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US Democrats Seek To Discourage Tax-Exempt Entities From Offshore Investment

by Leroy Baker, Tax-News.com, New York

11 September 2007


United States Representative Sander Levin (D-MI) has introduced legislation designed to tempt tax-exempt entities to invest directly in US-based hedge funds rather than routing their investments offshore.

The bill seeks to amend the Internal Revenue Code of 1986 to provide that indebtedness incurred by a partnership in acquiring securities and commodities is not treated as acquisition indebtedness by organizations which are limited partners for the purposes of the unrelated business income tax.

Under current law, tax-exempt entities that invest in hedge funds are subject to unrelated business income tax (UBIT), due to the debt incurred by the fund. The debt-financed income rules were created decades ago to address a separate issue, but Levin says they have forced tax-exempt investors to channel their investments in hedge funds through offshore “blocker” corporations.

The problem addressed by the legislation was discussed in last week’s hearing of the House Ways & Means Committee on tax fairness.

“We have said that we are taking a look at the entire tax code and making it as fair as possible. In that spirit, this bill will fix a problem that unfairly forces our pension funds, universities and foundations offshore to make certain investments,” said Levin. “These rules were never meant to apply to this kind of investment, and we should allow these institutions to bring their investments home.”

The bill would create an exception to the debt-finance income rules that would allow all tax-exempt entities to invest directly in onshore hedge funds without being subject to UBIT. The bill is modeled on the exception to these rules that currently allows pension funds and universities to invest in debt-financed real estate. However, this exception would be available to all tax-exempt entities, including foundations.

Levin was joined in supporting the bill by fellow Democratic Ways & Means Committee Members Reps. Jim McDermott, John Lewis, Earl Pomeroy, Earl Blumenauer, Bill Pascrell, Shelley Berkley, and Chris Van Hollen.


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