Mark Zuckerberg’s Donation

Official Version

Mark Zuckerberg and his wife Priscilla Chan have pledged to donate 99 percent of their Facebook shares to the cause of human advancement. That represents roughly $45 billion at Facebook’s current valuation, making it one of the largest pledges in history. The money will go to the Chan Zuckerberg Initiative, a company that Facebook says will “pursue its mission by funding non-profit organizations, making private investments and participating in policy debates, in each case with the goal of generating positive impact in areas of great need.”

The full amount is pledged over the course of Zuckerberg’s life, and the Facebook CEO plans to maintain his majority voting position “for the foreseeable future,” according to an SEC filing. In the immediate future, the Initiative will be funded by a series of three annual donations made from the sale of Zuckerberg’s stock, at no more than $1 billion each year. Profits made by any of the Initiative’s investment will be used for additional work to advance its goals.

The initiative’s announcement, which is written as a letter to Zuckerberg and Chan’s newborn child, focuses on two central goals: advancing human potential and promoting equality. The first goal is defined as “pushing the boundaries on how great a human life can be,” including initiatives on medicine, economic opportunity, and access to information. The second group of projects focus more on alleviating poverty and empowering traditionally underrepresented groups. “Our society must do this not only for justice or charity, but for the greatness of human progress,” the letter reads.

But after Zuckerberg got a windfall of positive publicity, critics started to question his motives and where the money will go.

The controversy stems from the initiative’s status as an LLC (limited liability company) of Chan Zuckerberg Initiative, rather than a nonprofit company.

Because the Chan Zuckerberg Initiative is a limited liability company (LLC) and not a charitable trust, Zuckerberg will have more freedom with how he chooses to spend the Initiative’s money. The money won’t be required to go directly to a charity; instead, Zuckerberg will be able to do advocacy work and use the money however he feels will best serve his goals to “advance human potential and promote equality for all children in the next generation.” Like all privately held companies, the Chan Zuckerberg Initiative is a black box: it is not obligated to report on its activities, which, legally, can include lobbying, owning for-profit companies and making no donations whatsoever.

That’s perfectly legal, but it is not a charity.

What Zuckerberg and his wife have done is merely transfer money from one pocket to another.

Real philanthropists create a non-profit charitable foundation or trust. To maintain their registered charity status, charitable foundations must donate a minimum of five per cent of their assets each year; and make publicly available the total amounts donated, the recipients, and the amount given to each. Real charities are forbidden from lobbying and from owning for-profit entities.

Why LLC

The beauty of having an LLC, you have the ability to act and react as nimbly as need be to create change, and you have the ability to invest politically, in the for-profit sector and the nonprofit sector simultaneously.

An LLC, for example, can spend money on political ads. A tax-exempt nonprofit can’t. And an LLC could make angel investments in clean energy startups in a way that a tax-exempt nonprofit can’t. But an LLC also can make donations to tax-exempt nonprofits, and thus reap the tax benefits of charitable giving.

One reason very wealthy philanthropists have traditionally set up charitable trusts is that they’ve been motivated in part by the desire to create enduring institutions that long outlive them. Things like the Ford Foundation, the Rockefeller Foundation, and the Carnegie Foundation are still alive and well generations after their creation. The recent trend, however, has been toward trying to spend all the money within a finite span of time rather than creating an infinitely lived grantmaking institution. Under those circumstances, the LLC structure has a lot of advantages, and it’s not surprising to see Silicon Valley donors starting to opt for it.

Of course, one reason a traditional nonprofit can’t invest in for-profit businesses is that when you invest in for-profit businesses that succeed, you end up earning a profit. Zuckerberg says the Chan Zuckerberg Initiative will simply reinvest any profits the LLC earns back into the larger enterprise. If he goes back on his word about that, then of course it will turn out that he didn’t establish a nonprofit at all — he established an angel investing fund. It’s not quite a legally binding divestment of funds in the same way a traditional charitable donation would be.

Why to donate in shares

This generosity is also incredibly tax efficient. One can assume that he will make these enormous gifts in shares, not in cash, just like famously savvy Warren Buffett of Berkhire Hathaway.  Why donate stock? With stock, the donor gets a charitable contribution deduction based on the fair market value of the shares. Value and basis are different things, which can mean enormous tax advantages.

In the past, Mr. Zuckerberg has donated hundreds of millions of dollars to charity, as he has to the Silicon Valley Community Foundation. Of course, he donates millions of shares, thus skipping tax on the run up in value. Facebook went public in May 2012, with shares initially priced at $38. They proceeded to dip below $20 but then rose by more than 25% by the time of Mr. Zuckerberg’s year-end donation. Zuckerberg’s deduction is keyed to that market value.

Donating appreciated stock is a much better tax move than selling it and donating the sales proceeds. After all, by donating the stock, the gain he would have experienced on selling it is never taxed. The donee organization can either hold or sell the stock. But since it is a tax-qualified charity, if it sells the stock it pays no tax regardless of how big the gain. And since Mr. Zuckerberg will get credit on his tax return for the market value of what he donates, he can use that to shelter billions of other income.

As a conclusion, a charitable contribution of long-term appreciated securities that have realized significant appreciation over time — is one of the most tax-efficient of all ways to give. The two key advantages are:

First, any long-term appreciated securities with unrealized gains (meaning they were purchased over a year ago, and have a current value greater than their original cost) may be donated to a public charity and a tax deduction taken for the full fair market value of the securities — up to 30% of the donor’s adjusted gross income according to the IRS website.

Second, since the securities are donated rather than sold, capital gains taxes from selling the securities no longer apply. The more appreciation the securities have, the greater the tax savings will be. When you look at it closely, you are getting a tax deduction in the current year, with dollars that would out as capital gains taxes.

Donating Appreciated Securities: A Win-Win for Donors and Charities.

Endnotes

1. The Verge: “Mark Zuckerberg and Priscilla Chan to donate 99 percent of their Facebook fortune”, 2015, <http://www.theverge.com/2 015/12/1/9831554/mark-zuckerberg-charity-45-billion>;
2. CBSNews: “Mark Zuckerberg faces criticism over his $45 billion pledge”, 2015, <http://www.cbsnews .com/news/mark-zuckerberg-responds-to-critics-of-face book-shares-donations>;
3. Vox: “Why Mark Zuckerberg’s huge new donation is going to an LLC rather than a charity”, 2015, <http:// www.vox.com/2015 /12/2/ 9836884/zuckerberg-llc>;
4. Forbes: “The surprising math in Mark Zuckerberg’s 45 billion Facebook donation”, 2015, <http://www.forbes.com/sites/robertwood/ 2015/12/02/the-surprising-math-in-mark-zuckerbergs-45-billion-facebook-donation>;
5. Wealth Management.com: “The Chan-Zuckerberg Initiative and For-Profit Charity”, 2015, <https://wealth management.com/high-net-worth/chan-zuckerberg -initiative-and-profit-charity>.