Nonprofit Radio: Wounded Warrior Project and Overhead

Budget Concept

I’ll be on Nonprofit Radio this Friday at 10:30 am PT / 1:30 pm ET discussing the Wounded Warrior Project controversy and overhead with host Tony Martignetti. Catch us live on Talking Alternative or a few days later on iTunes.

I’ve previously expressed my views on the overhead myth here and talked with Tony about good overhead and bad overhead. But the criticism of Wounded Warrior Project goes beyond a single statistic. I look forward to my discussion with Tony to see if we can share some insights about this case and on reviewing a charity’s activities.


Wounded Warrior Project accused of wasting donation money (CBS News, 1/26)

[A]ccording to public records reported by “Charity Navigator,” the Wounded Warrior Project spends 60 percent on vets.


According to the charity’s tax forms, spending on conferences and meetings went from $1.7 million in 2010, to $26 million in 2014. That’s about the same amount the group spends on combat stress recovery — its top program.

Ex-employee: Wounded Warrior Project conduct “makes me sick” (CBS News, 1/27)

CBS News has interviewed more than three dozen former employees of the Wounded Warrior Project and nearly all of them told us they’re concerned that the organization has become more focused on raising money than on serving wounded veterans.

Charity watchdogs question Wounded Warrior’s spending on vets (CBS News, 1/27)

“I couldn’t tell the number of people that were assisted. I thought that was truly unusual. If the organization is asking for money and purportedly spending money to assist veterans, and talking about it, I would like to know,” said Owens.

Letter from Wounded Warrior Project to CBS (1/27)

Based on our most recent independently audited financial statements, 80.6% of total expenditures went to provide programs and services for wounded service members, their caregivers, and families.

Wounded Warrior Project on Charity Navigator’s watch list (CBS News, 1/30)

But CharityWatch president and founder Daniel Borochoff said his biggest concern is the group is sitting on a $248 million surplus — and that not enough of it is being spent on veterans.

Wounded Warrior Project Spends Lavishly on Itself, Insiders Say (New York Times, 1/27)

About 40 percent of the organization’s donations in 2014 were spent on its overhead, or about $124 million, according to the charity-rating group Charity Navigator.

Wounded Warrior Project Investigation: What CBS News Got Wrong (Nonprofit Pro, 1/28)

Then there’s the issue of the $26 million Wounded Warrior Project spent on conferences and meetings. That figure is almost indefensible if all of it went toward staff-only team-building events and office parties, but the charity lists $24.4 million of it as a program expense, $491,000 as a management expense and $1.2 million as a fundraising expense.


That could be a crafty way for Wounded Warrior Project to skirt the system in an attempt to inflate its program numbers, or it could be that some number of these events involved veterans. (Or, it could be both.)

Wounded Warrior Project: The Fundraising Factory Issue (Nonprofit Quarterly, 2/1)

This focus on expanding the fundraising base among individuals would, in fact, require capital well above what most organizations would spend, since acquiring new donors at a fast pace is an expensive endeavor, so there is a different “model” at play here—a donor acquisition and growth model or a “fundraising factory” -but the fact that it appears to be funded by current donors without an acknowledgement of that is a very big problem. We also have no sense of when and if there will be a “big enough” moment at which time we might expect a smaller fundraising cost.

What Forms 990 Can and Can’t Tell Us About Wounded Warrior Project (Guidestar, 2/3)

[T]he 990 has little to say about the allegations that have been made by CBS and by the New York Times.  But it does indicate an organization that has grown very quickly, and one that could be more transparent about its operations on its Form 990.

Wounded Warrior Project Response to False News Reports

Wounded Warrior Project provides more than 20 needs-specific, free programs and services to more than 83,000 wounded veterans, who we call Alumni, and more than 15,000 family support members. We are constantly expanding our services to better support warriors.

Wounded Warrior Project Form 990 (for fiscal year ending 9/30/14)

  • The mission of the Wounded Warrior Project is to honor and empower wounded warriors.
  • Number of voting members of the governing body: 10 (all independent)
  • Total revenues: $342,066,114
  • Total expenses: $248,005,439
  • Total expenses of the three largest program services (by expenses): $81,892,441 (33% of total expenses)
  • Total program services expenses: $189,558,100 (76% of total expenses), including $40,916,885 in joint costs from a combined educational campaign and fundraising solicitation
  • Total fundraising expenses: $43,441,173
  • Net assets: $248,285,483
  • Principal officer: Steven Nardizzi

Nonprofit Radio: IRA Charitable Rollover

nonprofit radio


I’ll be on the first Nonprofit Radio program of 2016 on Friday, January 8, at 10:30 am PT / 1:30 pm ET discussing the IRA Charitable Rollover with host Tony Martignetti. Catch us live on Talking Alternative or a few days later on iTunes.


Until the PATH Act was signed into law at the end of 2015, the last day an individual could make a qualified charitable donation from an IRA was December 31, 2014. The PATH Act permanently extended this charitable giving incentive, which was first temporarily established under the Pension Protection Act of 2006 and renewed annually thereafter through the end of 2014. By making the incentive, among certain other temporary breaks (tax extenders), permanent, Congress must now factor it into the budget and stop using it as a point of political negotiation.

What is the IRA Charitable Rollover?

The IRA Charitable Rollover provision allows individuals aged 70½ and older to donate up to $100,000 from their traditional or Roth IRAs to eligible public charities without having to count such qualified charitable distributions as taxable income. Distributions from traditional IRAs, which are required starting at age 70½, are otherwise typically included in the individual’s adjusted gross income (AGI) and subject to income tax.

Because the qualified charitable distributions aren’t counted in an individual’s AGI, the individual cannot claim an itemized charitable deduction for them. But the IRA Charitable Rollover, unlike the charitable contribution deduction, is available to taxpayers, regardless of whether they itemize their deductions.

A Tax-Efficient Way of Giving

If a taxpayer wants to make a charitable contribution and can do it through a donation of cash or through the IRA Charitable Rollover, it will be advantageous to do it through the IRA Charitable Rollover.

  • A charitable contribution deduction is only available to taxpayers that itemizes their deductions; the IRA Charitable Rollover is available to taxpayers regardless of whether they itemize their deductions.
  • The charitable contribution deduction is subject to certain limitations based on the taxpayer’s AGI; the IRA Charitable Rollover is not.
  • The IRA Charitable Rollover counts as part of a taxpayer’s minimum required distributions and doesn’t increase the taxpayer’s taxable income or AGI (which has other benefits, including more favorable tax treatment of Social Security benefits and lower Medicare Part B & C premiums).
  • In certain states, it is not possible to take a charitable contribution deduction for state income tax purposes, but states generally adopt the federal definition of gross income.

Senate Finance Committee Working Group Report (July 7, 2015)

“The now-expired rules allowing taxpayers to exclude qualified charitable distributions from gross income have the salutary effects of encouraging and facilitating charitable giving. The rules accomplish this by allowing an IRA owner to arrange for a distribution to be made directly from his or her IRA to a qualified charity and generally to exclude the amount of the distribution from the IRA owner’s gross income. As a result, a taxpayer who has accumulated more assets in an IRA than she will need to fund her retirement expenses need not arrange both for a distribution from the IRA to the IRA owner and a subsequent donation to charity.

The intended benefits of the provision may be diminished by extending the provision only on a temporary basis, particularly where the provision is enacted late in the year to which it applies. When the provision was last extended in December 2014 for calendar year 2014, for example, many IRA owners who otherwise might have benefited from the provision were not able to use it. Some taxpayers were unable to arrange an IRA distribution, because their financial institutions’ deadlines for requesting distributions for the 2014 calendar year already had passed. Others took required minimum distributions from their IRAs before the extension was enacted and were no longer in a position to arrange for further distributions. While the Working Group does not make specific recommendations, the Committee may wish to consider proposals for qualified charitable distribution rules that would increase certainty for taxpayers and increase the amount of funds that flow to charity.

While the exclusion for qualified charitable distributions provides a critical incentive for charitable giving, the Working Group is mindful of the importance of ensuring income security for retirees. Some might argue that the exclusion for qualified charitable distributions encourages IRA owners to redirect retirement savings to a non-retirement income security use (charitable giving) before they know the full extent of their income needs during retirement. Others, however, believe that the IRA owners most likely to take advantage of the income exclusion are well-advised taxpayers who have excess accumulations in an IRA or who would make many of the same charitable contributions even in the absence of the special exclusion.” – Read more here.

Urban Institute

“In 2008, the National Committee on Planned Giving (NCPG) conducted an informal survey asking charitable organizations to report qualified IRA distributions. Approximately 900 charities (mostly institutions of higher education) reported nearly 8,700 such distributions. Donations of less than $5,000 accounted for nearly 60 percent of all distributions, although they represented only 6 percent of the total dollar value reported. Donations in excess of $25,000 accounted for less than 20 percent of donations, but nearly 75 percent of the total dollar amount.” – Read more here.


10 Predictions for the Nonprofit Sector in 2016 and Beyond

fortune teller forecasting 2016 new year it's coming soon,

Below are some of my predictions of events and trends that will impact the nonprofit sector in 2016 and beyond. Last year, while noting that good prognosticators have to go beyond stating obvious trends, I made only one prediction: “Nonprofits will increasingly recognize the importance of understanding and responding to the for-profit social enterprise movement.” And over the year, nonprofits certainly took note of such events as the announcement of the Chan Zuckerberg Initiative LLC, the non-charity vehicle for Priscilla Chan’s and Mark Zuckerberg’s $45 billion social good pledge, and the continuing emergence of the benefit corporation, a taxable “hybrid” entity bearing characteristics of both a traditional and nonprofit corporation. This year, I’ve made a few more predictions, mostly reiterating or reworking those of others who study these things.

1. Country Divided Over Issues Exacerbated by Terrorism

I hesitated to lead off with a prediction of bad news, but terrorism is growing exponentially as a critically important issue many nonprofits will need to factor into their planning. Beyond the direct physical harm caused by such acts, there will be continuing conflicts between those who demand social justice and those who demand laws that they believe will create greater security even at the expense of equitable treatment and the Constitution. The far right will continue growing stronger as it advances a campaign based on public fears of extremist Islamic terrorists, despite the fact that most terrorist acts are associated with domestic far right extremists.

2. Black Lives Matter

This social movement will rapidly grow and exhibit its political strength. Racial justice, particularly involving Black Americans, is an all-too-obvious problem, and citizens, especially those who are younger and/or belong to minority groups that have traditionally neglected their voting responsibilities, will step up and influence elections based on this simple, yet terribly complex, issue.

3. Gun Control

President Obama will use his executive powers to create stronger gun-control regulations focused on licensing requirements and background checks. Nevertheless, gun violence will continue to be a critical public health crisis for the country with over 100,000 victims a year.

4. Extreme Weather

A very warm El Niño, a strong Arctic Oscillation, and the continuing consequences of human-caused climate change will continue to produce some extreme weather conditions. Climate-related disasters will become more frequent occurrences. And cities (and their residents) that have not previously experienced such disasters will be very ill-prepared.

5. Greater State Regulation of Nonprofits

State regulators will be more assertive in enforcing registration requirements for charities and professional fundraisers. This will be a consequence of increasing media coverage of scandals in the nonprofit sector, decreasing enforcement by a seriously weakened Internal Revenue Service, and diminishing public confidence in the sector (even though it will continue to be by far the most trusted of the three sectors). Some states will attempt to clear their rolls by revoking the right of charities to operate within their jurisdictions for failure to register and threatening board members with potential liability. Unfortunately, this will disproportionately impact smaller, volunteer-run charities that provide services to neglected segments of our population.

6. Increased Push for Federal Regulation of Nonprofit Activities

While the budget cutbacks have greatly harmed the Internal Revenue Service’s ability to enforce existing federal laws applicable to nonprofits, there will be a greater push for more laws and regulations to address problems in the sector. Dark money utilizing 501(c)(4) and 501(c)(6) organizations to support and/or oppose political candidates will continue to be exposed as a horrible problem for the country, and there will be a stronger push for reforms throughout the election season. The Bright Lines movement to make clearer guidance for nonprofit political activities will gain political and popular support. But reforms, which will eventually be made, will not be seen until after the election. Donor-advised fund regulations will again be deferred, but the push for a minimum distribution requirement will strengthen and may be inevitable. The move to tax colleges on their enormous endowments will also continue to gain popularity (but will ultimately fail).

7. Rise of Nonexempt (for-profit) Social Enterprises

The Chan Zuckerberg Initiative LLC received much of the attention last year as a nonexempt alternative to a private foundation or donor-advised fund for social good giving. While it isn’t the first example of this nontraditional form of giving, it may mark the moment where the definition of “philanthropy” started to expand to include giving through nonexempt vehicles not subject to the laws of 501(c)(3). Benefit corporation legislation will continue to be passed by some of the 19 remaining states that have yet to adopt such corporate form (eventually, it will be adopted in all states). Mission-related investments and program-related investments (PRIs) by private foundations in for-profit entities will rise markedly as recognition that such investments may, under certain circumstances, be more effective and efficient than grants to nonprofits in creating the desired social change.

8. Collaborative Management Practices

More examples of collaborative management practices, like holacracy, will continue to be tested and implemented, including in nonprofits, with varying degrees of success.

9. U.S. Presidential Election

Hillary Clinton will be elected as President over Paul Ryan, the Republican candidate emerging from a brokered Republican convention.

10. Academy Awards

Spotlight, a movie about the media’s exposure of the greatest nonprofit scandal in our country’s history, will win “Best Picture” at the 88th Academy Awards.


Best of the Nonprofit Law Blog 2015

Best of 2015 - The year in review

An eventful year for the world, the sector, and for us at NEO Law Group. Some of my firsts: participating at Burning Man (one of our favorite clients), rapping at Independent Sector’s Annual Conference, and attending SOCAP. Here is the best stuff from the NEO Law Group over the past year:

Blog Posts


Why Are Charities Tax-Exempt? – with special thanks to the late Rick Cohen, the conscience of the nonprofit sector

Nonprofit Law 101 for Journalists

Independent Sector Threads: Oakland Style


Public Charity: Public Support Tests Part I: 509(a)(1)

Nonprofits – International Charity Activities

Fiscal Sponsorship: The Risks of Being a Fiscal Sponsor


Where Nonprofit Boards Fall Short

Why Nonprofit Governance is Different from For-profit Governance

Nonprofit Board Meetings – Calendar of Agenda Items


Executive Compensation – The Legal Issues

Women Leaders Still Make Less Than Their Male Counterparts…Even in the Nonprofit Sector

Private Foundations

Private Foundation Rules

Private Foundations & Self-Dealing

Private Foundation: New Rules Recognizing Mission-Related Investments

Social Enterprises

Chan Zuckerberg Initiative – Taxable Social EnterprisePart 1 & Part 2

California Social Purpose Corporation: An Overview


2015 Western Conference on Tax-Exempt Organizations

Embark: 2015 Independent Sector Annual Conference



A Prediction for the Nonprofit Sector in 2015

A Lawyer’s Journey to Black Rock City: Burning Man 2015

Articles – Erin Bradrick

California’s New Regulations: The Start of a New Problematic Trend in State Charity Oversight? The Nonprofit Quarterly

Fiscal Sponsorship: What You Should Know and Why You Should Know It, ABA Business Law Today

Basic Legal Considerations Before Launching a Planned-Giving Program, The Chronicle of Philanthropy


Tips for Nonprofits: Private Foundation or Public Charity?

Tips for Nonprofits: Fiscal Sponsorship

Nonprofit Radio


Volunteer Legal Issues

Speaking Engagements


Current Developments – The Bakers’ Dozen, Western Conference on Tax-Exempt Organizations

Legal Session, National Network of Fiscal Sponsors Annual Gathering

10 Rules Your Nonprofit Needs to Know for 2016, Annual Policy Convention, CalNonprofits


Nonprofit Board Scandals and the Lessons Learned, BoardSource Leadership Forum

Nonprofit Law: Hot Topics, Continuing Education of the Bar, State Bar of California

Top Five Hot Legal Topics for 501(c)(3) Organizations (webinar), American Law Institute


Nonprofit Legal Structures and Compliance Issues, CalCPA Nonprofit Interest Group, South Bay


Top 10 Events in 2015

The past 12 months have featured a number of major events that have affected, and will continue to affect, the nonprofit sector. In 2015, nonprofits mobilized to help with major crises, including the almost 8.0 magnitude earthquake in Nepal, the influx of migrant and refugees seeking new homes, and the continued socio-economic and racial inequalities in the United States. On the administrative, legislative, and foreign policy front, Congress passed legislation that will enhance charitable giving by making three essential tax incentives permanent, the IRS issued guidance that will permit private foundations to make impact investments, and nearly 200 countries reached an agreement to address climate change. And in a historic decision, the US Supreme Court ruled that the Constitution provides same-sex couples the right to marry. Here is a list of our top 10 events of 2015 affecting the nonprofit sector in the United States and a few links regarding each:

  1. Nepal Earthquake

  2. Refugee and Migrant Crisis in the Central America, Middle East, Africa, and Europe

  3. Terror Attacks (Paris, Beirut, Nigeria, Kenya, Elsewhere)

  4. Volkswagon Scandal

  5. Black Lives Matter (unrest in Baltimore after Freddie Gray)

  6. The US Supreme Court ruling that the Constitution provides same-sex couples the right to marry

  7. Guidance on Mission Related Investments

  8. Paris Agreement on Climate Change

  9. Chan Zuckerberg Initiative

  10. Tax Incentives for Charitable Giving Made Permanent in PATH Act of 2015


Proposal for a New (and Risky) Way to Substantiate Charitable Contributions

3d illustration of yelow tape with text warning

UPDATE 1/7/16:  The proposed regulations have wisely been withdrawn.

The Treasury Department and IRS are soliciting comments through December 16 regarding the recently proposed rule that would provide donors with another way to substantiate their contributions of $250 or more but at the cost of imposing significant new risks on charities and donors. The new way to substantiate charitable contributions would require charities to, among other things: (1) collect a donor’s social security number, which would trigger a number of privacy laws designed to prevent identity theft, and (2) file a new form of information return with the IRS.

Why the Proposed Regulation?

The likely intent of the proposed rule is to help prevent the situation where donors of $250 or more fail to obtain or maintain an appropriate and timely gift receipt (technically termed a contemporaneous written acknowledgement) from a charity and subsequently have their charitable contribution deductions denied. The burden is currently on the donor to get the appropriate and timely gift receipt to allow for the deduction. Such rule was adopted to help prevent fraudulent claims of large charitable contributions but has resulted at times in denials of deductions for legitimate charitable contributions merely for the fact of poor recordkeeping.

In the past, some donors who failed to obtain a a contemporaneous written acknowledgement had the charity donee amend its Form 990 to reflect the donation. They argued that such amended Form 990 would be sufficient to serve as the substantiation required to support a charitable contribution deduction. However, according to Accounting Today:

“The IRS has consistently maintained that an alternative substantiation method is not available until regulations are in place prescribing the method for charities to do this,” said the IRS statement. “The Treasury Department and the IRS have concluded that the Form 990 is an unsuitable reporting method for this purpose.  The purpose of these regulations is to consider appropriate alternatives to amended Forms 990.”

The Likely Impact

While the new proposed rule allows, but does not require, a charity to file the new information return, its likely impact will be to shift the burden to many charities to substantiate donors’ contributions (and potentially be liable for failing to do so properly) in something like a 1099 reporting regime. It would be difficult for charities to deny their donors’ requests for accepting the transfer of such burden without jeopardizing their donor relations. But before accepting such responsibility, charities would be well advised to develop appropriate risk management, document management, and cyber security systems, with knowledge of the risks and pitfalls associated with collecting donor data, including social security numbers.

What Can You Do?

Rather than developing appropriate systems to manage donors’ personally identifiable information, charitable organizations can first choose to let the Treasury Department and IRS know that the rule, if promulgated, will harm them and the nonprofit sector. Note that taking such action is an acceptable activity for public charities and private foundations and is not considered lobbying. Consider signing the letter in opposition to the proposed rule provided by the National Council of Nonprofits and Independent Sector here. The following is an excerpt from the form letter:

We submit this joint letter to demonstrate our universal opposition based on the following common concerns:


  • Protecting the Public Should be the Highest Priority: Like other law enforcement agencies, the IRS has consistently warned individuals to give out their Social Security numbers only when “absolutely necessary.” A charitable nonprofit should never be asking a donor for her or his Social Security number when soliciting donations. If someone is asking in relation to a donation, that should be considered a sign of a scam or fraudulent solicitation and reported to appropriate law-enforcement authorities. The proposed donee gift form, if utilized, would require nonprofits to ask donors to give out their Social Security numbers when it is not absolutely necessary. This conflicting message from the IRS is certain to confuse the public and result in fraud.
  • Administrative Burdens and Fiduciary Duties: Collection, storage, and reporting of Social Security numbers to the IRS is a costly additional endeavor that can impose significant risks on entities that are hacked. To protect sensitive donor information, nonprofits would have to divert resources from mission to purchase expensive data security systems that have no guarantee of protecting the public. Nonprofits that collect Social Security numbers and improperly protect the data could be subjecting themselves and their board members to lawsuits asserting a breach of fiduciary duty.
  • Disincentive for Donor Support: In 2009, the Government Accountability Office reviewed a proposal similar to the current draft regulation and found that “[t]axpayers may reduce giving because they are reluctant to provide Social Security numbers to charities given concerns over identity theft.” This consequence of reduced support for charitable works in communities was considered unacceptable then and remains a risk that cannot be countenanced today.

More About the Proposed Rule

The National Council of Nonprofits provides an excellent and detailed summary of the proposed rule and its opposition to its promulgation here. The Council’s president and CEO Tim Delaney provides further commentary in this HuffPost Impact post. This is a bad and unnecessary rule, and those in Treasury and the IRS pushing for the regulation (I’ve overheard some key officials most familiar with the sector are opposed) seemed not to have adequately considered all of the adverse consequences that would likely result.

More on Social Security Numbers

The federal government’s Social Security website advises: “Organizations should avoid using Social Security numbers (SSNs) as identifiers for any type of transaction.” It further provides: “Organizations that maintain SSNs in their system of records should consider encryption of this data.” Here’s why:

Identity theft is one of the fastest growing crimes in American society. The routine and often indiscriminate use of SSNs as identifiers creates opportunities for individuals to inappropriately obtain personal information. Repetitive use and disclosure of SSNs in organizational record keeping systems, multiplies the susceptibility of persons to potential identity theft. Through misuse of SSNs, individuals are subject to the danger of identity theft and its repercussions. Access to an individual’s SSN can enable an identity thief to obtain information that can result in significant financial difficulties for the victim. While this can be disruptive for the individual, it can also lead to civil liability for the organization and its individual employees if someone is harmed by information that has been made available to others.

Further Resources:

What You Risk When Your Social Security Number Is Hacked (Wall Street Journal)

Data Privacy and Cyber Liability: What You Don’t Know Puts Your Mission at Risk (Nonprofit Risk Management Center)

Protecting Personal Information: A Guide for Business (Federal Trade Commission)


Chan Zuckerberg Initiative – Taxable Social Enterprise – Part 2

Young hipster man making a good-bad sign

Shortly after Mark Zuckerberg announced the social good goals of the Chan Zuckerberg Initiative and the joint pledge he made with his wife Priscilla Chan to contribute 99 percent of their Facebook shares (currently valued at about $45 billion) to the Initiative, which is structured as a limited liability company (LLC), I started getting calls from the media. They wanted to know what it meant to give money to an LLC instead of a 501(c)(3) nonprofit. I subsequently wrote a very brief article explaining the rationale for using an LLC and how the Chan-Zuckerberg Initiative was reminiscent of earlier social good efforts from some Silicon Valley titans. Since then, dozens of stories have come out criticizing and defending Zuckerberg and the couple’s use of the LLC as a vehicle in philanthropic giving.

Among the publications I spoke with about the Initiative: Fast CompanyThe Chronicle of PhilanthropyNational Public Radio (NPR), the Canadian Broadcasting Company (CBC), and Tax Analysts.

LLC Background Information

An LLC is Not a Nonprofit

  • An LLC owned by individuals is not a 501(c)(3) tax-exempt entity
    • But the LLC may very well be a pass-through entity (like a partnership or sole proprietorship) in which its profits, losses, and other tax attributes are passed through to its owners
  • A contribution to such an LLC does not allow for a charitable contribution deduction
    • But the owners may be able to take a charitable contribution deduction if and after the LLC makes a contribution to a qualified 501(c)(3) entity
    • The owners will not be able to take a charitable contribution deduction for direct contributions to, or investments in, a for-profit social enterprise (a form of impact investing); contributions earmarked for lobbying; or contributions to engage in political campaign intervention

An LLC Offers Great Flexibility and Benefits

  • An LLC can have a social good purpose and, just like any individual, can engage in charitable and philanthropic activities
    • It can make charitable contributions to public charities or to a private foundation
    • It can make charitable contributions to a donor-advised fund (allowing for an immediate tax deduction and deferred grantmaking)
    • It can make investments in for-profit social enterprises
    • It can make loans to nonprofit or for-profit social enterprises
    • It can guarantee loans made by financial institutions to nonprofit or for-profit social enterprises
    • It can enter into joint ventures with nonprofits
    • It can enter into joint ventures with for-profits without being subject to the same limitations and restrictions that would be applicable to a 501(c)(3) co-venturer
    • It can engage in lobbying without limitations that would be applicable to 501(c)(3) organizations
    • It can engage in political campaign intervention like supporting or opposing political candidates without  limitations that would be applicable to most tax-exempt organizations
  • The purposes of an LLC can be changed by its owners at any time, subject to any internal restrictions they may have created by contract
    • Accordingly, the LLC can simply turn into a regular investment vehicle at any time without public notice
  • The governance of an LLC is extremely flexible; it can be structured with just one manager or have a corporate-like board of directors
  • An LLC offers its owners limited liability protection and is a widely used vehicle for asset protection purposes
  • A privately-held LLC is not required to operate transparently to the public

A Pledge is Not the Same as a Contribution

  • An unenforceable pledge to an individual’s own LLC is not binding and is merely an expression of present intent

My Take

The LLC offers Chan and Zuckerberg a limited liability vehicle in which to organize their social good efforts. It offers the couple no additional tax benefits with respect to the deducibility of their contributions. The deduction will follow the change in control of the funds from Chan and Zuckerberg (regardless of whether held in a pass-through LLC or in their personal accounts) to a 501(c)(3) charitable entity. But a limited liability form is completely customary in any entity of that size owned by individuals.

No money has changed control yet. At this point, there is just an unenforceable pledge, albeit a very public one for an enormous amount of money. It’s fair to criticize the message (was it initially misleading or simply broadly misinterpreted as a pledge to charity?), but utilization of an LLC from which to engage in individual social good efforts is not in and of itself worthy of criticism. We’ll see a lot more of this from younger, sector-agnostic, wealthy do-gooders in the future. See A Prediction for the Nonprofit Sector.

Finally, as The Atlantic article referenced below states:

It’s too early to criticize the Chan Zuckerberg Initiative—just as it’s too early to praise it.

Recommended Reading

Mark Zuckerberg’s Philanthropy Uses L.L.C. for More Control (New York Times)

Assessing Mark Zuckerberg’s Non-Charity Charity (Atlantic)

How Mark Zuckerberg’s Altruism Helps Himself (Pro Publica)

Mark Zuckerberg wants to change the world, again. You got a problem with that? (Fusion)

5 criticisms of billionaire mega-philanthropy, debunked (Quartz)


Chan Zuckerberg Initiative – Taxable Social Enterprise

Mother holding her newborn baby's feet

Yesterday, Mark Zuckerberg published a touching letter written to his week-old daughter Max which announced the beginning of the Chan Zuckerberg Initiative. The Initiative’s mission focuses on two ideas: advancing human potential and promoting equality. And the statement that raised all the attention:

We will give 99% of our Facebook shares — currently about $45 billion — during our lives to advance this mission.

Many initially assumed the pledge from Zuckerberg and his wife Priscilla Chan was to one or more 501(c)(3) charitable organizations, but a Facebook press statement clarified that the Initiative was a limited liability company (LLC). A New York Times article explains the rationale for choosing a non-tax-exempt entity:

By using a limited liability company instead of a nonprofit corporation or foundation, the Zuckerberg family will be able to go beyond making philanthropic grants. They will invest in companies, lobby for legislation and seek to influence public policy debates, which nonprofits are restricted from doing under tax laws. A spokeswoman for the family said that any profits from the investments would be plowed back into the Chan Zuckerberg Initiative for future projects.

This is reminiscent of Google’s announcement in 2005 that it would commit one percent of its profits and equity to, a division of Google Inc. and not a 501(c)(3) organization, to advance its philanthropic efforts. A Washington Post article explains Google’s rationale for not making the pledge to a tax-exempt charity or its own Google Foundation:

By using for the bulk of its charitable giving, the company will have greater flexibility in how it deploys the funds since the affiliate will not be subject to the restrictions imposed on foundations by the Internal Revenue Service. For example, will be able to invest in projects promoting entrepreneurship in Africa that are off limits for foundations because the programs turn a profit. It will also support charitable initiatives that spread the use of technology and could be viewed as questionable for a foundation since they are closely related to Google’s business.

The Omidyar Network (started by eBay founder Pierre Omidyar) provides another example of the use of a non-exempt LLC to further philanthropic purposes. A Forbes interview of the Omidyar Network’s managing partner Matt Bannick explains the hybrid model:

At the heart of our strategy is a flexible approach to philanthropy. We embrace whatever tools necessary—including nonprofit grants and for-profit impact investments–to support high-impact social entrepreneurs and the broader environments in which they work.  Our hybrid investment approach is supported by a hybrid organizational structure:  we operate both a foundation and a for-profit investment fund under the same roof.

Deeper Dive

For-Profit Philanthropy – Dana Brakman Reiser, 77 Fordham Law Review 2437 (2009)


Independent Sector Threads: Oakland Style


Independent Sector and its regional convening partners held critical community conversations called “Threads” about the key trends, obstacles, and opportunities that will affect every organization and individual working toward the common good over the next 20 years. I had the privilege of attending the conversation in Oakland and summarizing it in 90 seconds for the Opening Plenary of the 2015 Independent Sector Annual Conference. In light of Oakland culture, I decided to deliver the summary as a rap:

In the style of California Love – (Oakland-based) 2Pac feat. Dr. Dre

In the citaaay, the city of Oakland
We kept it rockin!

Now let me talk to everybody ‘bout the Oakland meet
Diverse perspectives with a touch-of-heat
Talkin’ leadership, culture and financial health
Governance, operations, not enough shared wealth

We in that sunshine state with great diversity
The town where ya find Steph Curry keep droppin’ three
Big on tech, and sustainability
Gentrification, inequality

We all in a game where concerns are just short-term
Each impact needs a metric to confirm
Funders pressurin’ for early innovation
But can’t show failure in the nonprofit nation

We think young, in the cities by the Bay
Your project is the bomb if your project makin’ pay
Throw up a finger if ya feel the same way
We’re damn short-sighted in Californ-I-a

In the style of Nuthin’ But a G Thang – Dr. Dre feat. Snoop Doggy Dog

One, two, three and to the fo’
Demographic changes are banging down the do’
Ready to make an entrance, so sit on up
(Cause you know we ‘bout to rip it up)
Board leadership first, so we can pop it like a bubble
The diversity’s pathetic, now we know we in trouble
It’s more than a gender thang, baby!
Gen’rations think we each crazy!
Minor’ties asking can you see me!
Inclusion demands voice and authority

But, uh, now the next topic at hand
Tech’s no panacea, I’mma let you understand
From an old G’s perspective
Before it’s a solution you gotta prove that it’s effective

We never think we could be wors’ning the gap,
Creating more crap, and taking rurals off of the map

Now you know, independence we must preserve
No subcontract should stifle our voice and duty to observe
And I.S. that’s what we expect of you
Courageous positions on each issue
‘cause when the problems are so big and getting biblical
We can’t just say that we ain’t political

It’s like this and like that and like this and uh


Women Leaders Still Make Less Than Their Male Counterparts…Even in the Nonprofit Sector

Caucasian middle-aged businessman and Filipino businesswoman holding different sized piggybanks.


GuideStar recently released its 2015 Nonprofit Compensation Report, an annual report compiled using data reported by exempt organizations to the IRS for 2013.  Unfortunately, the Report’s findings regarding women leaders in the sector are not at all encouraging.  According to a list compiled by the author of the Report, the Report resulted in the following Key Findings, among others:

  • The percentage of female chief executive officers at nonprofits overall has decreased over the last decade. Although the percentage of female CEOs at larger nonprofits with annual budgets over $10 million increased slightly, the percentage of female CEOs at nonprofits with annual budgets under $5 million actually decreased.
  • Of the nonprofits with annual budgets over $50 million, a mere 18 percent of them had a female CEO. The percentage of women CEOs in nonprofits in this size category has only increased 4 percent in the last ten years.
  • For nonprofits that do have female CEOs, their male counterparts at other organizations earned between 6 and 23 percent more than they did in 2013. This is an improvement from the 21 to 47 percent discrepancy, depending on organization size, that GuideStar found when it first began reporting on the gender pay gap in nonprofits in 2001, but it still far from parity.

The Chronicle of Philanthropy reported that the compensation gap was most dramatic for women CEOs at nonprofits with annual budgets ranging from $2.5 million to $5 million, whose male counterparts earned a shocking 23 percent more than them.  Even at small nonprofits with annual budgets of less than $250,000, male CEOs still out-earned female CEOs by 6 percent, the lowest discrepancy found in any of the categories of budget size.  Over the last decade, the gender pay gap has slightly narrowed for organizations with budgets of $1 million or less or $50 million or more, but has actually widened for organizations with budgets between $1 million and $50 million.

The disparate treatment of female nonprofit CEOs with respect to compensation was further on display at the recent testimony of Cecile Richards, President of Planned Parenthood, before the House government oversight committee.  In his opening statement, committee Chairman Jason Chaffetz stated that Planned Parenthood wasn’t in need of federal subsidies, as evidenced by Richards’s compensation.  During questioning, he later continued to press her on the specific amounts of her compensation in various years in a condescending and derogatory manner.  Representative Carolyn Maloney responded to his questioning by commenting “In my entire time I’ve been in Congress, I’ve never seen a witness beaten up and questioned about their salary” and accused Mr. Chaffetz of “beating up on a woman, our witness, for making a good salary.”  As Nonprofit Quarterly pointed out, Richards’s compensation is actually low compared to the average CEO compensation for organizations with annual budgets of more than $50 million as reported by the GuideStar Report.

Although organizations recognized as exempt under Section 501(c)(3) must ensure that compensation they pay to executives is fair, reasonable, and not excessive, I think that the dismaying results of the Report raise some questions that all nonprofit Boards of Directors should be asking themselves.  Is their CEO’s compensation in fact fair and reasonable in light of the services the organization is receiving in return?  How does that compensation compare to that paid by similarly sized and similarly situated organizations?  Has the organization offered compensation that will enable it to attract the level of talent that it desires and needs?  Within the boundaries applicable to 501(c)(3) organizations with respect to compensation, does the organization’s compensation generally reflect the values that the nonprofit strives to stand for?  Has the organization inadvertently allowed any form of bias (by a Director, major donor, or other stakeholder) to influence its decisions regarding compensation?

While nonprofit Directors must be cognizant of the federal and, in some cases, state regulations regarding nonprofit compensation, asking these questions, and considering how the answers may reflect on the organization, may also very well be a part of carrying out a Director’s fiduciary duties owed to the nonprofit on whose Board she sits.  I hope that the results of future nonprofit sector compensation reports will tell a very different story!