Why Mark Zuckerberg (and others) are Setting Up For-Profit Charitable Enterprises

There is a quite a bit of publicity out there about Mark Zuckerberg's new 99% initiative where he has pledged to give away 99% of his ownership in Facebook company shares to non-profit entities and organizations. In particular, headlines are noting that Facebook is careful to point out that this initiative is NOT about charity, but instead about philanthropy.  To most people, this is a distinction without a difference, but to tax attorneys there are substantial differences at play.

In fact, Zuckerberg seems to be following the trend of wealthy businessmen turned philanthropists who, rather than donating the bulk of their wealth to IRS approved tax-exempt private foundations (which they control subject to strict IRS rules and guidelines), are instead transferring their wealth to entities that are not tax-exempt, and thus not subject to the stringent IRS scrutiny and public disclosure requirements faced by tax-exempts.  In short, the tradeoff is that these philanthropists would rather miss out on certain income tax deductions and create a non-tax-exempt philanthropic entity than fund a traditional tax-exempt entity.  With a non-tax-exempt entity, the donors could "donate" the funds as they saw fit, making donations to approved IRS charities, as well as other organizations that might not qualify.  In short, it gives the donor ultimate discretion in making donations.