The front page of the March 10, 2024 New York Times featured a story illustrating that, with assets of $7 billion, Elon Musk’s charitable foundation consistently fails to donate the minimal amounts required by law. According to Times reporters David A. Fahrenthold and Ryan Mac, the Foundation appears to exist only as a financial benefit and public relations boost for Musk himself.
What exactly does the Musk Foundation do wrong? Who are the other bad players in the world of philanthropy? What can ordinary citizens - especially nonprofit professionals - do to help change the landscape?
First, some background on charitable foundations. The Internal Revenue Service (IRS) designates charitable foundations as 501(c)(3) nonprofit organizations whose sole purpose is to support charitable activities. Each foundation is required to spend five percent of its total worth for charitable purposes every year (averaged over a five year period) in order to avoid penalties. Foundations are required to submit an IRS Form 990-PF annually, in which they list the recipients of the donations they make.
Copies of those forms are available to the public. The IRS website has a portal that allows you to view these information returns through a search on its website, or you can search through a third-party such as Guidestar (which requires a free membership).
With more than $7 billion in assets, the Musk Foundation should spend $358 million each year on charitable activities. In 2022 (the most recent information available) the foundation donated $53 million to 501(c)(3) charitable organizations and claimed an additional $113 million in qualifying administrative and other costs. The foundation fell short of the minimum payout by nearly $200 million.
Let’s be honest: Elon Musk can do whatever he wants with his own money. He doesn’t have to donate it, but he does have to pay taxes just like the rest of us. In setting up a charitable foundation, he avoided billions in taxes -- money that would have supported the public benefit. Because he chose to divert that money, the foundation is legally obligated to ensure those funds eventually go back to support society.
Put another way, rich people get to CHOOSE where their tax money goes.
Or, if they are like Musk, they can just hang on to it, creating a slush fund to use as they please, when they please. For example, the Musk Foundation made a significant donation to the Ad Astra private school founded by Musk. The Bel-Air school had only 14 students, including Musk’s five children.
Within 90 minutes of a SpaceX rocket explosion over Cameron County, Texas in 2021, the Musk Foundation started making multi-million dollar donations to the community. It was the first time the foundation had supported the community with charitable donations.
With no employees and only three trustees who spend a few minutes a week making multi-million dollar decisions, no formal method to apply for funding, and no public plan for distributing funds, the Musk Foundation simply doesn’t have the structure in place to fulfill its charitable purpose - even if it wanted to.
The Musk Foundation is an example of a wider problem: Foundations used as tax shelters for the super rich often cause more harm than good in the nonprofit sector they are supposed to support. For every Gates Foundation making an effort to create real change in the world, there are dozens of foundations that operate more like Musk’s.
Founders often hire their own children - at extraordinary salaries that count toward the minimum distribution - to run the organization. Trustee meetings - also considered a qualifying expense - are held at luxurious locations and can include private performances by mega-stars. Some foundation offices feature world-class art and designer furniture.
Many foundations fall into a category I call “Sadistic Philanthropists,” by creating funding processes that are nearly impossible for a small or medium-sized organization (which are often doing the most innovative and effective work) to access the funds.
Then there are Donor-Advised Funds (DAFs), the fastest growing sector of philanthropy. DAFs allow donors to “hide” their funds in a larger account -- getting an immediate tax break and then sitting on the money as long as they want. Individual DAFs don’t require publicly available reports and don’t have to disclose how they choose to make donations. For every Musk Foundation not paying its fair share, there could be dozens of DAFs doing the same - we just don’t know about them.
How can we change this landscape?
First, like any democracy, we have the government we deserve. Our federal agencies and tax laws -- no doubt influenced by the super-rich -- have created these tax havens. Holding our elected officials accountable for these laws is the responsibility of each of us. There’s nothing inherently wrong with rich people avoiding taxes by making donations, but it needs to be equitable and transparent. Foundations should be limited on the amount of “administrative” and other non-charitable expenses that come out of their five percent. And let’s go ahead and raise that amount to 10% while we are at it: foundations may sunset more quickly (run out of money) but the funds will go into the public at a much faster rate.
Second, Nonprofit professionals must do their homework. Each of us is capable of viewing the 990-PF of each foundation we work with. Foundation staff often refer to a nonprofit’s 990 during conversations. Perhaps nonprofits need to have the foundation’s 990 on hand as well.
Third - and please don’t hate me for the next comment - but the IRS needs to be funded. While the tax gap in the U.S. has steadily grown over the last decade, funding to the IRS has been slashed by billions of dollars. The result? The IRS doesn’t have the resources to pursue tax collection from the super-rich. They only have enough to go after middle-class families who owe smaller amounts and can’t afford high-dollar attorneys and accountants. With adequate funding, the IRS can hold foundations accountable for making required contributions.
Finally, speak out! Of course, fundraisers and grant-seekers aren’t going to cut off their own noses to spite their faces -- publicly complaining about the same people they are working to get donations from just isn’t reasonable. One of my favorite sites is Grant Adviser, a Yelp-style site for foundations. On Grant Adviser, a professional can give an objective but anonymous review of a foundation’s policies and procedures. The site sends the anonymous report to the foundation and reviews are made available to future fundraisers who want to get more information.
Regardless, as the Musk Foundation so clearly shows us, the increasing use of foundations as tax shelters for the super rich rather than as ways of providing value to their community is a trend that needs to be pushed back on - for the good of the entire nonprofit sector and the people they serve.