With last week's announcement that Facebook founder Mark Zuckerberg and his wife Dr. Priscilla Chan would be giving away 99% of their $45 billion fortune Tax Notes reached out to Caplin & Drysdale President Beth Shapiro Kaufman and associate William D. Fournier to comment on the tax issues the Chan Zuckerberg Initiative LLC will face now that the newly formed LLC will be responsible for giving away Zuckerberg's fortune. For the complete article, please visit Tax Notes's website (subscription required).
Excerpt taken from the article "The Unknowns of the Chan-Zuckerberg LLC." by David Van Den Berg for Tax Notes.
While it isn't yet official that the Chan Zuckerberg Initiative LLC will be structured as a passthrough entity, Zuckerberg and Chan really don't have any other choice, experts told Tax Analysts.
"The alternative would be nasty," said Beth Shapiro Kaufman of Caplin & Drysdale Chtd. in Washington.
William D. Fournier, also of Caplin & Drysdale, said that the new LLC could either be a passthrough or a taxable C corporation but that choosing C corporation status would subject the entity to higher taxes. It's unlikely Zuckerberg and Chan would do that for a range of reasons, Fournier said.
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Tax and Legislative Unknowns
There are multiple tax issues "floating around" the announcement of the Chan Zuckerberg Initiative, Kaufman said. One is whether Zuckerberg gets a charitable deduction for "giving away" the Facebook stock. When he puts it in an LLC he and his wife own, there is no deduction, but if the LLC later transfers stock to a charity, there could be a charitable contribution deduction for them, she said.
The SEC filing says nothing about the initiative being a tax-exempt entity, and Zuckerberg and Chan said in their follow-up post that by choosing an LLC instead of a "traditional foundation" structure, there is no tax benefit for transferring their shares to it. Because the entity won't be tax exempt, Kaufman said, any earnings on the stock it holds or any capital gains realized when it sells stock would be subject to tax. If the stock were sold in the hands of a charity, Zuckerberg would escape capital gains tax, she said.
There's also the question of estate tax, Kaufman said. If shares are given to charity either while Zuckerberg is alive or upon his death, estate tax is avoided. If Zuckerberg and Chan die with the current LLC structure maintained, the LLC assets would be included in their estates, she said.
"But if they have a will or trust that bequeaths the LLC ownership to charity, then it would qualify for a charitable deduction at death and escape estate tax," she said, adding it's unknown whether Zuckerberg, 31, is even thinking about estate taxes at this point in his life.
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Silicon Valley Philanthropy
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Rules governing private foundations contain safeguards to ensure assets are used for charity and with regular distributions, Kaufman said. The LLC structure doesn't have those protections and is unregulated, she said. On the other hand, LLCs don't have the tax benefits.
Fournier said it isn't clear whether that's a threat to exempt organizations. "I think there are still plenty of advantages that come with being able to actually have tax-exempt status," he said. "Not everyone is going to want to necessarily participate in activities that you couldn't comfortably do inside of a private foundation. Certainly I don't think it eliminates or is an immediate threat to the existence of private foundations."