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| home > legislative update > 05.09.07
Legislative Update: May 9, 2007 Update from Capitol Hill The Senate Finance Committee will soon mark up an education bill which will include tax components. We understand that one of the revenue raisers being considered for the bill would limit the appeal of hedge funds for tax-exempts by imposing the unrelated business tax income tax (UBIT) on tax-exempt entities that invest in hedge funds, even if those are off-shore funds. As you may know, many U.S. tax-exempts, such as university endowments and pension funds, invest in hedge funds as an investment diversification strategy. Because of the structure of U.S. hedge funds, when tax-exempts invest in U.S. hedge funds, a portion of the fund’s debt is attributed to the tax-exempt, which could lead to the tax-exempt having unrelated business taxable income or debt-financed income. In order to avoid being subject to the UBIT, tax-exempts frequently choose to invest in U.S. funds’ non-U.S. affiliated funds which are organized as corporations as opposed to partnerships. Because of the organizational structure of the funds, tax-exempts realize dividends which are not subject to the unrelated business income tax. The proposed revenue raiser would subject all such tax-exempt investments to the UBIT regardless of whether they’re made in on- or off-shore funds. The Senate Finance Committee originally scheduled the mark up of the education bill for May 16th; however, we understand that the mark up will likely be delayed, possibly until June. As always, we will monitor Committee action on this and other issues related to tax-exempts closely and will keep you posted. If you have any questions or comments, please contact us at 202.466.8700. |
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