Senators Take Aim at Tax Shelters For Endowments

Two key leaders of the Senate’s Finance Committee said today that universities and foundations should not be able to use overseas tax shelters to guard hedge fund investments from taxes.

Sen. Max Baucus, the Montana Democrat who chairs the Senate Finance Committee, and Sen. Charles Grassley, an Iowa Republican, said during a hearing on offshore tax issues, that institutions are not acting in the public;s interest when they use offshore accounts to lower their tax burden.

“The law requires nonprofit investors that invest directly in hedge-fund partnerships to pay the unrealized business income tax, known as UBIT,” Mr. Baucus said. “The policy behind the law is that tax-exempt entities should not be able to have an unfair advantage over taxpaying entities doing the same thing.

Mr. Grassley said nonprofit institutions that manage endowments are already receiving sizable tax incentives.

Donors can deduct their contributions to such endowments from their federal income taxes and the endowments themselves are not taxed.

“Since tax breaks for charitable donations are supposed to contribute to the public good, it’s fair to ask whether the tax breaks that lead to big university endowments are serving the public,” Mr. Grassley said. “That’s especially true when low- and middle-income working families are struggling to pay college tuition.”

Full statements from Sens. Baucus and Grassley — as well as the testimony from others who spoke at today’s hearing, are available through the Finance Committee’s Web site.

You can also learn more about the issue by reading the Chronicle’s reports on hedge-fund rules and on a recent House Ways and Means Committee hearing on the topic.