Repatriating Tax-Exempt Investments: Tax Havens, Blocker Corporations, and Unrelated Debt-Financed Income
Samuel D. Brunson
Loyola University Chicago School of Law
January 01, 2012
Northwestern University Law Review, Vol. 106, No. I, 2012
Loyola University Chicago School of Law Research Paper No. 2011-003
Up to one-third of the money invested in hedge funds comes from tax-exempt entities. However, the tax law prevents tax-exempt entities from investing directly or indirectly with borrowed money. This limitation prevents tax-exempt entities from investing in U.S. hedge funds, and instead forces them to invest through tax havens. Tax-exempt entities are not the only investors using tax havens, however. U.S. taxpayers use tax havens to shave an estimated $40 billion to $70 billion off of their collective tax bills annually.
Congress never intended to force tax-exempts to invest through tax havens; that is an unintended consequence of Congress’s shutting down transactions in which taxpayers used tax-exempt entities’ exemptions to reduce their own taxes. The avenue Congress chose - the unrelated debt-financed income rules - failed to effectively combat the abuse, however, and today serve primarily to distort the investment decisions of tax-exempt entities. In order to allow Congress to effectively combat the abuse of tax havens, as well as to allow tax-exempt entities to make better investment decisions, the unrelated debt-financed income rules should be repealed and their putative policing of tax-exempt entities’ behavior should be replaced by expanding the tax shelter rules. The tax shelter rules would be more effective at preventing abusive behavior and at allowing tax-exempt entities to participate in non-abusive economic transactions.
Number of Pages in PDF File: 49
Keywords: tax-exempt entities, unrelated business income tax, UBTI, unrelated debt-financed income, reportable transactions, listed transactions, sale-leaseback, tax haven, hedge fund, blocker corporation
JEL Classification: H2, H26, K34
Date posted: January 29, 2011 ; Last revised: March 26, 2013