Paul L. Caron

Wednesday, December 2, 2015

The Tax (And Insider Trading) Benefits Of Mark Zuckerberg's Pledge To Donate 99% Of His Facebook Shares (Worth $45 Billion) To Charity

FacebookThe Daily Beast, Mark Zuckerberg’s Charity Windfall:

In a Securities and Exchange Commission filing on Tuesday, Facebook founder and chief executive officer Mark Zuckerberg announced that he would gift “substantially all of his shares of Facebook stock” to “further the mission of advancing human potential and promoting equality by means of philanthropic, public advocacy and other activities for the public good.” The vehicle for his beneficence will be the Chan Zuckerberg Initiative LLC, a charity that he controls and through which he will maintain control of Facebook for “the foreseeable future.”

Like great capitalists before him, including Bill Gates, Warren Buffett, John D. Rockefeller, and Andrew Carnegie, Zuckerberg is saving a lot of money by intending to do a lot of good. But there’s plenty in it for him.

Back in 2008, David Yermack a professor of finance at the NYU Stern School of Business, published a paper called Deductio Ad Absurdum: CEOs Donating Stock to Their Own Family Foundations. In it, Yermack questions the value of public subsidies for CEO stock gifts. He even points to such gifts as a mechanism for executives with highly appreciated stock to dispose of their holdings without running afoul of insider trading laws. It also allows those CEOs to maintain control of their companies in the future, but through their newfangled organizations.

Maybe the biggest benefit for Zuckerberg, or any CEO who donates stock to a family foundation: He will transfer ownership of his Facebook stock without paying capital gains taxes.

Though not mentioned by Yermack, Zuckerberg will also benefit from the possibility that his foundation will live beyond him, with his heirs and their heirs at the helm, untouched by estate taxes.

There’s an almost overnight financial benefit, too: The Facebook founder will deduct the fair value of his gift to his foundation from his taxable income in the year he makes the donation. A donor like Zuckerberg could realize a tax benefit equal to about one-third of the value of his gift.

In this case, he stands to benefit as much as $333 million, based on the $1 billion he plans as his first transfer.

Of course, all of this favorable tax treatment exists to encourage wealthy stock owners to build humanity-optimizing foundations. But this behavior can invite a dark side: We may be subsidizing more sinister insider trading.

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This article gets a number of things wrong. The LLC is not a charitable entity, so Zuckerberg will not get any charitable tax deduction for his gifts to the LLC. When Zuckerberg and Chan eventually set up a charitable entity, it will likely be a private foundation. Due to the excess business holdings rules, a private foundation will be very limited in the number of shares of voting stock it could hold. Over the long term, the foundation could not have a controlling voting interest in Facebook. Finally, once Zuckerberg actually makes a charitable gift (which will be in the future because he will need a different vehicle beyond the LLC), his charitable deduction will be limited to a percentage of gross income. Zuckerberg and Chan are very wealthy, but comparatively have a low AGI because Zuckerberg only takes $1 in salary. The value of the facebook shares are not included in AGI unless they are sold. All things considered, Zuckerberg is not realizing any significant/immediate tax benefit from his promise to donate these shares in the future.

Posted by: WR | Dec 4, 2015 9:01:02 AM

Zuckerberg also gets tax-breaks for a foundation that'll promote his agenda, whatever that may be. That's a benefit in many ways denied to ordinary people, and certainly one he can control more closely than they.

Posted by: Michael W. Perry | Dec 2, 2015 11:58:39 AM