The Chan Zuckerberg Initiative: Charity or non-charity?

MANILA, Philippines – When Facebook co-founder Mark Zuckerberg and wife Priscilla Chan announced that they were giving 99% of their Facebook shares – currently worth about $45 billion – to advance the cause of good in the world, some quarters were not as enthusiastic.

A ProPublica blog likened it to Zuckerberg getting money from his righ pocket and putting it in the left, and gaining publicity for it. 

Jesse Eisinger was worried about the oligarchic implications of the Chan Zuckerberg Initiative, even if it is intended social good.

Discussing the matter with Victor Fleiscer, a law professor and tax specialist at the University of San Diego School of Law, Eisinger said: "If the LLC donated to a charity, he would get a deduction just like anyone else…. The savvier move...would be to have the LLC donate the appreciated shares to charity, which would generate a deduction at fair market value of the stock without triggering any tax.”

"What this means is that Zuckerberg amassed one of the greatest fortunes in the world – and is likely never to pay any taxes on it," Eisinger explained.

The Zuckerbergs aren't coursing their Facebook shares through a charity, nor are they putting up a foundation. They are setting up a Limited Liability Company (LLC) called The Chan Zuckerberg Initiative.

By being an LLC, the Initiative is not a corporation either. It is a legal form of a company that provides limited liability to its owners in many jurisdictions, like in the United States. (READ: Zuckerbergs to donate Facebook fortune to fix world problems)

To put it simply, the Zuckerbergs are giving themselves the freedom to do what he will with the money.

In a piece by Chris Arnold on NPR, Stanford professor Paul Brest explains: "He and his wife are…giving themselves the freedom to decide what will be the most effective way of dealing with the social issues they care about."

The difference between a non-profit organization and an LLC, according to Brest, is how it engages in political lobbying.

"A foundation itself is not allowed to do what the Internal Revenue Code defines as lobbying,” said Brest.

"If you're trying to achieve a social end through advocacy, you're going to find yourself very constrained, whereas if you're just paying it out of your own pocket if you're a company or an LLC, there are really no constraints at all, at least imposed by the tax code,” he added.

'Flexibility to execute mission'

Zuckerberg himself said in a Facebook post that the LLC does not give them tax benefits from transferring their shares to the Initiative but it allows them “flexibility to execute [their] mission more effectively."

Zuckerberg added: "If we transferred our shares to a traditional foundation, then we would have received an immediate tax benefit, but by using an LLC we do not. And just like everyone else, we will pay capital gains taxes when our shares are sold by the LLC."

But how will the money be spent?

That is up to the Initiative, which means a number of potential things.

Zuckerberg said that this will allow the Chan Zuckerberg Initiative itself to fund non-profit organizations, make private investments, and participate in policy debates, "in each case with the goal of generating a positive impact in areas of great need."

He added, "Any net profits from investments will also be used to advance this mission."

The Atlantic's Gillian B. White sums it up well: because of how the couple chose to set up their program, "its fundamental goodness (or lack thereof) is entirely in their hands." – Rappler.com

Victor Barreiro Jr.

Victor Barreiro Jr is part of Rappler's Central Desk. An avid patron of role-playing games and science fiction and fantasy shows, he also yearns to do good in the world, and hopes his work with Rappler helps to increase the good that's out there.

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