The Real Deal New York

Charity’s ownership stake in HNA Group raises some very interesting questions

Conglomerate could face stiff penalties meant to prevent using nonprofits as tax shelters
July 27, 2017 09:30AM

245 Park Avenue and HNA Group’s Chen Feng (Credit: Richter Frank-Jurgen via Flickr)

The move by a little-known Chinese businessman to transfer nearly a third of the ownership stakes in HNA Group to one of two charities involved in the conglomerate’s murky corporate structure raises questions about how the company will comply with United States tax laws.

Guan Jung, who is in his 30s, transferred more than 29 percent of HNA Group, worth about $18 billion, to the New York-based charity Hainan Cihang Charity Foundation, which along with another charity based on the Chinese resort island of Hainan owns 52 percent of the company.

Adam Tan, HNA’s chief executive, told the Financial Times that Guan only held a temporary stake for the company, deepening the mystery behind the ownership web.

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HNA, which paid $2.21 billion for 245 Park Avenue earlier this year, said Guan’s transfer was meant to allay concerns over its shareholding as it faces more scrutiny from regulators and banks, the New York Times reported, but it could also be quite costly for the company.

In most cases, federal tax law puts a cap of 20 percent on the portion of a company that can be owned by a charity, and requires it to give out 5 percent of the holdings each year. The law was put in place in 1969 in order to prevent rich families from putting their assets into foundations as a way to shelter them from paying taxes.

There are exceptions to the rules, though. The 20 percent cap could be lowered all the way to two percent if major company shareholders have a role in running the foundation.

Charities can have up to ten years to comply with the rules, giving them time to dispose of excess holdings. But after that time period they pay a stiff penalty: a tax rate of 10 percent on excess holdings and then a 200 percent follow-up tax on the holdings that remain out of compliance.

“Sooner or later you’re going to have to get rid of your excess business holdings or your foundation is going to be handed over to the I.R.S.,” said Richard Schmalbeck, a law professor at Duke University who specializes in the area of nonprofit organizations.

The Hainan Cihang charity is likely to focus on issues like refugee aid, food aid, free cataract surgery and women’s issues, a person with knowledge of the matter told the Times. [NYT] Rich Bockmann