Another strong year of endowment investments by colleges across the nation caused federal legislators to take a closer look at how these non-profit institutions are making so much money.
What they’re finding is that many of these schools with huge endowments – such as the University of Oregon’s more than $450 million – are making a portion of their investments in offshore fund structures. These offshore investments shelter the school from federal taxes that can be as high as 39 percent.
The University has at least three of these investments, which are located in the Cayman Islands, Bermuda and Cyprus according to 2006 tax records. It’s unclear just how much money the University invests in this way, but tax records show that in the 2006 fiscal year there were nearly $2 million in transactions related to these offshore fund structures.
While the practice, which is technically legal, doesn’t upset the Internal Revenue Service, it has raised eyebrows in the U.S. Senate Finance Committee. Some of its members say it’s unfair that colleges – which are generally tax-exempt anyway because they are non-profit entities – get additional tax breaks.
“These universities get very generous tax benefits as it is, yet are using offshore corporations to invest in hedge funds to avoid taxes on one of the few things requiring them to pay taxes,” Sen. Charles Grassley, R-Iowa, told The Chronicle of Higher Education in a written statement. “We’ve heard a lot in the Finance Committee about the inappropriate use of offshore entities to avoid taxes. It’s troubling that some nonprofits are part of that game.”
But Jay Namyet, chief investment officer of the University of Oregon Foundation, says the investments are legally sound and prudent. The UO Foundation manages various investments for the University, which total roughly $600 million.
“These aren’t bank accounts,” Namyet said. “It’s unfortunate that there is the kind of scrutiny coming out of the legislature related to these, because it makes one think that there’s a nefarious reason for these to exist, when really there’s a quite fundamental reason.”
The reason is that a university’s investments typically aren’t taxed because it is considered a non-profit organization. But some of its investments, which could be compared to mutual funds in that they have various investments within them, earn profits that would be considered taxable.
In order to eliminate these taxes to align with the foundation’s tax-exempt status, the fund’s manager bases it offshore, Namyet said.
“This really does boil down to a very convoluted tax code,” he said. “This provision allows for a leveling of the playing field.”
The specific tax rule that the foundation avoids by basing these investments offshore is the Unrelated Business Income Tax, which says that a nonprofit must pay taxes on income it earns from business unrelated to its mission.
“It’s only on a select few cases in which this dilemma presents itself,” Namyet said. “It gives us an opportunity to get ourselves back to a non-tax-paying entity.”
Senate Finance Committee Chairman Sen. Max Baucus, D-Mont., sides with Grassley, and has reportedly said he has considered raising legislation that could block universities with large endowments from making offshore investments.
These offshore investments are important to the foundation’s financial success, but they don’t drive their investment choices, Namyet said. “It’s a byproduct of the investment decision. It’s not why we invest with anyone.”
Namyet couldn’t say offhand the kinds of investments that rely on an offshore status, saying “there are a myriad of issues that come into play that would be subject to this UBIT taxation.”
Nevertheless, these offshore fund structures are only a small piece of the foundation’s overall investment strategy.
“The vast majority of these are onshore,” Namyet said. “This represents a handful of the investments, this is not how the majority of the fund is invested.”
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UO among schools with offshore investments
Daily Emerald
February 4, 2008
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