The December 11th Chronicle on Philanthropy update, which I get in my email, had not one but TWO opinion pieces on it. Personally, I don’t quite get all the drama, but I have three working theories, none of which are mutually exclusive. ( I do have to put one caveat out there – my comments are based on the structure as I understand it from media reports, which may or may not be reliable.)

Tax Deduction? We Don’t Need No Stinkin’ Tax Deduction. So the first line of attack appears to be that it’s all a big tax scam – they get the deduction but they give nothing to charity. As far as I can tell, however (and sort of confirmed in a non-technical way by Zuckerberg himself) is that the LLC is, not surprisingly, not a tax-exempt entity. As a result, the C-Zs won’t get an income deduction for funding the LLC; an income tax charitable deduction might pass through to them if and when the LLC actually makes a contribution to a recognized, qualified charity. Which makes it no different than any other for-profit business out there that makes contributions to charity – albeit with way more fanfare and more decimal places at stake.

So maybe all of it is just a fundamental misunderstanding of the tax implications of the LLC? If the notion is that the tax-paying public has a right to certain expectation of a charitable endeavor as a condition of tax exemption, then that notion is misplaced here – at least with respect to the federal charitable income tax deduction and/or tax-exemption from the income tax. I’ve seen some speculation that there may be some estate and gift planning going on here – but there is a great deal of speculation on that and even so, what makes that any different than any other wealthy person out there? I’ve also seen reference to evading California income taxes – not sure on that one, but it seems unlikely from my rudimentary knowledge of the California income tax. Would love to hear from anyone from CA with thoughts on that issue.

One set of taxes the Initiative is most certainly dodging is the private foundation excise taxes, which generally were designed to make sure that assets for which a charitable income tax deduction is granted are used for those charitable purposes. It hardly seems surprising that the private foundation excise taxes don’t apply to a for-profit entity, for which no charitable income tax deduction has been granted.

2. Let The Eat Charitable Cake. My second theory is a concern over philanthropic oligarchy – in the US, a concern that goes back (at least) to the creation of the first large private foundations during the Industrial Revolution era. If you’ve read the legislative history to the private foundation excise taxes, one of the repeated themes is an anti-trust type concern (not surprising, I suppose) – the ultra wealthy concentrating and controlling wealth not only in the business sector, but in charitable vehicles as well. I couldn’t help but hear the echos of the Patman hearings and reports (which formed much of the basis for the passage of chapter 42) in the criticisms of C-Z. Some also cite to Zuckerberg’s recent and widely-criticized foray into donor controlled philanthropic experimentation in the form of the Newark school system. In the Jacobin article linked at the beginning of this paragraph, the author notes, “People like Zuckerberg and Gates are unelected and unaccountable to anyone and face few, if any, repercussions for the negative consequences of their social experiments.” In my mind, these concerns undergird the suggestions of Pablo Eisenberg in his editorial in the Chronicle of Philanthropy, which suggests that the C-Z Initiative ought to make public reports, have an independent board, and champion issues of poverty. As Eisenberg states, “The overwhelming majority of superwealthy donors who have signed the giving pledge do not give much, if any, of their money to fight poverty or help marginalized citizens, the neediest nonprofits, or advocacy organizations. Despite what they often claim, tech billionaires are not giving money that disrupts the status quo.”

I’m struggling with the question of why? If this is a private enterprise not subsidized by public funds through the charitable deduction, what standing do we have as a society to demand such things? If the entity is not itself charitable as a legal matter, then… so what? Which raises the final question…

3. Or Maybe, We Just Don’t Know What Charity Is Any More…? Fundamentally, I really think this is about our fundamental notions of charity as a society. In the initial letter to his daughter announcing the pledge to the initiative, the C-Zs stated…

As you begin the next generation of the Chan Zuckerberg family, we also begin the Chan Zuckerberg Initiative to join people across the world to advance human potential and promote equality for all children in the next generation. Our initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities.

We will give 99% of our Facebook shares — currently about $45 billion — during our lives to advance this mission. We know this is a small contribution compared to all the resources and talents of those already working on these issues. But we want to do what we can, working alongside many others.

Education. Advancement of Health. Building Communities. All things that clear fall within traditional notions of charity, both in common parlance and in a Statue of Charitable Uses/Jackson v. Phillips/Section 501(c)(3) legal kind of way. What’s different, however, is the way that the C-Zs have chosen to go about achieving these otherwise laudable ends. It shouldn’t be surprising that Zuckerberg appears to want to pursue some serious impact investing, which would clearly be hampered by (although not necessarily prohibited by) the strictures of 501c3 and, if applicable, the private foundation excise taxes. It does sort of turn traditional thinking on its head – do tax incentives encourage giving? In this case, maybe the cost of those tax incentives actually discouraged giving, or at least traditional endowed grant-making giving? To the extent that one of the benefits of the private foundation form (or even tax exempt charity, generally) was to create an environment where individual were free to experiment with solutions free from the bounds of shareholders, voters, or other stakeholders, maybe this is just a step back to these roots?

Or maybe the C-Z Initiative isn’t charity at all. Yes, it has social benefit as an end. However, maybe it is just a private business enterprise and should simply be treated as such?

EWW

Posted in:

Current Affairs