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Comment by jefftk | Hacker News Reader

"We are turning our non profit into a for profit because we want to make money" isn't legal.

To make this transition in a way that maximizes how much money they can make while minimizing what they lose to lawsuits they need to explain what they're doing in a positive way.

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I don't think it should really matter how they explain it, legally.

That depends - they probably have to do whatever is in the best interests of the non-profit, so if they explain the motivations behind why they feel they are acting within their responsibility then that could probably help a defence.

IANAL though. I assume you can make a case though that says OpenAI needs to be able to raise sufficient capital to maintain its current market position, and these changes are required for that, and without maintaining market position the non-profit arm will not be able to achieve its aims.

As they have to act in the interests of the non-profit arm, I assume there must be an element of mens rea (state of mind) - the same action could probably be illegal or legal depending on why it was done.

Is it illegal? If it is, not amount of explaining will make it legal.

When the consequence is paying a fine/settlement, it means the law is only for poor people.

That's not really true and is at the heart of much of the 'confusion' about e.g. tax evasion vs. tax avoidance. You can do illegal things if you don't get prosecuted for them and a lot of this type of legal wrangling is to give your lawyers and political allies enough grey area to grab onto to shout about selective prosecution when you're called out for it.

I don't see how that's relevant. In what case is the difference between tax evasion and avoidance just the motive/explanation? I'm pretty sure the difference is purely technical.

Moreover, I don't think a lack of prosecution/enforcement makes something legal. At least, I don't think that defense would hold up very well in court.

> I'm pretty sure the difference is purely technical.

It's really not - there is a ton of tax law that relies on e.g. the fair market value of hard-to-price assets or if all else fails and a penalty is due, there's an entire section of the CFR on how circumstances surrounding the underpayment can reduce or eliminate the liability.

https://www.law.cornell.edu/cfr/text/26/1.6664-4

If you've only ever filed a personal tax return, you're dramatically under-appreciating how complicated business taxes are and how much grey area there really is. Did you know you can pay your 10-year old to work for you as a means to avoid taxes? Try looking up the dollar amount where avoid turns to evade... there isn't one. The amount paid just has to be "reasonable and justifiable" and the work they perform has to be "work necessary to the business".

Waiving penalties depending on the circumstance is interesting but not directly relevant to the question on hand. You would have already been found to have evaded taxes before the penalty could be assessed. So the circumstance/motivation/explanation is still not the differentiator between avoidance and evasion in this case - just the penalty.

If tax law were black and white / “purely technical” they wouldn’t make accommodation to reduce your penalties if you made good faith errors when filing was my only point.

There are solidly legal and solidly illegal ways to do this, and a range of options in between. My reading of what they are doing is that it is pretty far toward the legal end of this spectrum, and the key question will be whether whether the non-profit is appropriately compensated for its stake in the for-profit.

Explaining reduces the chance that they're challenged by the IRS or attorney general, since that is a political process.

> "We are turning our non profit into a for profit because we want to make money" isn't legal.

Source? The NFL did this because they were already making a lot of money. As I understand it, the tax laws practically required the change.

The NFL was a 501c6 trade association, not a 501c3 though?

Ah interesting. How are those different?

The key thing is that assets of a 501c3 are irrevocably dedicated to charitable purposes, which is not the case for a 501c6. If the NFL had somehow started as a 501c3 before realizing that was a bad structure for their work, the standard approach would be for the 501c3 to sell their assets at fair market value to new for-profit. Then either those proceeds could be donated to other 501c3s, or the old NFL could continue as a foundation, applying those assets charitably.

(Not a lawyer, just someone interested in non-profits. I'm on the board of two, but that doesn't make me an expert in regulation!)

Interesting, TIL. That is the basis for why the conversion is illegal?

Sorry, which conversion? If you mean OpenAI, it's not clear that what they are currently planning is illegal. If they do it correctly, the non-profit is fully compensated for their stake in the for-profit.

The NFL passes net income back to the team owners. The taxation is generally the owner's problem.

OpenAI isn't making money. They are like a giant furnace for investment dollars. Even putting aside that the NFL and OpenAI aren't the same kind of entity, there is also no taxes issue.

That doesn't explain how the conversion is illegal.

If everyone sees it through, does anything else that direct evidence of actions prove otherwise? Explaining just wastes everyone's time.

They are explaining how they see what they are doing as compliant with the law around 501c3s, which it arguably is. And they are putting a positive spin on it to make it less likely to be challenged, since the main ways this could be challenged involve government agencies and not suits from individuals.

No matter how obvious a facade is though, there is probably a sizable group that doesn't see through it.

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