NAICU Washington Update

Higher Ed Groups Press IRS for Clarification on Endowment Investments

October 08, 2009

NAICU has joined several other associations in a letter to the IRS, drafted by the National Association of College and University Business Officers (NACUBO), asking for clarification on the agency's stance on international investments.  Recent IRS officials have indicated that foreign investments - including endowment fund investments in offshore hedge funds, private equity funds and venture capital funds - would be subject to sudden and unexpected changes in IRS reporting requirements.

IRS officials recently took the position that these kinds of offshore funds are foreign financial accounts, and are covered by the Report of Foreign Banks and Financial Accounts (FBAR).  The higher ed groups signing the October 6 letter see the IRS position as inconsistent with written instructions, wrongly classifying hedge funds and similar investments as mutual funds.  FBAR specifically states that "individual bonds, notes, or stock certificates held by the filer are not a financial account." 

Colleges and universities routinely include hedge funds and similar investments - typically structured as corporations and partnerships - as part of their endowment portfolio.  However, these investments don't function as mutual funds, which are freely redeemable, or as typical financial accounts, with ready access to account funds.  Rather, hedge funds and similar endowment investments are illiquid and subject to limited, if any, redemption.  When making these kinds of investments as part of their endowment, colleges and universities are passive investors with legal restrictions on direct access to the funds.  The IRS has historically supported this distinction.

Colleges and universities use their endowments to diversify and strengthen their financial base, and through that, to maintain institutional quality and enhance access for current and future students.  These institutions, in principle and in practice, are far removed from the type of offshore tax evasion that has triggered recent IRS scrutiny and enforcement.  Through the letter, the associations are asking for confirmation that the IRS's long-standing acknowledgement of this distinction remains valid.

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