A TCU investment strategy drew scrutiny this week as an international investigation into offshore investments examined how TCU and other university’s use “blocker corporations” to legally avoid having to pay some U.S. business taxes.
TCU’s endowment is about $1.5 billion, or an asset ratio of $144,000 per student. Jim Hille, TCU’s chief investment officer, said he is “charged with maximizing the return on the university’s investment” and that can include the use of blocker corporations, which are subject to U.S. tax laws.
“We have used tax blockers when they have made sense from a total return perspective,” Hille said. “This is a longstanding and acceptable practice for tax-free institutional investors, like TCU, especially pensions and larger endowments. Asset managers that utilize debt in their strategies more often than not offer offshore blockers as an option for tax-free investors.”
Hille said he didn’t have the precise amount of how much money had been earned through the use of the blocker corporations, but, “we estimate there would have been tens of millions more of unrelated business income that would then be taxed.”
Universities across the country have invested in private equity and hedge funds to strengthen their endowments. However, when private equity and hedge funds frequently borrow money, they are susceptible to taxes, which can cut into the money the universities earn.
Samuel Brunson, a law professor at Loyola University Chicago who has studied endowment taxation, explained the idea as: if TCU puts money in a U.S. hedge fund, the hedge fund then borrows money and invests the total sum of money, TCU will have to pay taxes on a portion of its return representative of how much of the money was borrowed. Put another way, if TCU provides 25 percent of the money, and the other 75 percent is borrowed, TCU will have to pay taxes on 75 percent of the dividend.
“TCU can get out of that by investing in blocker corporation,” Brunson said.
A blocker cooperation is a non-U.S. corporation usually set up in a tax haven area offshore, frequently the Cayman Islands or the British Virgin Islands, where the corporate tax rate is low or nonexistent. This allows investors to put money in a hedge fund or get a stake private equity without having to pay taxes on the returns.
Brunson said the use of these blocker corporations is a frequent occurrence.
“Most tax people don’t see anything offensive about that,” Brunson said. “It’s such common practice, we wouldn’t have ever thought twice about it.”
Hille added that TCU’s non-profit status was never in danger because of their use of these tax blockers.
“Using blocker corporations is a longstanding and acceptable investment strategy supported by current tax law,” Hille said. “If that status were to change, TCU would no longer invest in them.”
However, Bunson doesn’t think that Congress will be outlawing the use of blocker corporations any time soon.
“They are not terribly interesting to Congress or to most normal people who aren’t tax people,” Brunson said.
TCU has no current plan to lobby Congress in order to keep blocker corporations legal, Hille said.
“Though losing that particular investment option would make things more challenging for the university, and a reduction in our after-tax rate of return could mean a reduced payout to support our mission, we could adjust,” Hille said.
As for where this money goes, Hille referred to the TCU mission statement.
“Funds from the endowment are used to support TCU’s mission to educate individuals to think and act as ethical leaders and responsible citizens in the global community,” Hille said. “Endowment funds are used for scholarships to help defray tuition costs, for endowed professorships and for academic programs.”
