Changing OpenAI's nonprofit structure could have major consequences

NEW YORK (AP) – The Artificial intelligence Creator OpenAI may face a costly and inconvenient accounting for its non-profit sources The valuation recently exploded to $157 billion.

Nonprofit tax experts closely monitor OpenAI, The Creator of ChatGPTSince last November when its board CEO Sam Altman was ousted and rehired. Now, some believe the company may have reached — or exceeded — the limits of its corporate structure, under which it is organized as a nonprofit with the mission of developing artificial intelligence to benefit “all humanity” but with for-profit subsidiaries under control.

Jill Horvitz, a professor of law and medicine at the UCLA School of Law who studied OpenAIstates that when the two sides of a joint venture, a non-profit and a for-profit, come into conflict, the charitable purpose must prevail.

“First the job of the board, then the job of the regulator and the courts, is to ensure that the promises made to the public by the charitable interest are kept,” he said.

Altman recently confirmed that OpenAI is considering one Corporate restructuring But did not make any concrete proposals. The company is looking at turning OpenAI into a public benefit corporation, a source told The Associated Press. No final decision has been taken by the board and the timing of the transfer has not been fixed, the source said.

In the event that the nonprofit loses control of its subsidiaries, some experts believe that OpenAI may have to pay for the nonprofit's interests and assets. So far, most observers agree that OpenAI has carefully avoided ties between its nonprofit and various corporate entities.

However, they see OpenAI as subject to scrutiny from regulators, including the Internal Revenue Service and state attorneys general in Delaware, where it is incorporated, and in California, where it operates.

OpenAI nonprofit board chairman Brett Taylor said in a statement that the board is focused on fulfilling its fiduciary obligations.

“Any potential restructuring will ensure that the nonprofit will continue to exist and thrive, and that the for-profit will receive full value for its current stake in OpenAI with an enhanced ability to pursue its mission,” he said.

Here are the top questions from nonprofit experts:

How can OpenAI transform from non-profit to profit?

Tax-exempt nonprofit organizations sometimes decide to change their status. This requires what the IRS calls a conversion

Tax laws require money or assets donated to a tax-exempt organization to be within the charitable sector. If the primary organization is for-profit, typically, a conversion is required where the for-profit pays the fair market value of the assets to another charity.

Even if the nonprofit OpenAI somehow existed, some experts argue that it would have to pay fair market value for any assets that are transferred to its for-profit subsidiaries.

In the case of OpenAI, there are many questions: What resources are not profitable? What is the value of that asset? Do they include intellectual property, patents, commercial products and licenses? Also, what is the value of giving up control of profitable subsidiaries?

If OpenAI were to reduce its nonprofit control over its other business entities, a regulator might need answers to these questions. Any changes to OpenAI's structure will require it to navigate laws governing tax-exempt entities.

Andrew Steinberg, of counsel at Venable LLP and a member of the American Bar Association's Committee on Nonprofit Organizations, said it would be an “extraordinary” transaction to change the structure of a tax-exempt nonprofit to corporate subsidiaries.

“It will be a complex, involved process with various legal and regulatory considerations to work through,” he said. “But it's not impossible.”

Is OpenAI fulfilling its charitable mission?

To obtain tax-exempt status, OpenAI must apply to the IRS and explain its charitable purpose. OpenAI provided a copy to The Associated Press That September 2016 applicationWhich shows how significantly the organization's plans for its technology and structure have changed

OpenAI spokeswoman Liz Bourgeois said in an email that the organization's mission and goals remain constant, although the way it carries out its mission has evolved as technology advances.

When OpenAI incorporated as a nonprofit in Delaware, it stated that its purpose was, “to fund the research, development, and distribution of technologies related to artificial intelligence.” In tax filings, it also described its mission as building, “general-purpose artificial intelligence (AI) that safely benefits humanity, unencumbered by the need to generate financial returns.”

Steinberg said the company had no problem with the plan change as long as it reported the information on its annual tax returns, which it has.

But some observers, including Elon Musk, a board member and early supporter of OpenAI Filed a case against the companyDoubtful that it was faithful to its mission.

“Godfather of AI” Geoffrey Hintonwho was Awarded the Nobel Prize in Physics Tuesday, expressed concern about OpenAI's evolution, openly boasting that one of his former students, Ilya Sutskever, who went on to co-found the company, helped oust Altman as CEO before bringing him back.

“OpenAI was set up with a big emphasis on security. Its primary purpose was to develop artificial general intelligence and make sure it was safe,” Hinton said. “Over time, it became clear that Sam Altman was much less concerned with safety than profit. And I think that's unfortunate.”

Sutskever, who led a team focused on AI security at OpenAI, He left the organization in May And started his own AI company. OpenAI for its part says it's proud of its security record.

Can OpenAI Board Members Avoid Conflicts of Interest?

Ultimately, the question comes back to OpenAI's nonprofit board and how much it's doing to advance the organization's charitable mission.

Steinberg said any regulator looking at a nonprofit board's decision would be most interested in the process by which it reached that decision, not necessarily whether it reached the best decision.

Regulators, he said, “often defer to board members' business judgment as long as the transaction does not involve a conflict of interest for any of the board members. They do not stand to gain financially from the transaction.”

Whether any board members would benefit financially from any changes to OpenAI's structure may also be of interest to nonprofit regulators.

In response to questions about whether Altman could be given equity in the for-profit subsidiary in a potential restructuring, OpenAI board chair Taylor said in a statement, “The board has discussed whether this would be beneficial to the company and our goals. Sam is to be compensated with equity, but no specific figure has been discussed or decided.”

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