The announcement by Facebook co-founder and CEO Mark Zuckerberg and his wife, Priscilla Chan, that they will give nearly all of their Facebook stock to a new limited liability company they formed to work on social causes has generated enormous media attention, some adulation, and also some controversy.
But despite the attention the move has received, numerous questions remain -- including the project's exposure to legislative change and associated risks, its impact on the exempt organizations sector, whether it will follow through on its stated plans to work on seemingly charitable causes, and some tax-related aspects of its formation and operations.
"I think he's just announced something that is not even remotely fleshed out," Jeffery L. Yablon of Pillsbury Winthrop Shaw Pittman LLP told Tax Analysts. "I don't think anybody has terrific insight into this."
What is known, for now, is that Zuckerberg and Chan have announced they will give 99 percent of their Facebook shares, currently valued at about $45 billion, to the LLC, called the Chan Zuckerberg Initiative. In a Facebook post to their newborn daughter, Maxima, they said the organization's initial focus will include curing disease, personalized learning, and community building. And in a follow-up post, Zuckerberg and Chan said structuring the organization as an LLC instead of a foundation allows them to pursue their mission by funding nonprofit organizations, making private investments, and participating in policy debates.
"What's most important to us is the flexibility to give to the organizations that will do the best work -- regardless of how they're structured," they said.
According to a filing with the SEC, Zuckerberg will give not more than $1 billion of stock to the new LLC for each of the next three years, and he plans to keep his majority voting position in Facebook stock. As of the filing, Zuckerberg beneficially owns about 4 million shares of class A common stock and about 419 million shares of class B common stock.
While it isn't yet official that the Chan Zuckerberg Initiative LLC will be structured as a passthrough entity, Zuckerberg and Chan really don't have any other choice, experts told Tax Analysts.
"The alternative would be nasty," said Beth Shapiro Kaufman of Caplin & Drysdale Chtd. in Washington.
William D. Fournier, also of Caplin & Drysdale, said that the new LLC could either be a passthrough or a taxable C corporation but that choosing C corporation status would subject the entity to higher taxes. It's unlikely Zuckerberg and Chan would do that for a range of reasons, Fournier said.
Apart from the organization's form, Gene Takagi of the NEO Law Group said, it's premature to call the Chan Zuckerberg Initiative philanthropy at the moment. It's also premature to judge it on anything other than possibly the intended marketing effect of the announcement. Takagi said that the message Zuckerberg and Chan wrote to their daughter was "very touching" and that he thinks they want to do good things with the money, but it's an unenforceable pledge.
"Ultimately, they can turn it into just a pure investment vehicle if they wanted," Takagi said. "It's basically his money and her money, and it's coming out of their pocket, and it's not really changed any control for charitable purposes at this point."
One concern critics have, Takagi said, is that Zuckerberg and Chan can use their LLC to engage in lobbying and electioneering almost without restrictions, compared with those placed on, say, a section 501(c)(3) charitable organization. Zuckerberg and Chan, in their follow-up post, mention participating in policy debates.
"The LLC can just contribute all they want to any candidates they want just within the limits that any business could," Takagi said. "I don't have any reason to doubt their intent, but it's certainly within their power and control to do so, to change the purposes of the LLC at any time."
Tax and Legislative Unknowns
There are multiple tax issues "floating around" the announcement of the Chan Zuckerberg Initiative, Kaufman said. One is whether Zuckerberg gets a charitable deduction for "giving away" the Facebook stock. When he puts it in an LLC he and his wife own, there is no deduction, but if the LLC later transfers stock to a charity, there could be a charitable contribution deduction for them, she said.
The SEC filing says nothing about the initiative being a tax-exempt entity, and Zuckerberg and Chan said in their follow-up post that by choosing an LLC instead of a "traditional foundation" structure, there is no tax benefit for transferring their shares to it. Because the entity won't be tax exempt, Kaufman said, any earnings on the stock it holds or any capital gains realized when it sells stock would be subject to tax. If the stock were sold in the hands of a charity, Zuckerberg would escape capital gains tax, she said.
There's also the question of estate tax, Kaufman said. If shares are given to charity either while Zuckerberg is alive or upon his death, estate tax is avoided. If Zuckerberg and Chan die with the current LLC structure maintained, the LLC assets would be included in their estates, she said.
"But if they have a will or trust that bequeaths the LLC ownership to charity, then it would qualify for a charitable deduction at death and escape estate tax," she said, adding it's unknown whether Zuckerberg, 31, is even thinking about estate taxes at this point in his life.
Zuckerberg can easily avoid estate taxes, said David Herzig, a tax law professor at Valparaiso University in Indiana. Were he planning Zuckerberg's estate, Herzig said he would set up a private foundation within the trust instrument and have the stock pass to the foundation through a revocable trust that would become irrevocable at death. "And that's a standard plan, and then it's just a part of a foundation when he passes," he said.
Sometimes, tax planning happens with an eye toward cementing the application of current law, said Susan Morse, a tax law professor at the University of Texas at Austin. But by launching their LLC in the way they did, Zuckerberg and Chan have not insulated themselves from the impact of future law changes on the estate tax or other fronts, Morse said. For instance, if the U.S. implemented a consumption tax regime that treated charitable contributions as consumption, the Chan Zuckerberg Initiative would be exposed to that change, too.
"The point is that a contribution to an LLC is a tax nothing," Morse said. "And therefore they don't change what is already their exposure to a change in future law."
Ofer Lion of Seyfarth Shaw LLP said it is possible Congress "may well end up taking a look at some sort of cap on taxpayers' ability to avoid capital gains through charitable contributions."
The Chan Zuckerberg Initiative isn't a tax avoidance scheme, though, Herzig said. There is a risk of future rule changes regarding the ability of charities to sell received stock by deferring contributions, he said.
Everything is subject to legislative risk, Herzig said, but he added that he isn't sure what legislative risks the project faces. If there were a capital gains change, Zuckerberg and Chan would see it coming and could plan for it, and it's hard to envision a modification to the estate tax that wouldn't provide a charitable deduction at death, he said.
The biggest risk could "be outside the tax realm," he said. "Maybe there would be an SEC rule or some other type of governing agency that would affect what they want to do."
'Silicon Valley Philanthropy'
Zuckerberg's project is undeniably high-profile, but it follows what some other leaders in the tech industry have already done. A December 2 New York Times report said Laurene Powell Jobs, widow of Apple Inc. co-founder Steve Jobs, has an LLC called the Emerson Collective. The report also cited the Omidyar Network, set up by eBay co-founder Pierre Omidyar, which takes a hybrid approach. In a Facebook post praising the Chan Zuckerberg Initiative, the Omidyar Network billed itself as a philanthropic venture with both a foundation and an LLC, allowing it to invest in "the right change makers" regardless of structure.
"I've already heard the term 'Silicon Valley philanthropy' given to using for-profits as philanthropic vehicles," Takagi said. "Not necessarily always as the intermediary vehicle if you will -- just impact investing in general."
The nonprofit sector, however, "should welcome gifts of this magnitude with open arms," Lion said.
"Frankly, as a native of Pittsburgh, where the likes of the Carnegie Library, the Carnegie Museum, Carnegie Mellon University, and other monuments of the charitable acts of the staggeringly wealthy stand to this day, I'm all for this (not so new) model of philanthropy," Lion said. "I just hope it catches on."
But for Takagi, such a trend may bring risk to the exempt organizations sector. "I've been saying for several years now that charities need to be paying attention to taxable social enterprises as competition," he said.
That competition isn't necessarily a bad thing, but charities should be aware they are competing for resources, including talent, Takagi said. For-profits can also claim a greater share of money that might have otherwise been granted or donated to charities, he said. Foundations haven't taken full advantage of their ability to make program-related investments in for-profit corporations because of complex rules regarding those investments and because of fear of penalties, he said.
But that may change as LLCs with ostensibly philanthropic focuses invest more on taxable social enterprises, Takagi said. Many foundations make just enough qualifying distributions to charities each year to meet the 5 percent minimum requirement, he said. And for foundations with specific plans for qualifying distributions, the more they spend making program-related investments in for-profits, the less they have to spend on grants to charities.
"I think we're slowly going to see more money go into for-profit social enterprises, and that will be at the expense of charities receiving some of that money," he said.
Rules governing private foundations contain safeguards to ensure assets are used for charity and with regular distributions, Kaufman said. The LLC structure doesn't have those protections and is unregulated, she said. On the other hand, LLCs don't have the tax benefits.
Fournier said it isn't clear whether that's a threat to exempt organizations. "I think there are still plenty of advantages that come with being able to actually have tax-exempt status," he said. "Not everyone is going to want to necessarily participate in activities that you couldn't comfortably do inside of a private foundation. Certainly I don't think it eliminates or is an immediate threat to the existence of private foundations."
Yablon said the charitable world is changing but the sector shouldn't panic -- its model isn't being blown up. The Zuckerberg model of philanthropy "might be a wonderful model, but it's not going to be a model for most people," he said. Organizations like his are only "for people who are really, really, seriously rich," he said.