Musk-OpenAI Trial Puts Nonprofit Law in Spotlight

Smith expert says case hinges on ‘old, sleepy rules’ about who gets to profit from a charity

The high-stakes Musk–OpenAI trial entered its second week with new testimony and leaked pre-trial messages intensifying scrutiny of how one of the world’s most influential AI labs evolved from a nonprofit ideal to a multibillion-dollar corporate force. Elon Musk argues that OpenAI abandoned its founding mission and misused his early donations when it shifted to a for-profit structure heavily backed by Microsoft.

What looks like a Silicon Valley power struggle is, in the view of Smith’s Samuel Handwerger, something more fundamental. “Somewhere in a federal courthouse in Oakland,” he says, “the richest man on Earth sat on a witness stand and called himself a fool.” Musk told jurors he was “foolish enough” to donate roughly $38 million to what he believed would remain a nonprofit AI research lab—one that could now be valued at more than a trillion dollars.

Handwerger, CPA and accounting and information assurance senior lecturer for the University of Maryland’s Robert H. Smith School of Business, argues that beneath the personalities lies “one of the oldest, sleepiest, most overlooked corners of American law: the rules about what a charity can and cannot do with its money.” Those rules, he notes, form a bargain between a 501(c)(3) organization and the public: tax exemption and deductible donations in exchange for operating solely for public benefit.

Central to Musk’s claim are two doctrines—private inurement and private benefit—that prohibit a charity’s earnings from flowing to insiders or disproportionately enriching a private company. Musk testified that OpenAI’s founders assured him the organization would remain a charity, only to build later a structure that, in his telling, made them “fabulously wealthy.” As Handwerger paraphrases the legal principle: “You cannot run a charity for yourself.”

The Microsoft partnership is the second pillar of Musk’s argument. The tech giant’s $10 billion investment and exclusive commercial license, he says, subordinated a charitable mission to a single corporation. Handwerger calls this “a doctrinal argument wearing everyday clothes,” echoing Musk’s courtroom line: “Do you really want Microsoft controlling digital superintelligence?”

OpenAI’s defense has framed the lawsuit differently. Attorney William Savitt told jurors, “We are here because Mr. Musk didn’t get his way at OpenAI,” portraying the case as an expensive dispute brought by a former board member who later launched a rival company.

Still, Handwerger, who also advises students serving in UMD-affiliated nonprofit organizations Justice for Fraud Victims and TerpTax, says the trial is forcing the public to confront the rules that govern every charity—from universities to food banks. “You cannot have your cake and eat it too,” he says. “The cake belongs to the charity. And so does the eating of the cake.”

Whatever the jury decides, he argues, the case has already become “a very expensive teaching tool” about what happens when a wildly successful nonprofit is accused of forgetting the deal it made with the public.

Read more: “Have Your Cake and Eat it Too” (What the Musk-OpenAI trial is really about, and why a sleepy corner of nonprofit law just took center stage) at Handwerger’s Tax Insights & Fraud Awareness blog.