IRS Says Hilton Estate Can Keep Controlling Block of Stock
The controlling 27.4% block of Hilton Hotels Corp. stock in the late Conrad N. Hilton’s estate could be held in perpetuity for charitable purposes under terms of one of three new IRS rulings, The Times has learned.
Despite the rulings, further conflict among parties in the five-sided dispute over disposition of the hotelier’s fortune seems certain, interviews with attorneys in the case show.
Barron Hilton, the hotel chain’s chairman and chief executive, claims a right to buy the stock under an option clause in his father’s will. In court papers, Barron Hilton has argued that he is entitled to buy the stock for a 15% discount from its price on the New York Stock Exchange the day his father died in 1979, a sum totaling about $138 million.
But the IRS private letter rulings would allow the stock to remain in charitable hands permanently. Based on Friday’s closing price of $63.50, down 37 1/2 cents, the estate’s Hilton Hotels stock is worth $427 million. The closing price Friday is significantly less than the stockholders’ equity of $84 per share listed in Hilton Hotels’ latest annual report. Other published estimates suggest the assets could be worth $115 per share.
The dispute over how to dispose of the estate’s stock has divided the board of the Century City-based Conrad N. Hilton Foundation so severely that several directors have hired attorneys to advise them.
In addition, the estate’s executor, James Bates, has alleged in court papers that foundation President Donald Hubbs has a conflict of interest because he was Barron Hilton’s attorney for many years and proposed the disputed language in Conrad Hilton’s will.
Hubbs has declined to comment on the allegations. He referred questions about the IRS rulings to Andrew Garb of Loeb & Loeb, the foundation’s tax counsel, who was not available for comment.
Central to the dispute is an IRS regulation that private foundations and “disqualified persons,” such as close relatives of the foundation’s donor, together may own no more than 20% of a profit-making business.
The hotel man’s estate holds 27.4% of Hilton Hotels stock and his foundation owns another 2%. In addition, Barron Hilton owns about 4% of the stock.
The IRS, in one of three private letter rulings in the Hilton case last week, held that even though Barron Hilton is a “disqualified person,” he may buy the estate’s stock provided that a Los Angeles County probate court judge approves the terms.
Not Exempt
In another of the rulings, the IRS said the estate’s stock is not exempt from the regulation limiting a private foundation and the donor’s heirs to owning 20% of a corporation’s stock.
However, the third ruling would allow the Hilton Foundation to escape the 20% rule.
According to three attorneys in the case, the IRS said the 20% limitation may be avoided if part of the estate’s stock goes to the foundation and part to creating a parallel grant-making charity known as a “supporting organization” which could have the same board and staff as the private foundation.
Such parallel “supporting organizations” are not subject to the 20% limitation on stock holdings, according to John Eady, attorney for the Council on Foundations.
The parallel charity’s grants would be limited to a list of nonprofit organizations, with one-third of the grant monies going to a single organization, probably a Catholic religious charity because Hilton’s will asked that nuns be major beneficiaries of his fortune.
If this plan were implemented the foundation could hold 16% of the stock and Barron Hilton his 4%, with the remaining 13.4% going to the parallel organization.
The stock could also be sold to Barron Hilton, but because of the IRS ruling that the stock may be held in perpetuity it increases the likelihood that Barron Hilton would have to pay a price close to current market or asset value.
“The major issue,” said Barron Hilton’s attorney, Ronald Gother of Gibson, Dunn & Crutcher, “is whether the will of Conrad Hilton can be interpreted in a manner which allows the foundation to convert itself into this (public support) organization solely for the purpose of thwarting the option.
“The will didn’t say leave it (the assets) to a support organization, it said leave it to ‘the Conrad N. Hilton Foundation, a private foundation,’ ” Gother said.
Deputy Atty. Gen. James Cordi of the charitable trust division looks at the will’s use of the term “private foundation” differently.
“The same clause in Conrad’s will that refers to a private foundation also says he is giving the money for the same purposes set forth elsewhere in his will--for charitable purposes and not to benefit his son Barron,” Cordi said.
“Gother’s statement presupposes Conrad Hilton wanted his foundation to be a private foundation,” Cordi added. “No one wants their foundation to be a private foundation. That is a condition imposed on people, kicking and screaming, by the IRS.
“Conrad Hilton especially did not want his to be a private foundation when he was told he could only hold 20% of the stock in Hilton Hotels Corp.,” Cordi said.
Strict Limitations
Federal law places far more strict limitations on private foundations than any other type of charitable enterprise because typically they operate out of the public eye and under the control of a small group of people, often a family, and the assets occasionally consist of the controlling interest in a business, according to Eady, the Council on Foundations attorney.
Myron Harpole of Harpole & Witter, the attorney for Bates, the estate executor, said the support group ruling “ought to decide the case 100% our way.”
Bates contends that Conrad Hilton’s stated intent in his will was to give his fortune to charity and that Barron Hilton may have an option to buy a portion of the Hilton Hotels stock only if the 20% limitation cannot be avoided.
