Paul L. Caron

Friday, November 10, 2017

NY Times: Columbia, Dartmouth, Duke, Stanford, Texas & USC Are Among Colleges Using 'Blocker Corporations' To Avoid Taxes On Endowment Income

New York Times, Endowments Boom as Colleges Bury Earnings Overseas: American Universities Are Using Offshore Strategies to Swell Their Coffers, Skirt Taxes and Obscure Investments That Could Spark Campus Protests:

A trove of millions of leaked documents from a Bermuda-based law firm, Appleby, reflects some of the tax wizardry used by American colleges and universities. Schools have increasingly turned to secretive offshore investments, the files show, which let them swell their endowments with blocker corporations, and avoid scrutiny of ventures involving fossil fuels or other issues that could set off campus controversy.

Buoyed by lucrative tax breaks, college endowments have amassed more than $500 billion nationwide. The wealth is concentrated in a small group of schools, tilting toward private institutions like those in the Ivy League and other highly selective colleges. About 11 percent of higher-education institutions in the United States hold 74 percent of the money, according to an analysis in 2015 by the Congressional Research Service. ...

College and university endowment earnings are usually tax-exempt. But as endowments have sought greater investment returns in recent years, they have shifted more of their money out of traditional holdings like United States equities to alternative, potentially more lucrative investments. These include private equity and hedge funds that frequently borrow money, opening them up to tax consequences.

When schools earn income from enterprises unrelated to their core educational missions, they can be required to pay a tax that was intended to prevent nonprofits from competing unfairly with for-profit businesses.

Establishing another corporate layer between private equity funds and endowments effectively blocks any taxable income from flowing to the endowments, the reason they are called blocker corporations. The tax is instead owed by the corporations, which are established in no-tax or low-tax jurisdictions like the Cayman Islands or the British Virgin Islands. ...

The use of blocker corporations has raised concerns among policymakers in recent years. That’s partly because they cost the United States Treasury millions of dollars, but also because they legitimize an opaque offshore network sometimes used for nefarious purposes.

“They’re not cheating. They’re not hiding money or disguising money,” said Samuel Brunson, a law professor at Loyola University Chicago who has studied endowment taxation. “But they’re adding money to a system that allows people, if they want to hide their money, to do it.” Not only do the universities benefit — so does the wealthy and influential private equity industry. ...

While legal, blocker corporations are part of a system of endowment tax breaks fueling an undercurrent of populist anger. Many students across the country struggle under massive college debt. At the same time, critics say, some wealthy schools use these tax advantages to stockpile endowments that exceed the gross national product of entire countries.

Legal Education, Tax | Permalink


Iv is correct.

Posted by: Joseph W. Mooney III | Nov 12, 2017 6:43:47 PM



Posted by: taxtaxtax | Nov 11, 2017 12:31:43 PM

So why do they exist?

Posted by: C | Nov 10, 2017 11:37:15 PM

@Michael Perry,

Yes, this is objectively more egregious than the $2.5 trillion American corporations keep stashed overseas. Yup. It sure is.

Posted by: Unemployed Northeastern | Nov 10, 2017 5:54:52 PM

This isn't about revenue or taxes. It's about consolidating power.

Universities can credibly say that Republicans are wrong about a wide range of issues. Think tanks living on donations are beholden to right wing donors and can't be honest or credible.

Republicans hate the idea of knowledge and truth getting in the way of their power. So Republicans are trying to damage universities any way they can.

Or preferably, get fake liberals like the NY Times to do it for them.

Posted by: Power-mad republicans | Nov 10, 2017 2:11:07 PM

Endowments are needed to keep billionaire right wing nut jobs from taking over Universities in the same way they've taken over the press.

Posted by: Right wing populism | Nov 10, 2017 1:53:57 PM

This is a non-story. These blockers don't help anyone avoid US taxes, other than possibly indirect debt-financed UBIT due to the structure of the funds.

Posted by: lv | Nov 10, 2017 12:17:57 PM

And these same universities want to tell us how to live our lives...

Posted by: Michael W. Perry | Nov 10, 2017 8:04:57 AM