Facebook’s $45 Billion Donation

Wow … talk about a demanding audience! One moment, Facebook’s co-founder and chief executive Mark Zuckerberg announces that he is giving $45 billion of corporate stock to charity. And the next moment, members of the media criticize him for self-serving behavior!

That’s a harsh response to a $45 billion donation, isn’t it? But do the media critics have a point? Why are they so concerned?

Apparently, instead of creating a traditional nonprofit foundation in the style of the Bill & Melinda Gates Foundation, Zuckerberg and his wife Priscilla Chan decided to transfer the stock to a Limited Liability Corporation (LLC). That’s what drew the ire of their critics.

So what’s the difference? Well, a nonprofit foundation must adhere to certain rules of conduct in order to earn its income tax exemption. For instance, it must disclose many activities to the federal government and the general public. And it must refrain from making many investments in profit-making ventures.

LLCs, on the other hand, are simple corporate entities that are not required to disclose their activities to any one. They are free to invest their funds in any legal operation. And although they do not receive income tax exemptions per se, they usually do not pay income taxes at all because they pass any taxable earnings or losses through to their owners.

So what makes an LLC a charitable endeavor? Nothing, really, other than the intention of its owners to utilize it for the public good.

And that’s why some people are criticizing Priscilla Chan and Mark Zuckerberg. Had they placed the $45 billion in stock in a nonprofit foundation, they would have accepted the need to comply with legal rules of conduct that ensure the expenditure of the funds for charitable purposes.

But by placing the stock in an LLC instead, they avoid any legal requirement to expend the funds for the public good. In fact, the only constraint that compels them to do so is their own conscience.

So perhaps it would be fair to neither praise nor criticize their announcement at the present time. Instead, perhaps it would make sense to wait and see how they actually expend the LLC’s funds before drawing any conclusions about their intentions.

News Flash: The NFL Pays Taxes!

Did you catch the surprising news about the National Football League (NFL) last week?

No, we’re not referring to any of the results of the college draft. There weren’t any surprises there at all. The top two marquee quarterbacks in the college game, as expected, were selected #1 and #2.

And no, we’re not referring to any announcement about the NFL’s Deflate Gate scandal. No announcement whatsoever was made. Apparently, the League is no rush to release any information about its investigation into that affair.

Instead, we’re referring to the NFL’s announcement that it has decided to start paying income taxes on its earnings. Before last week, it had always opted to avoid any such taxation liability.

But hold on! Wait a minute. Huh? How can that possibly be true?

Why hasn’t the most profitable professional sports league on earth been paying income taxes on its earnings? And why has it been given a choice to “opt in” or “opt out” of the tax system throughout its existence?

Perhaps surprisingly, the American regulatory system permits various types of nonprofit organizations to declare themselves exempt from income taxation, even though they may not serve any social charitable purpose. Under Section 527 of the federal tax code, for instance, political organizations that accept financial contributions on behalf of candidates can file for exemption from income taxes.

Although such organizations may be “profitable” enterprises in a colloquial sense, they (in theory, at least) pass all of their available funds to their favored candidates. Thus, the tax code treats them as pass-through entities, and not as entities that are seeking to earn taxable profits on an independent basis.

Likewise, the NFL has always been treated as a “trade association” entity that exists to help its member teams optimize their profits, and not as an entity that is seeking to optimize its own independent earnings. That’s why the League, for instance, distributes its television revenues to its 32 professional teams.

But why did the NFL agree to start paying taxes on its profits at all? Why didn’t it simply continue its status quo tax exempt arrangement with the Internal Revenue Service? Apparently, because the League has always passed through so much of its revenue to its member teams, its potential tax liability in any given year can be characterized as “a pittance,” and is expected to remain so in the future.

More importantly, by electing to pay annual income taxes, the League can avoid disclosing certain sensitive information to the public. For instance, the salaries of the NFL’s senior officers will no longer be available for public inspection, now that the League is foregoing its tax exempt status.

So although we might be surprised that the NFL will now start paying income taxes, its motivation for doing so should be no surprise at all. After all, it’s not as if the League is acting upon an altruistic desire to contribute more resources to society. Instead, it appears to have chosen to pay taxes as the result of a sober business assessment that the benefit of keeping sensitive information confidential exceeds the cost of any annual tax liability.

Shrewd, eh?