Charitalism and Mixed Markets in Federal Tax Exemption:  A Case Study Using OpenAI's Joint Venture with Microsoft

Abstract

OpenAI and the Professional Golf Association Tour (PGAT) have entered separate partnerships with private investors who, in exchange for necessary capital, share in the organizations’ net assets. In effect, capitalists have been invited to share in profits generated by tax subsidized charities, that term expanded a bit to include the PGAT. The PGAT is a business league but subject to the same profit-prohibitions as charities. I argue that tax law’s resistance to explicit profit sharing is futile because the market is incessant and capitalists are indispensable to the charitable goal. My purpose is to discover and give meaning to “charitalism,” a portmanteau used to describe the co-dependent relationship between tax law’s prohibition against profit-taking, and capitalism’s unceasing quest for profit. The relationship is fraught, most of all, when charitalists form partnerships with capitalists. The private inurement doctrine prohibits unreasonable payments – amounts beyond fair market value – but only payments made in self-dealing transactions. It doesn’t demarcate the extent to which charitalists may facilitate profit taking on the open market – “outsider profit taking” – to acquire necessary inputs. A second prohibition, that against “private benefit,” purports to do so, though not very well. It is that prohibition that charitalism will more thoroughly explain. The current uncertainty suggests that less intrepid charitalists might forego pursuit of good purposes rather than risk revocation, jeopardy for which exists in greatest measure when charitalists enter partnerships or use profit shares as consideration for indispensable goods or services. I attempt here to state and defend an analysis by which charitalists may safely determine permissible profit-sharing in varied circumstances. I use the general facts of OpenAI LP and “NewCo,” PGAT’s forthcoming joint venture entity with private investors, to demonstrate the analysis. Open AI wins, but PGAT loses.

Keywords: charity, tax exemption, federal tax, private benefit, nonprofit joint ventures

JEL Classification: H25, K34, L30, L31, L32, L33