October 14, 2016 / 12:26 PM / 10 months ago

Chinese-backed charity may be violating U.S. law, tax specialists say

NEW YORK/SHANGHAI (Reuters) - A New York educational charity affiliated with a Chinese company may have violated rules governing tax-exempt organizations in the United States, tax specialists say.

The Council for American Culture and Education Inc was set up in 2009 on behalf of Chinese for-profit school operator Dipont Education Management Group, according to the two consultants who created the charity. Thomas Benson and Stephen Gessner later ceded control of CACE to Dipont, according to Gessner.

Dipont says CACE is independent. On a December 2014 board meeting agenda seen by Reuters, Dipont founder Zhang and three other Dipont employees are listed as directors on CACE’s five-member board. The fifth member listed is a Dipont consultant.

Dipont’s close ties to CACE should have been disclosed in CACE’s tax filings, said Marcus Owens, former director of the tax-exempt organizations division of the Internal Revenue Service.

That’s because the private Chinese company is benefiting from the charity’s activities. The only reference to Dipont in CACE’s application for tax-exempt status is a note that the two organizations collaborated on a college admissions seminar in China in 2009.

Bruce R. Hopkins, a law professor at the University of Kansas, said the relationship should have been fully disclosed. “Being so closely tied to a for-profit and functioning to benefit it in so many ways – that could be a problem for them,” said Hopkins. “The consequences could be that they lose their tax-exempt status.”

Owens also questioned the way in which Dipont founder Benson Zhang gave money to a research center at the University of Southern California.

Zhang told Reuters he used CACE to make a $750,000 personal donation to USC because it is difficult to transfer money out of China. “I paid back the money to CACE from my personal accounts later,” he said.

New York prohibits charities incorporated in the state – such as CACE – from lending to board members, Owens said. It makes no difference whether Zhang reimbursed the charity, he added.

Owens said $750,000 “is a considerable amount of money. That alone should attract the attention of the (New York) attorney general and it should also attract the attention of the IRS.”

Reuters outlined its findings about CACE’s activities to the New York Attorney General’s office. A spokesman for the attorney general said: “We will be reviewing the organization.” Reviews don’t necessarily lead to formal investigations. An IRS spokesman declined to comment.

Another potential problem, said Owens, is the list of board members and officers that CACE has disclosed to tax authorities. Two people listed in federal tax returns as an officer or director of CACE say they don’t hold those positions.

David Joiner, a former Dipont employee, told Reuters he left the company shortly after the charity was set up in 2009 and has had nothing to do with CACE since. But he was listed on its federal tax filings as its treasurer from 2010 through 2014, the most recent year disclosures are available.

“They have been using my name without my permission,” he said.

Jeff Zhu, CACE’s chief executive and a Dipont vice president, said the failure to remove Joiner’s name was probably “a clerical error.”

CACE’s 2014 federal tax return also lists as a board member Robert Clagett, a Dipont consultant and former admissions dean at Middlebury College. Clagett told Reuters he didn’t know he was on CACE’s board.

Owens, the former IRS executive, said falsely listing people as board members and officers may be viewed by the IRS as part of a pattern of behavior that could jeopardize CACE’s tax-exempt status.

“It raises fiduciary duty questions for the board,” he said, “not to mention confusing the IRS.”

Edited by Michael Williams

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