The Zuckerberg Tax Dodge

Like other big name charity donations before him, Mark Zuckerberg’s decision to donate 99% of his wealth to charity isn’t being done out of the goodness of his heart. It’s a tax dodge.

It’s quite simple once you know how it works. First of all, you have to get rich. That’s the only part of the process that’s actually hard. Once you’ve accomplished that, you form a non-profit corporation. You and I can do it for a couple of hundred dollars and an hour or so in line at the county courthouse. Someone like Zuckerberg will probably shell out a few thousand dollars to have some lawyers do some extra fancy setup for him because he’s got so much money that why not?

Now, a non-profit corporation is almost exactly the same as a for-profit corporation… except that you have to set things up just right in order to maintain your tax exempt status. It’s “purpose” (more on this in a minute) has to be one of the listed purposes approved by the IRS, and it can’t be a political organization primarily aimed at influencing elections or legislation. It’s “purpose” can’t be to benefit private interests. And any profits can’t get passed back to the shareholders.

Yes, you read that last sentence right. Being a non-profit organization doesn’t mean you can’t make a profit. It just means you can’t pass that profit on to the shareholders. There are also a few riders that a non-profit organization has to spend a certain amount of its net worth every year. Again… more on this in a minute.

About that “purpose” noted above. That’s the easy part. You just pick a cause. Or, if you have billions like Zuckerberg – and Bill Gates before him, whose model he’s following – you pick several. This is the nice part: they’re probably causes you legitimately care about and want to do something about. Easy and done. But this isn’t the actual purpose. It’s just the organizing purpose that you build the organization around. The actual purpose, of course, is to avoid a shitload of taxes.

Next, you “donate” all of your money to the non-profit organization. Of course, it’s not actually a donation. You’re just transferring your money (or stocks, bonds, or whatever other assets) from one account into another, or from one name into another. In reality, you and/or your spouse, children, family, friends, etc own 100% of the shares of the non-profit. So you’re really “donating” all of your funds to… yourself.

But the great thing is, this donation is, itself, a tax deduction. So you’ve transferred all of your wealth into another account and wiped out most or all of your actual income for the year (from a tax perspective) at the same time. It’s a good deal, right?

We’re just getting started.

Being a non-profit organization doesn’t mean you don’t pay your employees. So now, you, your spouse, your children, and other family and friends are all instantly employees of the non-profit organization. And it doesn’t mean you have to pay them poorly, either. Let’s make them officers, because we can. And officers at non-profit organizations routinely make six figure salaries. Some of them make seven figure salaries. But… we don’t want our salaries to be too high, because then we get into tax issues again. Remember, we’re trying to avoid taxes here. Not pay more.

So we set a decent salary, but not too high. But aren’t we just paying ourselves out of our own money? Ah – here’s where the real fun starts. Because no, we aren’t doing that. We just put together a “charity organization,” right? So we’re going to get a lot of other people’s money, too. And unlike a real business, we’re going to get it all tax free.

So what, we’ll go around like the Salvation Army or Children’s Miracle Network and ask people for donations to the cause, right? Sure. But that’s not where the real money comes from. The real money comes from doling out services and influence in exchange for payment… er, donations. All those six figure speaking fees that Bill Clinton collects? They don’t go to him. They’re donations to his charity. So they’re a tax deduction for the payer, and they’re tax free revenue on his side.

But now we’re still only getting that six figure salary, while all of the rest of our money languishes. We’re not paying taxes on it, but we can’t really do anything with it for ourselves, can we? Well, not exactly. And this is where the non-profit life starts to look a lot like the for-profit one.

Because your job requires you to travel around town a lot, for all kinds of functions. It’s required for a charity, right? You’ve got to mingle. So here’s a car, on the foundation’s dime. Oh, it’s not your car – it’s the foundation’s. You’re only using it. Except that you own the foundation and nobody else is ever going to ask you for it. And you really need a nice one, because your an executive at a very important foundation. Bam. $100k+ car that didn’t come out of your income. No taxes involved, other than sales tax and annual property taxes… which again, are paid by the foundation. And oh yeah, the insurance, maintenance and gas are paid for by that foundation, too.

But we’re not talking about a regular foundation here. We’re talking about Mark Zuckberberg. Surely he does a lot of real travel, too. We’d better have a private plane ready. And of course he’ll need a posh place to stay, at only the best hotels. He’s gotta eat while he’s out, but those big wigs he’s hobnobbing with only eat at the best places. So that’s gonna cost. And of course the foundation picks up the tab for all of it.

You definitely need that home office decked out with the latest communication and technology. Top end computers every year, new smart phones to keep in touch with all of your important charity work. Phone bill, internet bill, all paid for by the foundation. It’s a work expense. Health insurance? Paid for by your “employer” – but only the best, because you’re important.

You have to be careful with some of this, because the IRS actually does have guidelines to prevent “abuse” of this. But a little ingenuity can find substantial overlap between what the IRS allows and what you actually want to do. The foundation doesn’t need to pay for everything, either. After all, you’re still getting that six figure salary and you didn’t donate all of your wealth to it. But imagine how little money you’d actually need if your house is already paid for, your cars are bought and paid for by your employer, and all your vacation… um, I mean work travel is paid for by somebody else. And at the end of the day I’ve only scratched the surface of what you can get away with having the foundation paid for.

But wait a minute. Don’t we require charities to, you know, actually pay for charity? Yes, some. But nowhere near all of your assets. The tax laws on this – and on all of the sneaky ways to pad your own coffers – get complex. But that’s OK, because your “charity” has billions of dollars to pay all the best tax lawyers to be sure that you’re following the rules to the letter. Remember, the purpose here isn’t to break the law. The purpose is to avoid every penny of taxes that you can avoid legally and keep that money in your own pocket. I mean, your foundation’s pocket, of course. Right? Right.

And finally, we get to the best part. You set in your will, and in the foundation’s bylaws, that when a shareholder dies, the shares revert to the foundation itself. “Wait a minute!” I hear you saying. “Don’t you want all this wealth to pass on to your children?”

Yes, yes you do. Which is why you make them – at some point before you die, either at the formation of the charity or later – shareholders. You sell them the shares for some token fee, so that it’s not a “gift” and doesn’t incur taxes. And they can be minority shareholders – even slim minority shareholders. But when you die, your shares revert to the foundation instead of going to them – and hence incur no taxes – they already own their shares – and hence pay no taxes – but now their shares (combined) give them full ownership and control of the foundation.

At the end, you’ve avoided the biggest tax of them all: the 40% inheritance tax that kicks in on estates valued at over $5 million. If you believe nothing else I’ve written above, realize that by forming a foundation and “donating” his money, Zuckerberg manages to pass on all of his $45 billion to his daughter instead of paying 40% of that ($18 billion) to Uncle Sam.

And that’s why I call it the Zuckerberg Tax Dodge. He’s hardly the first to do it. Bill Gates, Bill Clinton, Warren Buffet, and plenty of others have done it. The practice dates back at least to JD Rockefeller, Andrew Carnegie and Andrew Mellon in the nineteenth century.

But when the wealthiest of the wealthy “donate all their money to charity,” don’t call them saints. Follow the paper trail and see how they’re perpetuating their family wealth.

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