Chan Zuckerberg LLC: No Tax Breaks + No Accountability = What Exactly?

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December 3, 2015; New York Times and Wall Street Journal

Mark Zuckerberg and Priscilla Chan have chosen a mechanism for acting on their recently announced intent to “give away” most of their holdings in Facebook, a “gift” estimated to be worth $45 billion in today’s dollars. The couple have chosen to organize the new Chan Zuckerberg Initiative as a limited liability company, a structure that has grown popular with younger philanthropists due to the greater level of control and flexibility they retain in directing these funds use. The mechanism may end up challenging the traditional understanding of what “giving” and “philanthropy” mean.

The use of an LLC heightens Ruth McCambridge’s concern about the potential negative impact of this large “gift” expressed in her NPQ story about the couple’s announcement.

This re-surfaces our concern voiced earlier this year about the effects of a growing wealth gap on our democracy, especially at a moment when so many public systems are integrating philanthropic dollars that have the potential to diminish the voices of others. Such philanthropic approaches smack of colonialism and carry with them an anti-democratic assumption that can only perpetuate and worsen inequality.

Natasha Singer and Mike Isaac noted in the New York Times that

Traditionally, philanthropists have set up nonprofits to make charitable donations. Under the federal tax code, charities and foundations are required to spend a minimum of 5 percent of the value of their endowment every year for charitable purposes. There is also a nonprofit tax designation for advocacy groups, like the Sierra Club or the American Civil Liberties Union. But a limited liability company is a structure that acts partly like a corporation and partly like a business partnership. The structure can provide benefits, and specifically one important advantage to the young billionaires: more control. (Some of them are giving away money earlier in their careers compared with benefactors of past eras—like the Rockefellers and Andrew Carnegie, who largely began their philanthropy closer to the end of their lives.)

Mark Zuckerberg, via Facebook, discussed about his reasons for choosing to form an LLC instead of making a more traditional form of donation. “By using an LLC instead of a traditional foundation,” Zuckerberg wrote, “we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative.” Instead, the couple is compensated for the lack of an immediate tax write-off with “the flexibility to give to the organizations that will do the best work—regardless of how they’re structured.” Faced with that, paying capital gains taxes on stock the LLC sells is less important.

Jack A. Blum, a lawyer and chairman of Tax Justice Network USA, described how an LLC significantly differs from traditional giving mechanisms.

The Internal Revenue Code defines various kinds of tax-exempt charitable entities and sets standards for their governance. For example, all the tax returns of non-profits and charities are public and online. If they make grants to other entities, those grants are reportable. Director’s names are disclosed and any hint of self-dealing or conflict of interest is a matter of record. There are serious prohibitions on self-dealing. The records of an LLC are completely private. We will have to take Mr. Zuckerberg’s word that his LLC is doing good works. Then there is the matter of lobbying and campaign contributions. The LLC can do both but a regulated non-profit cannot enter the political realm without limits. Internal Revenue Service law puts a tax on “excess lobbying” by a non-profit. If Zuckerberg had set up a private foundation, there would be a requirement that the foundation give away a portion of its funds every year. The LLC is under no such obligation. In my view what we have is a promise to give money away at some future time in amounts to be disclosed at some future time. That kind of promise does not rate a front-page headline saying that he is giving $45 billion to charity. Time will tell if the promise is kept but the public may never know. It looks like a vehicle for the Zuckerberg’s to use as a plaything—to invest through and to promote their ideas—without having to sell their Facebook shares and pay tax.

But this is more than an issue of which approach is a better tax strategy for Chan and Zuckerberg. Leslie Lenkowsky, writing for the Wall Street Journal, in a piece entitled “Ending Philanthropy as We Know It” spelled out the implications of the LLC as a “philanthropic” mechanism:

What Mr. Zuckerberg and others are proposing instead is to harness the profit motive on behalf of their philanthropic goals. This is often referred to as a “double bottom-line” approach: The companies in which the Chan Zuckerberg Initiative invests will have to show both a financial return in order to be sustainable and a social one—for example, increased numbers of lives saved or children finishing school—in order to obtain additional funding. And at least in theory, those companies that are unsuccessful would in time go out of business, unlike traditional charities…the Chan Zuckerberg Initiative represents the most significant effort so far to take a new approach to the kinds of problems with which philanthropy has long struggled. If it fails, at least it will disappear, as its investment portfolio loses money, unlike foundations, most of which are set up to go on indefinitely, regardless of what they are accomplishing. But if it succeeds, it may bring an end to philanthropy as we have known it.

What Zuckerberg and Chan have done is more an act of investing in themselves than a decision to give away their assets. It privatizes the way these funds will be directed and minimizes the public’s control of how charitable dollars are spent. In a time when there is a growing concentration of wealth in the United States, as illustrated by a study recently published by the D.C.-based Institute for Policy Studies, the difference this makes presents a great danger to our nation’s civil society in general and to the nonprofit sector in particular. Jesse Eisinger, in the “DealBook” section of the New York Times, captured the threat posed by this effort:

Maybe Mr. Zuckerberg will make wonderful decisions, ones I would personally be happy with. Maybe not. He blew his $100 million donation to the Newark school system, as Dale Russakoff detailed in her recent book, The Prize: Who’s in Charge of America’s Schools? Mr. Zuckerberg has said he has learned from his mistakes. We don’t know whether that’s true because he hasn’t made any decisions with the money he plans to put into his investment vehicle. But I think I might do a good job allocating $45 billion. Maybe even better than Mr. Zuckerberg. I am self-aware enough to realize many people would disagree with my choices. Those who like how Mr. Zuckerberg is lavishing his funds might not like how the Koch brothers do so. Or George Soros.

This lack of oversight and the ability to freely use funds to affect public policy invisibly become toxic when combined with the growing concentration of wealth in the hands of a small slice of the American public. And the Chan Zuckerberg Initiative is not an anomaly:

Pierre Omidyar, an eBay co-founder, has set up the Omidyar Network, which has taken a hybrid approach by operating as both an LLC and a nonprofit structure. Laurene Powell Jobs, the widow of Steve Jobs, the former chief executive of Apple, has formed the Emerson Collective, an LLC dedicated to supporting issues on “education, immigration and innovation.”

Rather than applaud the generosity of these actions, we should be raising alarm bells as a warning of a dangerous trend in the making and looking for ways to nip it in the bud.—Martin Levine

  • Harvey Newman

    Is it the choice of a person of wealth to decide how to use his or her wealth? I think yes.
    The “robber barons” of the late 19th and early 20th century who chose to be philanthropic tended to distribute their wealth at the end of their careers. Eisenberg is choosing to create the potential to be charitible with his funds early in his professional life. Is he benefiting in tax laws by using an LLC model to control his assets, or will he benefit when the assets are distributed to tax deductible 501(c)3’s? Has he given up any personal benefit of tax deductibility or will he be advantaged in other parts of the IRS laws by moving the funds to an LLC?
    It would be interesting to see a tax law analysis of the LLC means of being philanthropic.

  • Julia

    Putting aside the questionable honesty of the Chan Zuckerberg announcement, the fact that they were able to amass this kind of wealth reflects a broken tax system that contributes to the growing economic inequality.

  • Ronald David Greenberg

    What of the limited liability feature of the LLC to shield their assets from lawsuits?