Mark Zuckerbergâs announcement last week that he and his wife, Priscilla Chan, would dedicate 99 percent of their wealth to the Chan Zuckerberg Initiative drew a remarkable combination of adulation and scorn.
Adulation because of the coupleâs stated intent to use nearly all of their estimated $ 45 billion for good; scorn that the initiative would not be a charity but a limited liability company, and would remain owned by the couple, and free to engage in lobbying and for-profit activities.
Instead of a hot take, here is my effort at a cold one: I find it hard to form an opinion, positive or negative, about this action.
The financial transaction itself has few implications, positive or negative. Mr. Zuckerberg, Facebookâs co-founder and chief executive, and Ms. Chan own some assets, and now they are giving those assets to an L.L.C. that they own. The Chan Zuckerberg Initiative, L.L.C., will not pay taxes directly, but if it has income (as the I.R.S. defines income) its owners â that is, Mr. Zuckerberg and Ms. Chan â will have to pay tax on it.
Credit Rick Wilking/Reuters
If the initiative owns Facebook stock that appreciates, it will be able to defer tax on that appreciation until it sells the stock, perhaps for many years â just as the couple could do if they owned the stock directly. But this probably wonât shield all their wealth from tax forever, because as Facebook becomes a mature company it is likely to start paying dividends, on which tax cannot be deferred.
If, in the future, the initiative gives stock away to charity, its owners will get a double bonus â they will pay no tax on the gain on the stock, and they will be allowed deduct the full value of the donated stock against other income they might owe taxes on. Thatâs a big tax break, but itâs also one Mr. Zuckerberg and Ms. Chan could get simply by holding the stock in their personal capacity and donating it later. Indeed, itâs a tax avoidance strategy that Fidelity Investments recommends to clients with much less money.
And to the extent Mr. Zuckerberg and Ms. Chan use their wealth for lobbying or for-profit initiatives â both possibilities he laid out in a letter to his daughter announcing the move â they will get no charitable tax break for such activities, whether or not their wealth is held in an L.L.C.
Mr. Zuckerberg âhas moved money from one of his pockets to another,â as Michael Graetz, a tax professor at Columbia Law School, put it. If theyâre going to get the tax benefits associated with charitable giving, theyâll have to give their wealth to a real charity sooner or later. As for now, the transaction is neither an irrevocable gift to charity nor a tax dodge; itâs more as if you moved your money to Chase from Bank of America.
The bigger issue is the promise: to use nearly all his wealth âto further the mission of advancing human potential and promoting equality.â On one hand, this is a big deal: The two have a lot of money, and Mr. Zuckerberg is promising to use it for the common good.
They even have a good argument for the L.L.C. structure. Not all good activities fit within the tax codeâs definition of charity. A for-profit company can develop products that help people live better lives; a lobbying initiative can seek public policies that make people happier and more equal.
On the other hand, âadvancing human potentialâ is, to a large degree, subjective. Most political donors believe their favored candidates benefit not just themselves but the public, and essentially all start-up founders in Silicon Valley believes their companies will serve to advance human potential. Even donations that fit within the legal framework of charity can be duds: Mr. Zuckerbergâs $ 100 million gift to the Newark Public Schools seems to have done little to benefit Newark students.
So unfortunately, those of us hoping to make judgments and draw broad lessons from the Chan Zuckerberg Initiative will have to wait and see what it does, and how it works, to decide how much praise it deserves. In the short run, some, including Jesse Eisinger of ProPublica and The New York Times, have identified one policy area that merits a look: the aforementioned tax break for charitable donations of appreciated stock, which can generate much larger tax benefits than donations of equal amounts of cash.
Unlike some donors, the couple wonât be able to take full advantage of this provision. The key to the bonus for stock donations is the double benefit: exclusion of the accrued capital gain from tax, combined with the deduction of the stockâs value against other income. But if the couple really intend to give away nearly all their wealth in the long run, they will be limited in how much other income they have to deduct these donations against.
As Matt Levine of Bloomberg put it, âGiving away 99 percent of your money to shield yourself from income taxes on the other 1 percent is economically nonsensical.â
The I.R.S. also will only let you take a tax deduction for gifts of appreciated stock equal to 30 percent of your adjusted gross income in any year. Thatâs a limit thatâs unlikely to interfere too much with the tax-planning strategies of ordinary rich, very-rich or very-very-rich people, but that would probably prevent Mr. Zuckerberg and Ms. Chan from taking advantage of a full $ 44 billion in tax deductions.
Still, if the tax code were changed to treat gifts of cash and stock equally, it would further reduce the tax benefits available to Mr. Zuckerberg and Ms. Chan. Essentially, this would entail counting as income any accrued gains on the stock they give away (or that the initiative gives away). Against that newly counted income, they could then deduct actual donations to charity, but only up to 50 percent of their income â on the rest, they would owe tax.
This reform would serve to prevent Mr. Zuckerberg and Ms. Chan from, as Mr. Eisinger puts it, amassing one of the worldâs greatest fortunes and never paying tax on it. But it would also reduce their incentive to, sooner or later, give away all their wealth.