Ellen P. Aprill
A little more than two weeks have passed since Priscilla Chan and Mark Zuckerberg announced that they would give away 99% of their Facebook stock, currently valued at $45 billion, during their lives. This distance, albeit short, gives time to reflect back on what the Chan Zuckerberg Initiative is and what it is not.
Early coverage, particularly headlines, suggested that Chan and Zuckerberg had made a current donation to charity. Facebook quickly worked to correct this erroneous impression. The Chan Zuckerberg Initiative involves a transfer to Delaware LLC, a limited liability company, not a public charity or private foundation. For tax purposes, the transfer to the LLC is a tax nothing; it has no effect on the couple’s taxes. As Professor Michael Graetz stated Mr. Zuckerberg “has moved money from one of his pockets to another.” Chan and Zuckerberg have given nothing away yet.
Any transactions undertaken by the LLC will show up on Chan and Zuckerberg’s tax return. For example, if and when the LLC makes a contribution to an organization tax-exempt as a charity under the Internal Revenue Code, the couple should be able to take a charitable contribution deduction, at least to some extent (they would likely face limits on the ability to take a charitable contribution deduction for gifts of appreciated stock based on adjusted gross income; the super-rich, however, often are not concerned with these deduction limits). The couple would pay income tax on any sale of Facebook stock from the LLC. (LLCs, however, are often used as an estate planning tool.)
What Chan and Zuckerberg have chosen not to do also warrants review. First, unlike Bill Gates and Warren Buffett, Chan and Zuckerberg have not given their assets to a private foundation. Private foundations have a formal definition in the Internal Revenue Code, but, in general, they are grant making institutions established by an individual, family or corporation. As a result of excise taxes that in practice function as prohibitions, private foundations are subject to many restrictions: that they pay a tax on net investment income, that 5% a year of their investment assets be distributed, that there be no self-dealing, that they not lobby or engage in campaign intervention, that they not engage in risky investments, among others. Obeying all these rules, which were enacted in 1969, can be complicated and time-consuming. In addition, too much investment in for-profit ventures might risk a private foundation’s tax exemption. Moreover, and of particular importantce, private foundations must file the Annual Information Return Form 990PF, which contains detailed financial information, and make the form public.
Second, the Chan Zuckerberg Initiative is also not a donor-advised fund (DAF). A DAF is an account set up at a community foundation or at the now enormous charitable funds that have been established at Vanguard and Fidelity to which donors make contributions and recommendations as to charitable use. Under applicable tax law, these DAFs sponsors must have ultimate control and decision-making authority, although appropriate donor recommendations are in most cases followed. A contribution to a DAF counts as a donation to a public charity with a current deduction, even if the money is expended at a later time. A DAF is not itself an entity, but simply an account at a charity. In the recent past, Chan and Zuckerberg have made a large contribution to a DAF at the Silicon Valley Community Foundation. (In part in response to the enormous growth in DAFs and fears of abuse, Congress enacted new provisions regarding them in 2006; the IRS has not yet issued long-awaited regulations interpreting these provisions.)
The choice that Chan and Zuckerberg made, establishing an LLC, offers them a number of advantages. While the LLC has no impact for federal tax purposes, it does exist under state law and offers liability protection. It can facilitate venture capital investment. As an entity, it can have a web page, issue press releases, and, as the past week has demonstrated, garner enormous publicity. It can disclose as much or as little as it likes. It can take actions to advance social welfare activities that do not meet the tax definition of charitable activities. It can lobby for legislative changes and support political candidates. The Chan Zuckerberg Initiative has stated that it expects to do all of these. We will have to wait and see what choices the Chan Zuckerberg Initiative in fact makes.
The LLC has emerged, for some of the very rich in the Silicon Valley, as a new and improved private foundation, a structure that allows control without the many restrictions a private foundation faces. Laurene Powell Jobs, the widow of Steve Jobs, set up a similar LLC, the Emerson Collective, some time ago.
We as a society may well want to accept these innovations as simply one option along with established structures, such as DAFs and private foundations. We may, as Congress did with DAFs, decide that changes in the use of certain vehicles for giving call for new and additional rules. And we may also decide that these new alternatives require us to review and, as I and others have written, perhaps change some of the rules we apply to established structures, such as some of the private foundation excise taxes, in light of 21st century realities and needs.