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 fnance 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.
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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.
Yermack wrote his paper at a fortuitous time because newly enacted Sarbanes-Oxley rules required public disclosures of the type Zuckerberg just made. Yermack tracked those disclosures and found 150 large stock gifts made to executive-controlled foundations between 2003 and 2005. Yermack noticed a pattern of abnormal negative returns—both five and 20 days after executives made large stock grants. Because these grants aren’t sales, they’re not subject to insider trader laws.
“On average these gifts occur at peaks in company stock prices, following run-ups and just below price drops,” Yermack wrote.
Facebook shares are up 37.3 percent year-to-date while the market is up only around 1 percent. This doesn’t mean that Facebook shares will fall or that Zuckerberg is up to anything nefarious. Yermack noticed a pattern within these gifts.
Each circumstance is unique. But the pattern is important.
It may well be that at Zuckerberg’s status, pecuniary issues of tax and estate planning don’t hold so much sway. Yermack’s large donors were pipsqueaks compared to Zuckerberg—the median executive in his sample had $172.8 million invested in his company, which is just over half the tax benefit that Zuckerberg might realize with his first donation. Maybe when you’re Zuckerberg, the motive to remake humanity is pure.
Besides, Zuckerberg's announcement coincides with National Day of Giving as well as his daughter’s birthday. So we should assume the best.
If purity is the essence here, there seems no reason that the tax system should support it. Zuckerberg can afford to dabble in politics and society without massive subsidies from the rest of the country. He can afford to do whatever he feels is in the public good and he can even afford not to have to worry whether or not the public agrees with his particular vision.
Mark Zuckerberg doesn’t need massive tax benefits to do whatever he wants. He can just do whatever he wants.
But he will get those tax benefits and estate planning benefits and he’ll be able to give up his stock while holding onto power over his company. So will others. Yermack’s work reveals that, in aggregate, when we pay people like Zuckerberg to fund their own foundations, we are really helping the rich and coddled few even as we thank and honor them for their charity.
