US senate looks into university investment tax
May 9, 2007
By Ryan Donmoyer
Washington - Offshore hedge fund investments by top US universities are prompting scrutiny by senate aides seeking new sources of tax revenue.
Senate finance committee staff had discussed the matter with experts on tax and hedge funds in a closed door meeting in Washington on Monday, according to four congressional aides who were present.
The discussion was part of a broader review of the tax treatment of hedge funds and private equity firms, according to Mark Heesen, the president of the National Venture Capital Association, who met with congressional aides last month.
"They have been told to look for potential revenue raisers and to be very aware of what's going on in the private equity and hedge fund arenas," he said.
Universities, pension funds and foundations are not taxed on most investment proceeds, but they are required to pay "unrelated business income tax" when they receive profits from debt-financed investing.
Hedge funds set up blocker companies in tax havens that convert such profit into dividends, which aren't taxed.
Aides who attended the meeting said the inquiry had established that the endowments of many universities, including Harvard, Yale and Stanford, used this technique.
Tax exempt entities that invested in hedge funds were "very properly and legally in a much better position by investing in one of these corporations", said John Gaine, the president of the Managed Funds Association, the main US lobby group for hedge funds.
He said his organisation had been meeting with congressional aides for months to educate them about how hedge funds operated.
Chris Yates, the director of planned giving at Stanford, said the university "probably" used intermediary companies in some cases.
A Harvard spokesperson said the university "does not discuss investment structuring", and Yale said it could not immediately comment.
The senate finance committee's broader review includes scrutiny of fund managers' ability to pay the 15 percent capital gains rate on a large portion of their pay.
The staff is also reviewing the use of offshore tax havens by fund managers to defer large amounts of profit; and the intention of Blackstone Group, the private equity firm seeking to raise $4 billion ($28 billion) in a public offering, to avoid the 35 percent corporate tax on most of its income by organising as a limited partnership.
Committee chairman Max Baucus said his panel was "looking at the general question" of how hedge funds and private equity firms were taxed. Congress was "nowhere close" to drafting a bill, he added.
"I'm not close to having legislation, not yet, but I may," the Montana Democrat told the National Press Club on Monday. "First I want the facts. I want to know what's going on here."
Charles Grassley, the ranking Republican on the committee, said the inquiry should determine how hedge fund managers' income should be defined for tax purposes.
"If it's earned income, it ought to be taxed at 35 percent instead of 15 percent. If it's capital gains, then we'll just leave it the way it is," Grassley said.
Congressional aides said they had become more interested in how tax-exempt organisations were sidestepping rules taxing debt-financed investing that were created in 1950 to stop charities from acquiring profit-making businesses with borrowed money.
The blocker company technique has been approved in individual cases by Internal Revenue Service rulings. It makes it easier for tax-exempt organisations to take bigger risks, and reap bigger returns, without incurring tax penalties.
On average, about 18 percent of university endowment money was invested in hedge funds as of last June, according to two recent surveys.
If the blocker strategy is banned, the returns on the portion of endowments allocable to hedge funds will face tax of up to 35 percent. - Bloomberg
|
|
