For Facebook’s Zuckerberg, Charity Is in Eye of Beholder

Updated on
  • $45 billion can be spent anywhere despite pledge to newborn
  • Akin to family office or socially responsible company

What's Zuckerberg Worth Without 99% of His Fortune?

However philanthropic the intentions of Mark Zuckerberg, he isn’t required to give a penny of his $45 billion to charity despite his announcement Tuesday.

In a widely publicized letter to his newborn daughter, Zuckerberg with his wife, Priscilla Chan, said they would give 99 percent of their Facebook Inc. shares to “advance” various missions, including promoting equality and curing disease.

Although this step has been widely interpreted as Zuckerberg and Chan pledging their fortune to charity, they didn’t announce the establishment of a nonprofit group or a charitable foundation. Instead, they will set up a limited liability company. That’s right, an ordinary company.

The vehicle can donate to charity, but it doesn’t have to give away some every year, as a foundation would. It can also make investments and participate in “policy debates.” That means it could turn a profit and make donations to political candidates and pay lobbyists.

Mark Zuckerberg and Priscilla Chan with their daughter Max.
Mark Zuckerberg and Priscilla Chan with their daughter Max.
Source: Courtesy of Mark Zuckerberg via EPA

“This is not a charitable foundation,” said Victor Fleischer, a tax law professor at the University of San Diego. What they’ve done “is essentially nothing more than a promise to give some money to charity in the future. But the structure somewhat resembles a family office, used both for investment and charitable purposes. The level of activities in the charitable versus investment and political pieces isn’t specified.”

Four Reasons Why Zuckerberg and Chan Set Up an LLP

  1. There won't be limits on lobbying
  2. This charity can actually turn a profit
  3. It will be easier to do joint ventures
  4. Avoiding the '5 percent rule'

Find out more

Zuckerberg, 31, and Chan believe the goals of the new company will be served through a combination funding nonprofit organizations, making private investments and participating in policy debates, said Facebook spokeswoman Rachael Horwitz. Any charitable donations would be eligible for tax deductions, she said in a statement.

“The bottom line is that the ultimate impact of the funds deployed will be the driving force for their decisions,” Horwitz said.

Zuckerberg and Chan won’t derive any tax benefit this year.

Zuckerberg’s Taxes

The swirl of attention around Zuckerberg’s announcement has also largely missed another important point: the tax code allows the wealthiest to sidestep ever paying any income taxes, gift taxes, estate taxes or capital gains taxes. Although Zuckerberg has twice sold Facebook shares -- in 2012 and 2013, for about $3.4 billion -- he won’t owe capital gains tax on the massive appreciation in his remaining stake unless he sells more shares.

Income taxes are not a big issue for Zuckerberg either: his annual base salary is just $1. (He has reported other taxable compensation related to his personal use of the company’s aircraft.)

Some tax experts have proposed a federal tax on wealth -- regardless of whether the richest sell their stock or other property -- similar to that imposed by countries such as France, Italy and Spain. David S. Miller, a tax lawyer at Cadwalader Wickersham & Taft LLP, has proposed “marking to market” the holdings of the country’s top 0.1 percent wealthiest citizens and imposing a tax at capital gains rates. He estimates it would raise almost $1 trillion over a decade.

‘Double Irish’

Zuckerberg’s wealth has grown as his company has deployed its own tax-avoidance strategies: Facebook has used a popular tax shelter employed by other big U.S. multinationals known as a “Double Irish” to shift profits to the Cayman Islands.

He and his wife described their desire to help others with passion. In the letter to their newborn, Maxima, the two wrote of promoting equality, and spoke more specifically, and repeatedly, about spending money to cure disease. “We can also help hundreds of millions of children get an education and save millions of lives by helping people avoid disease,” they wrote.

Zuckerberg may want an entity that can influence policy decisions based on his past experience. A $100 million donation he made to schools in Newark, New Jersey, was widely criticized for failing to achieve its result of holding teachers more accountable. His philanthropic initiative couldn’t address state law providing teachers with tenure.

Though not adopting a typical charity’s structure, the couple could even wind up doing something else innovative, creating a new kind of socially responsible company.

“I applaud their emphasis on ‘promoting equality,’ but that starts with paying one’s taxes,” said Gabriel Zucman, an economics professor at the University of California, Berkeley. “A society where rich people decide for themselves how much taxes they pay and to what public goods they are willing to contribute is not a civilized society.”

Fueled partly by tax incentives for the wealthy, charitable giving in the U.S. totaled almost $457 billion in the U.S. in 2014, a 9.3 percent rise from the previous year, according to the Atlas of Giving website.

The pledge by Zuckerberg and Chan places them in a century-long tradition of American philanthropists including Bill Gates and Warren Buffett, a line that stretches back to industrialists Andrew Carnegie and John Rockefeller, whose foundations still rank among the biggest in the country.

“I absolutely think this propels Zuckerberg and his wife into that sphere,” said Berit Ashla, vice president at Rockefeller Philanthropy Advisors. “They clearly are not going to be siloed grant-makers.”

— With assistance by Caleb Melby, and Amanda L Gordon

(Updates with Facebook spokeswoman in sixth paragraph.)
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