October 24, 2011
Sen. Grassley At It Again
The Chronicle of Philanthropy reportsthat the Senate recently rejected Sen. Grassley's proposal to bar the Justice Department from awarding grants to charities that put money in offshore accounts to avoid paying income taxes. In a news item that I somehow missed, a 2010 Senate investigation found that the Boys & Girls' Clubs of America held more than $50 million in offshore equities and partnerships in order to "avoid paying . . . UBIT." I would not have thought that such passive investment income would be subject to UBIT, but perhaps one of the true tax profs among us can explain.
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presumably he is talking about leveraged investments in hedge funds through "blocker" organizations. the drafting on this amendment is atrocious. in his capacity as ranking member of the judiciary committee, grassley has succeeded in getting this language into two bills, s. 1231 and s. 1301, the latter of which, at least, has bipartisan support.
Posted by: r. willis | Oct 24, 2011 1:45:37 PM
Tom: This is part of a long-standing debate about whether using off-shore "blocker" corporations to avoid UBIT from debt-financed income (typical of hedge fund investments) is evil. See, e.g., Suzanne Ross McDowell, Taxing Leveraged Investments of Charitable Organizations: What Is the Rationale?, 39 Case W. Res. L. Rev. 705 (1988). Steve Schwarz addressed some of the issues in his paper for a 2008 conference at NYU -- see http://www1.law.nyu.edu/ncpl/resources/documents/Conf2008SteveSchwarz.pdf. Best, Harvey
Posted by: Harvey Dale | Oct 25, 2011 5:05:22 AM
Here is Grassley's press release: http://www.grassley.senate.gov/news/Article.cfm?customel_dataPageID_1502=37524
UBIT is unrelated business income. This is 1. income from a trade or business, 2. that is regularly carried on, and 3. is not substantially related to the exempt purpose of the organization. There are caveats for dividends and "passive income"
However, the boys and girls club has offshore bank accounts and is invested in Partnerships and LLP's in the Cayman Islands, Bermuda, etc. Partnership income is specifically non-exempt for a Non-profit under publication 598. - http://www.irs.gov/pub/irs-pdf/p598.pdf
Go to pg. 13 of the link.
Posted by: michael Tyson | Oct 28, 2011 11:11:24 AM
The partnerships pass through their income - and its character - to the charities. If a partnership is engaged in a trade or business, that could be UBIT, then; more significantly, to the extent that hedge fund and private equity investments are leveraged (and many, if not most of them, are), then its debt-financed UBTI. Charities get around that by investing in offshore corporations, which transform the income from pass-through partnership income (in which character is also passed through) to UBIT-exempt dividend income.
Posted by: jpe | Oct 31, 2011 10:43:14 AM