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Comment by aurareturn | Hacker News Reader

Is this some kind of loophole?

Start a non-profit with a noble mission. Get $130.5 million in donations without giving out any shares. Make a product. Renounce non-profit mission. Convert to a for-profit.

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The consequence of renouncing non-profit status is that the $130.5m in donations is characterized as taxable income to the corporation, and the IRS can impose penalties and interest dating back to the formation of the corporation (i.e., it can pierce the non-profit veil).

So, not a loophole in the sense that the entity will be subject to tax. And saavy donors will usually have a conversion clause that either converts their donation to a capital contribution in the event that non-profit status is lost, or rescinds their donation. But that would require having donors that don't believe they know everything about everything and poo-poo safeguards like that...

> The consequence of renouncing non-profit status is that the $130.5m in donations is characterized as taxable income to the corporation

Or can they convert to equity, then it's not income.

No, if it was characterized as a donation on the non-profit's financials, after the loss of non-profit status the amount will be treated as revenue unless the donation legalese contained a conversion clause.

But conversion clauses are extremely rare. 99.9999% of the time, if a donor is concerned that an entity will do something to jeopardize or deliberately lose its non-profit status, they simply won't make the donation.

The $130m in tax and penalties are likely puny compared to the value of the equity the original donors could have gotten.

I think if Elon can convert his donations into equity, he wouldn’t have sued.

This seems like something that works exactly once ever and every non-profit will be treated with extreme scrutiny from now on.

For about two weeks, until everyone forgets.

Hell no, the IRS doesn't forget something like this.

More than the money, they were able to attract top talent and avoid regulations and senate hearings by calling themselves OpenAI. Genius move even by scamster standards.

When accused of copyright infringement, they could also say, "But we are a non-profit, we are just advancing the progress of science!"

It's not like a for-profit cannot do scientific research.

Yes, but...

> The fair use statute itself indicates that nonprofit educational purposes are generally favored over commercial uses.

[0] https://copyright.columbia.edu/basics/fair-use.html

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