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.
“The approach Mr. Zuckerberg is taking has several advantages.”
I’m sorry, apparently a few words got chopped out of that sentence. Let me edit it: “The approach Mr. Zuckerberg is taking has several advantages FOR MR. ZUCKERBERG.”
Basically, it boils down to, he transferred his shares for a better (tax-free) ROI. Because he’s transferring the money over the course of his lifetime, his annual transfers will be roughly what he would have paid in taxes, so he’s really not losing anything (although we the public are). And, to boot, he remains completely in charge and he can go right on making money with his “charitable donation”.
I often joke that this year I’m giving to my favorite charity: my bank account. But Zuckerberg really has gone and done exactly that and he’s getting loud applause for it.
There should be a broader “civics” class for younger kids- maybe 12, 13, 14. Do the (traditional) 3 branches of government- fed, state and local and then do the big lobbyists and then the big foundations. They’re really getting a grossly incomplete picture without the quasi-government pieces.
God knows, they are going to need that information.
Or maybe that course could be offered to journalists….
I guess the fundamental thought is pure, we’re having a baby and we want to make the world a better place for her, or provide other children with the preschool and education that she gets?
I guess it remains to be seen, and I would love to be proven wrong, but I’m pretty sure that the pre-school and education that Zuckerberg and Chan will be funding will bear very little resemblance to what little Max will get.
TC, how about this? In honor of the birth of our baby, we want to put all children online in their classrooms.
I got the same feeling about preschool as Diane said. The whole time I read his letter I was thinking the whole thing is designed to put more kids in front of a computer for their whole childhood.
Smells of manipulation ala the Koch Brothers and Bill Gates.
Ah yes…..let no good deed go unpunished!
You have only speculation to draw upon. Wait until you see what he does before you start complaining.
If the media would likewise wait and see what he does before they start applauding, I might agree. I’m just noting that setting up this fund as an LLC under his own control and transferring shares over his lifetime that will be roughly equivalent to what he’ll owe in taxes is, so far, not charitable. If he actually uses his LLC for truly charitable endeavors (not just influence/profit-making endeavors in disguise), then I will be pleasantly surprised and I will say my mea culpas and join his chorus. But, unlike the stock market, with people past behavior is a pretty darn good predictor of future behavior, and there’s little in Zuckerberg’s previous behavior to admire.
Tom Brown
“Only speculation to draw on” ? How about Zuckerberg’s backing of for-profit Bridge International Academies (with Pearson and Gates), which international organizations criticize as costing 1/3 of a family’s income, sold in the poorest countries and, promoted to the exclusion of public education, by the World Bank?
Tom, I updated the post to include a description in this morning’s NY Times. Please read. The main beneficiary of Zuckerberg’s creation of an LLC for his fortune is…the Zuckerbergs.
That the overwhelming majority of mass media outlets would fawn over these two cynical, creepy people (grotesquely using their newborn daughter as a beard and vehicle for their PR department) and uncritically reproduce their self-serving description of a for-profit, limited liability corporation as a “charity” or “philanthropy,” when it is a transparent means of increasing their wealth and power, is typical, and very depressing.
As Paul Anka sang
Havin’ my baby
What a lovely way of pitchin’ our LL company
Havin’ my baby
What a lovely way of keepin our profits tax-free
Philanthropy, as practiced by Broad, Buffett, Walton’s, Zuckerberg and Gates is already suspect, in terms of its harm to individuals, existing systems for the protection of people, and to democracy. Their failure to deplete (in any way) their fortunes, as families among of the most powerful, “charitable”, 0.2%, equals exploitation in many spheres.
For Gates and Buffett to remain the richest and 2nd richest men, decades after they bragged about spending down their fortunes, is proof that, it makes little difference if the “giving” is structured as an LLC or a charitable foundation.
The most significant invention of the past quarter century, has been self-appointed saviors, who create multinational corporate dominance, in every endeavor they touch, using the guise of “doing good”, when it is, self-aggrandizement at the expense of the world’s population.
It’s just too small a circle to be representative. Broad promotes Obama Administration which promotes Gates which promotes Zuckerberg, and staffers go back and forth:
https://twitter.com/BroadFoundation
They have too much influence. It doesn’t matter if they’re “good” or “bad” people. Such a small group of people shouldn’t have this much power over so many. That’s a bad idea.
“The Möbius Group”
The Möbius Group
Is woe-be-us loop
A billionaire troop
With odious poop
I don’t understand.
Why would Zuckerberg want to set up a company to limit his lieability?
Doesn’t that come in handy on occasions?
Poet, a lawyer can answer your question better than I, but an LLC limits your liability to lawsuits as I understand it.
I thought it was spelled lieability.
My bad
Here’s another version of the story:
How Mark Zuckerberg’s Altruism Helps Himself
“Zuckerberg set up a limited liability company, which has reaped enormous benefits as public relations coup and will help minimize his tax bill.”
https://www.propublica.org/article/how-mark-zuckerbergs-altruism-helps-himself
From the Pro Publica article above:
“Maybe 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?” 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.”
Even if he was able to make infallible decisions about the use of his fortune, it avoids the very real issue of whether a functioning democracy should have these wide-ranging decisions made by one or two people.
As Jesse Eisinger correctly points out in his Pro Publica article, if something is worthwhile for society, it should be payed for by society, and we should not have to rely on the good faith, whims or digestion of the members of the Overclass, who have shown themselves to be a fickle bunch.
It’s particularly outrageous that a few people are making decisions to effectively “experiment” on millions of American school children with virtually no review beforehand, no informed consent and no oversight during said experiments.
Zuckerberg and Gates seem to have no qualms performing such experiments and seem to take a “whatever” attitude toward the outcomes. No skin off their backs if the experiments “fail” or have negative consequences for others (teachers fired, students failed)
No matter what people think of the motivations of the men behind them, such experiments without informed consent are most certainly not “OK.”
Without a doubt, they violate ethical principles (and probably laws as well.)
And, we are back to the question, “What happens when the rich, self-proclaimed do-gooders, stop propping up charter schools, with their tax-skirting money?
This is an interesting topic about PHILANTHRO-capitalism.
I am only a commoner. I would suggest to law maker that everyone from homeless to the richest from 15 years old to 65 years old will equally PAY 10% INCOME TAX from their gross earning income below one million dollars, WITHOUT any exemption, without any tax return as the basic of civic rights that is to enjoy police protection, fire-protection, hospital EMERGENCY free care, and OLD AGE SUBSIDY.
Now, to all investments, and stock exchange money, and crooked philanthropy gift to charity, people MUST first pay 50% to national tax of any amount THAT EXCEEDS ONE MILLION DOLLARS IN NET INCOME; and they would get back 50% INCOME TAX RETURN FOR any amount that is given to any public charity (Yes, if crook can earn net 500 million, they shall pay 250 million in national tax; then if they give away 100 million they will get back 50 million in tax, therefore they ONLY pay 200 million to national tax – they still earn 200 millions after national tax plus the honor of giving to CHARITY 100 MILLIONS).
This will solve the basic rights from the basic contribution from each citizen in a country.
We simplify all loopholes and all technicality in double-meaning word in philanthropy. Back2basic
We do not need a flat tax. We need a truly progressive tax like we had up until Reagan.
This is not your grandmother’s charity. This is not the Salvation’s Army’s red tin can. This is a Brave New World of venture philanthropy that may leave the little man the tech-Titans claim to want to help “learn how to fish,” completely voiceless in traditionally democratic institutions. https://kafkateach.wordpress.com/2015/12/05/watch-out-gates-here-comes-zuckerburg/
Reblogged this on Network Schools – Wayne Gersen and commented:
The term “philanthropy” is not really applicable here. From what is written here it seems that Zuckerberg is behaving like a venture capitalist while getting credit for being a selfness donor. I begrudgingly admire the PR firm that spun this narrative while lamenting the fact that most media outlets unquestioningly bought the story.
With respect to the author and those who somehow believe that they have some sort of claim on the estate, the money in question is Zuckerberg’s and he is absolutely free to do with it whatever he chooses (throwing some of it my way might be nice, though).
Unless the shares are cashed in there is no tax due and if he chooses to put it into a corporation that will invest in humanity, spitting at the donor is simply stupid, because he can simply take his money back and fart in your direction as a consequence. His lifestyle will be unaffected either way
That charities (which often spend more on administration than they ever do on their mission – check out how much the head of the Red Cross takes home each year) are clamoring for less oversight may be evidence that perhaps the oversight is best applied to those charities.
Mr. Zuckerberg and his wife have taken absolutely no money from the public in providing the service that allowed them to achieve their status of uber-rich – the man was in the right place at the right time and a convergence of the stars provided him with unimaginable wealth. it is, however HIS money and HE gets to decide where it is to be spent, no different than if he’d won the lottery – except that to get where he is required luck AND brains.
To whine and complain about the size and manner of his largesse is beyond petty and filled with sour grapes.
Accept the gift with whatever limitations that may accompany it, or reject it outright. That is the choice to be made.
Do you think that billionaires should pay taxes?
This is my problem Casino Wife Wynn who runs the Nevada State Board of Education – via her “giving” to the district.
There is no “charity” when you insist on controlling the money you have given or insist on a “match”.
Watch out for Community In Schools.