Gift of $18 Billion in Chinese Stock to Foundation Raises Questions

Gift of $18 Billion in Chinese Stock to Foundation Raises Questions

A donation of shares valued at approximately $18 billion to a New York City-based foundation is raising questions about a conglomerate that is the largest Chinese investor in the United States, the reports.

Hainan-based announced earlier this week that businessman Guan Jun transferred his more than 29 percent stake in HNA to the Hainan Cihang Charity Foundation, the company's charitable arm in the U.S. According to HNA, 52 percent of the company is owned by Cihang foundations, including a 22.8 percent stake held by a sister charity in China. However, HNA chief executive Adam Tan told the that Guan and another shareholder, Bharat Bhise, who had transferred much of his stake to Guan last year, never actually owned the shares "but had just held the stake for us," despite Bhise and Guan — about whom little is known — being listed as the owners in the company's regulatory filings. HNA's murky shareholder structure and allegations of political connections led to Bank of America's recent decision not to engage in any transactions with the conglomerate, the Times reports, while scrutiny of HNA's ownership intensified in January after Anthony Scaramucci, now the White House communications director, announced that he was selling his hedge fund to an HNA subsidiary.

HNA said it decided to transfer Guan's stake to the Hainan Cihang Charity Foundation to allay concerns over its shareholder structure, but the move has raised questions about how the foundation plans to comply with U.S. tax law. The foundation has registered with the and is in the process of applying for tax-exempt status with the . Federal laws intended to keep the wealthy from using foundations as a tax shelter generally restrict foundations from owning more than 20 percent of a company, and if major shareholders have a hand in running the foundation, tax lawyers told the Times, that percentage can be reduced to 2 percent.

"The concern was that if private foundations owned large amounts of a business, then the trustees of the foundation could become more concerned with the interests of the business," Ray Madoff, a law professor, told the Times.

Foundations have five years to comply with the requirement and are often given an additional five years to dispose of their excess holdings, but after that penalties are severe — a 10 percent tax on the excess holdings, followed by a 200 percent follow-on tax on the excess amount. Moreover, meeting the 5 percent minimum distribution requirement for foundations — $900 million a year, if the $18 billion valuation holds — could necessitate an assets sale in order to raise the cash.

"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 IRS," Richard Schmalbeck, a law professor, told the Times.

Michael Forsythe, Alexandra Stevenson. "Behind an $18 Billion Donation to a New York Charity, a Shadowy Chinese Conglomerate." New York Times 07/11/2017.