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At this point most people know OpenAI, one of the hottest companies in America, has below strange organization structure.

My question is whether this gains any benefits tax-wise. Is it just another tax avoidance scheme mentioned here?

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  • I’m voting to close this question because it belongs on money.stackexchange.com Nov 19 at 15:36
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    @BlueDogRanch Tax planning is a legal issue too. It could be appropriate in either place, and since this involve both corporate law and tax law it is appropriate at Law.SE as well.
    – ohwilleke
    Nov 19 at 19:18

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OpenAI, Inc. and OpenAI GP, LLC pay no federal income taxes and are usually exempt from state income taxes, and often state and local sales taxes and property taxes as well. Donations to OpenAI, Inc. or OpenAI GP, LLC are also tax deductible and not subject to gift and estate taxation.

The chart is ambiguous with regard to the holding company. What rights do the employees and investors have contractually? What rights does OpenAI, Inc. have contractually? What is the form of organization of the holding company? There isn't enough information in the question to know the answer to these critical questions.

Microsoft would owe federal corporate income taxes at the rate of 21% on its share of OpenAI Global, LLC as reported to it on the Schedule K-1 for IRS Form 1065 of OpenAI Global, LLC (assuming that OpenAI Global, LLC is taxed as a partnership under Subchapter K and not as a C-corporation - it is not eligible for an S-corporation election), and also any applicable state corporate income taxes on that income.

The holding company has federally taxable income on its share of Open AI Global, LLC as reported to it on the Schedule K-1 for IRS Form 1065 of OpenAI Global, LLC (assuming that it is taxed as a partnership under Subchapter K and not as a C-corporation), and also any applicable state corporate income taxes on that income. But again, without knowing more about the holding company's form of organization and ownership structure it is difficult to know what is going on there.

If the holding company is a partnership taxed LLC, Open AI, Inc.'s share of the income would be tax free and tax deductible donations to it would provide it (and effectively the larger group of companies) with a subsidized form of capital contribution.

From the perspective of Microsoft, which probably licenses OpenAI resources for the Bing! search engine, the effectively subsidizes what would otherwise be R&D expenditures involved in developing this large language model (LLM) AI resource with charitable funds, which may be cheaper than developing the product fully in house.

The fact that Open AI Global, LLC is capped profit company, which is probably the company the licenses the AI resource to Microsoft, also means that the licensing fee to Microsoft is effectively kept reasonable close to cost rather than reflecting the true fair market value of the license. The need to distance this below fair market value license to a for-profit corporation from the non-profit, which isn't allowed to directly engage in below fair market value transactions with third-parties whose aren't intended beneficiaries of its charitable mission, may be part of the reason for the complicated corporate structure.

Footnote

Is it just another tax avoidance scheme mentioned here?

The particular tax avoidance scheme mentioned at the link uses 501(c)(4) organizations, which aren't eligible for the charitable income tax deduction for contributions to it, not 501(c)(3) organizations.

Tax avoidance may be a motive in the OpenAI case but it is not the same scheme.

The mere ability of wealthy people to donate property, including appreciated property whose appreciation is never taxed, tax free to charities whose charitable uses of the property a donor controls, is a feature and not a bug. It is one of the main intended reasons that these tax breaks exist at all.

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