A US senate finance committee is looking into offshore hedge-fund investments
by the universities of Harvard, Yale and Stanford to establish new sources of
Members of the senate finance panel discussed the matter
with experts on taxes and hedge funds at a closed-door meeting on Capitol Hill,
reports quoting congressional sources said.
The discussions were part
of a broader ongoing review of the tax treatment of hedge funds and private-equity
firms amidst search for new revenue sources that would offset the costs of tax
and budget priorities.
Universities, pension funds, and foundations don''t
have to pay tax on most of their investment proceeds, though 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 such as the
Cayman Islands that convert such profit into dividends, which aren''t taxed.
Congressional aides who attended the meeting said the inquiry has established
that the endowments of many universities, including Harvard, Yale and Stanford,
use this technique.
The senate panel''s broader review includes scrutiny
of fund managers'' ability to pay the 15 per cent capital-gains tax on a large
portion of their pay. They are also reviewing the use of offshore tax havens by
fund managers to defer large amounts of pay and the intention of Blackstone Group
LP, the private-equity firm seeking to raise $4 billion in an initial public offering,
to avoid the 35 per cent corporate tax on most of its income by organising as
a limited partnership.
Congressional aides said tax-exempt organisations
are sidestepping rules taxing debt-financed investing that were created in 1950
to stop charities from acquiring for-profit 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 per cent of university endowment money was invested
in hedge funds as of June 30, 2006, according to separate surveys by the Commonfund
Institute in Wilton, Connecticut, and the National Association of College and
University Business Officers, based in Washington. Schools with more than $1 billion
in assets are more likely to have money invested in hedge funds than smaller colleges.
According to IRS data, 1,012 US tax exempt organisations reported earning
a total of $110.1 million from debt-financed investing and 646 of them paid tax
of $13.3 million on those proceeds. That''s slightly less than the 1,217 organisations
that paid $14.8 million on debt-financed investments a decade earlier.
has a target of 17 per cent of its endowment invested in hedge funds, according
to its annual report. For Stanford, the target
is 15 per cent. Yale had 23 per cent of its assets invested in hedge funds as
of June 30, 2006, according to its annual report.