The Indiana University Foundation is responding to a report published by the New York Times Wednesday that details how universities, including IU, use offshore investments to avoid federal taxes.
In a statement, the Foundation says its investment activities fall within legal boundaries.
“The use of blocker entities is an accepted and long-standing common practice by university foundations across the country,” IU Foundation President Dan Smith says in a statement. “IU’s use of them has been reviewed and approved by the IU Foundation Board of Directors Investment Committee, by the Foundation’s Audit Committee, and by the Foundation’s external auditors.”
The report says by using what are called “blocker corporations,” universities are exploiting a tax loophole:
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.
“Congress is essentially subsidizing nonprofits by allowing them to engage in these transactions,” said Norman I. Silber, a law professor at Hofstra University who co-authored a paper on blocker corporations in 2015. “They’re allowing them to borrow so that they can build up their endowments.”
Desi Burton is a tax accountant in Indiana who has experience in asset management. He says the use of blocker corporations is common among tax-exempt organizations, including charities. But he says those types of investments make it harder to figure out where the money is going.
“What are they actually investing in?” Burton asks. “Is it something that’s good for planet earth? Is it something that’s taking advantage of a third world country’s economy?”
The Times reports IU’s $2 billion endowment invested $10 million with a capital group called Quintana Capital as part of a partnership with Texas Christian University in 2006. The report says the partnership was established in the Cayman Islands.
Burton says there are political risks associated with these types of investments. He says many of the people who manage the funds are among the wealthiest in the country.
“You’re mixing the world of research and academics with big money Wall Street,” Burton says.
The Times reports one of the senior investors of Quintana Capital was a longtime supporter of George W. Bush and had previously served as commerce secretary.
This post has been updated.