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Education reporters across the nation reported breathlessly that Mark Zuckerberg and Priscilla Chan were “giving” $45 billion to education and public health. They did not get the nuances of the financial transaction behind the $45 billion “gift” of the Zuckerbergs, but writers familiar with the business of philanthropy did.
Jesse Eisinger of ProPublica writes in the business section of the New York Times that the Zuckerberg pledge will actually help Zuckerberg, because the money will go to a Limited Liability Corporation that he controls, not a foundation.
Mark Zuckerberg did not donate $45 billion to charity. You may have heard that, but that was wrong.
Here’s what happened instead: Mr. Zuckerberg created an investment vehicle.
Sorry for the slightly less sexy headline.
Mr. Zuckerberg is a co-founder of Facebook and a youthful megabillionaire. In announcing the birth of his daughter, he and his wife, Priscilla Chan, declared they would donate 99 percent of their worth, the vast majority of which is tied up in Facebook stock valued at $45 billion today.
In doing so, Mr. Zuckerberg and Ms. Chan did not set up a charitable foundation, which has nonprofit status. He created a limited liability company, one that has already reaped enormous benefits as public relations coup for himself. His P.R. return-on-investment dwarfs that of his Facebook stock. Mr. Zuckerberg was depicted in breathless, glowing terms for having, in essence, moved money from one pocket to the other.
What’s more, a charitable foundation is subject to rules and oversight. It has to allocate a certain percentage of its assets every year. The new Zuckerberg L.L.C. won’t be subject to those rules and won’t have any transparency requirements….
So what are the tax implications? They are quite generous to Mr. Zuckerberg. I asked Victor Fleischer, a law professor and tax specialist at the University of San Diego School of Law, as well as a contributor to DealBook. He explained that if the L.L.C. sold stock, Mr. Zuckerberg would pay a hefty capital gains tax, particularly if Facebook stock kept climbing.
If the L.L.C. donated to a charity, he would get a deduction just like anyone else. That’s a nice little bonus. But the L.L.C. probably won’t do that because it can do better. The savvier move, Professor Fleischer explained, would be to have the L.L.C. donate the appreciated shares to charity, which would generate a deduction at fair market value of the stock without triggering any tax….
Mega-donations, assuming Mr. Zuckerberg makes good on his pledge, are explicit acknowledgments that the money should be plowed back into society. They are tacit acknowledgments that no one could ever possibly spend $45 billion on himself or his family, and that the money isn’t really “his,” in a fundamental sense. Because that is the case, society can’t rely on the beneficence and enlightenment of the superwealthy to realize this individually. We need to take a portion uniformly — some kind of tax on wealth.
The point is that we are turning into a society of oligarchs. And I am not as excited as some to welcome the new Silicon Valley overlords.
Leslie Lenkowsky is an expert on foundations who is a professor at Indiana University. Some years back, he headed a conservative think tank (the Hudson Institute). He says in this article in the Wall Street Journal that the Zuckerberg gift may mark the end of philanthropy, and he explains why.
Mark Zuckerberg’s announcement that he and his wife, Priscilla Chan, are pledging $45 billion over their lifetimes to an “initiative” to help solve the world’s problems has been widely hailed as an extraordinary act of philanthropy. But generous as this commitment is, it actually marks the culmination of a frequent critique of philanthropy in its current form, emanating chiefly from high-tech entrepreneurs like Mr. Zuckerberg.
Most reports of the couple’s pledge, made after their daughter’s birth last week, have characterized it as a “gift” to charity, the sort that wealthy businessmen from John D. Rockefeller and Andrew Carnegie to Bill Gates and Warren Buffett have traditionally made. But in fact it is an investment in a limited-liability corporation to be called the “Chan Zuckerberg Initiative.”
Although perhaps contradictory, the purposes of the company are clearly philanthropic, to advance “human potential” and promote “equality,” rather than earn money for its owners. However, it will not just make grants to nonprofits, as foundations typically do. The Chan Zuckerberg Initiative will also own stakes in for-profit businesses in fields like education and health care, which its owners believe will help achieve their philanthropic goals….
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, which can keep going, even if they are not very effective at their work, as long as they are good at raising money from donors.
The approach Mr. Zuckerberg is taking has several advantages. One is that if he had created a foundation, American tax laws would have required him to sell most of the Facebook stock he gave it. But by using the stock to fund a limited-liability company, he can keep control over as much of it as he wants (though he may sell some to make grants or investments)…..
Finally, charities are already complaining—often not unjustifiably—that business-minded donors are doing too much micromanaging and not giving those directly in touch with the problems they want to solve—and people they want to help—enough leeway to try unproven or unorthodox methods of making progress. If donors were to become equity investors, the conflicts would undoubtedly grow.
Even so, 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.