OpenAI, a Nonprofit-For Profit Hybrid, Really?

ACORN International Non-Profit Taxes

            New Orleans      I may be a techno-peasant, but I at least like to keep up.  That’s not to say, that I’ve tried any of the artificial intelligence or AI things that are out there, but I’m what you might call AI-adjacent, in the weird, but common parlance popular these days.  My daughter showed me some stuff to walk me through it, but it fell off my list, so now I would have to start over.  With a few minutes left in the communications meeting for ACORN Canada, I tried to fill the time with a question to this younger cohort about who had tried ChatGPT.  We were one out of four, making me feel not quite so trailing edge.  Our one veteran queried a question about ACORN’s tenants’ unions in Canada, and the response wasn’t terrible.  I really need to put this whole AI thing back on my list, but I have this bandwidth problem, so who knows when I’ll get there.

On the other hand, I read the lengthy interview in Wired with OpenAI’s CEO and co-founder, Sam Altman, the latest iteration of a Silicon Valley hotshot.   A lot of it was the standard hype about how AI will change the world and everything in it, that it needs to be regulated, and how Altman was on a whirlwind, worldwide meet-and-greet tour with all the big whoops in the universe.  A lot of it was blah, blah until I got almost to the end of the piece, and it described the corporate structure of OpenAI as some kind of weird hybrid between a nonprofit and for-profit.  All of that sounded super sketchy to me, so let me share my misgivings.

OpenAI was created as a tax-exempt, 501c3 nonprofit in 2016 by some heavy hitters including Reid Hoffman, Elon Musk and others.  A dispute supposedly over security and the purity of the engineering and scientific pursuit, but more likely just a Musk power play, saw him pull his financial support from OpenAI.  The way Altman tells it, this was an existential crisis and their path forward was going to be mega-expensive, so they created a for-profit OpenAI arm of OpenAI owned by the nonprofit.  I hope you’re still with me.

Likely they had a ton of high-priced lawyers devise this scheme, so maybe I’m missing something, but it still doesn’t pass the smell test.  Revenues for a tax-exempt nonprofit are not taxed unless it is unrelated income, and AI is AI, so it would be related.  On the other hand, “The actual structure of the arrangement is hopelessly baroque, but basically the entire company is now engaged in a ‘capped’ profitable business.  If the cap is reached – the number isn’t public, but its own charter, if you read between the lines, suggest it might be in the trillions – everything beyond that reverts to the nonprofit research lab.”  Looking at the most recent IRS 990 for the nonprofit, filed in late 2022 for fiscal year 2021, heightens by concern.  They claimed revenue of only a bit over $11000 even though they supposedly own something that everyone agrees is worth billions.  They had expenses of almost $1.4 million on that little bitty revenue with $19 million in assets.  The revenue was mainly investment income, not donations, which is also a warning sign, since a 501c3 requires significant public support to continue to qualify.  The $19 million asset figure is also dodgy, it seems to me, since they “own” the for-profit subsidiary.  The fact that they say the c3 board and the for-profit board overlap and are identical, also is highly questionable.  None of this looks like it aligns well with IRS requirements.

Then there’s the question of the nonprofit getting no benefit from the for-profit until it reaches potentially trillions of income. Then it would only get the excess.  The board of OpenAI, its lawyers and staff clearly pulled this figure out of the blue sky, since there are less than a handful of companies in the world now that make or are worth even one trillion dollars.  More ridiculously, Altman tries to argue that if AI is fully reached, the whole concept of money and the current economy will be reshaped, so none of this matters, although some of the big whoops stand to make billions from their investments in the for-profit.

AI isn’t here yet, but for those of us who are at least as smart as the average bear, I would think the IRS nonprofit section needs to get ahead of this nonsense, which is way too complicated by half, and makes little sense under any argument.  Why wait until the FTC has to sue the lot of them for monopoly practices like Google and Amazon, and they widen the gap between the superrich and the rest of us?  They need to head this off at the pass, rather than getting confused by all of these twists and turns on tax and nonprofit regulations.