The Reasons for For-Profit Philanthropy
Just as it differs from its for-profit forbears, Google.org is significantly and intentionally distinct from traditional philanthropic forms. As compared with a tax-exempt nonprofit entity, the for-profit Google.org division has greater freedom to invest, direct access to Google’s resources, and leeway to engage in political activities. State and federal law applicable to traditionally-organized philanthropic entities would curtail all of these. These legal limits would frustrate Google.org’s strategy, and to a large degree explain Google’s decision to chart a new path.
Freedom of Investment
Several aspects of state nonprofit corporate law could hinder Google.org’s investment plans. State law prohibits nonprofit corporations from distributing net earnings to those with control over the corporation’s decisions.3 If Google.org were a nonprofit corporation, any profits it realized from investments in for-profit companies would have to be reinvested in the nonprofit’s mission, rather than shared with Google or its shareholders.4 Likewise, state law may demand that nonprofit corporations have charitable purposes and limit or prohibit pecuniary or commercial purposes.5 A nonprofit Google.org substantially devoted to investing in for-profit companies, or developing products or services for eventual sale by a for-profit entity, could breach these restrictions. Finally, nonprofit fiduciaries are bound by the duty of care to manage and invest corporate assets prudently and investing charitable assets in risky ventures (even those seeking socially-useful goods) might not comply with fiduciaries’ obligations.
If Google.org were to seek tax-exempt status under Internal Revenue Code §501(c)(3), federal law would further hinder Google.org’s freedom of investment. Federal tax law looks skeptically upon commercial activity by tax-exempt entities. As a tax-exempt nonprofit, Google.org would have to expend significant time and energy ensuring its investment and technology development activities were not viewed as commercial activities that overshadow its philanthropic program. Furthermore, income from an exempt organization’s unrelated business activity is subject to tax. If some of Google.org’s investment or technology development activities were deemed unrelated to its exempt purposes, the income they generated would be taxable, limiting the benefit of tax-exemption in the first place.
The private benefit doctrine, which forbids tax-exempt entities from conferring substantial benefits on unrelated individuals and entities, would further frustrate Google.org’s vision. Conferring such a benefit is punishable by loss of exemption, cancellation of donors’ deductions, and fines. If any Google.org investment were deemed to confer a substantial benefit on its for-profit recipient, this would be an improper private benefit with serious consequences. Google.org’s for-profit investment strategy is therefore perilous on this ground as well.
Direct Access to Google
Incorporation as a nonprofit, and particularly status as a tax-exempt private foundation, would also hinder Google.org’s desired direct access to Google’s resources. A nonprofit Google.org could be perceived by state regulators as overly concerned with the affairs of Google or to be acting at its behest. If so, regulators could challenge the bona fides of Google.org’s charitable purposes or claim it had crossed the line into being a commercial entity. Further, if Google or its key personnel had control over the affairs of a nonprofit Google.org, it would be important to ensure that neither Google nor those key players received inappropriate distributions. In the same vein, fiduciary obligations on Google.org’s directors and officers would attach liability to unfair self-dealing. Resource-sharing arrangements would need to be scrutinized to ensure that Google.org received any benefits of such bargains.
Analogous federal tax law concepts would pose similar obstacles for direct access. Although proprietary activities are permitted, too much intermingling of Google’s personnel, technology, and other resources with Google.org would raise alarms regarding the commerciality limits on tax-exempt entities. Additionally, the mutually-beneficial relationship envisioned by direct access could raise concerns under the inurement doctrine and the excess benefit statute. The inurement doctrine bars exempt organizations from distributing net earnings to insiders with organizational control; violations are punishable by loss of exemption.6 The excess benefit statute, Internal Revenue Code Section 4958, imposes penalty taxes on transactions that provide excessive benefits to fiduciaries or major donors. Together, these restrictions would place intermingling of Google and Google.org resources under even greater scrutiny than state fiduciary law.
Federal tax law would have the most dramatic effect on Google.org if it were classified as a private foundation (as it almost certainly would be due to its single funding source). Extremely strict rules penalize sharing of resources between private foundations and their funders. Transactions between Google.org and Google would therefore subject both entities and their managers to penalty taxes and would have to be unwound. Thus, Google.org’s direct access plan would be fraught with risk if the entity were set up as a traditional nonprofit, and particularly dangerous were it deemed a private foundation.
Finally, the for-profit model avoids restrictions on Google.org’s political activities. Federal law imposes major limitations on political activities by traditionally-organized philanthropic entities. These limitations vary based on an organization’s classification within tax-exempt status. If a tax-exempt Google.org were deemed a private foundation, as is most likely, it would not be allowed to lobby at all.7 If Google.org were somehow able to avoid private foundation status, federal law would still permit “no substantial part” of its earnings to be spent on lobbying.8 Regardless of classification, political campaign activities by an exempt Google.org would be banned.9
Therefore, the legal restraints on nonprofit, tax-exempt entities would interfere with the Google.org vision. They would limit Google.org’s ability to invest in for-profit ventures and would scrutinize and, at times, punish its use of and access to Google resources to support its activities. They would constrain, if not entirely prohibit, Google.org from engaging in political action. Therefore, Google’s decision to eschew traditional charitable forms to pursue its philanthropic endeavors is easily understood.
3. See e.g., Revised Model Nonprofit Corp. Act §§ 1.40, 13.01 (1987).
4. Of course, Google.org has disclaimed any intention to use profits for anything other than future philanthropy.
5. e.g., N.Y. Not-for-Profit Corp. Law §§ 201(b), 204.
6. I.R.C. § 501(c)(3).
7. I.R.C. § 4945(d)(1).
8. I.R.C. § 501(c)(3).