Harvard’s Taxes Face Senate Scrutiny

Tax-exempt institutions like Harvard are privy to some special options when it comes to investing their money. But in light of recent discussions in the Senate, these options may soon become quite taxing.

Staff members of the Senate Finance Committee met privately with experts on Monday to discuss how universities—specifically Harvard, Yale, and Stanford—avoid paying taxes on money that is invested in offshore hedge funds, according to an article in Bloomberg News.

Depending on the conclusions reached, Harvard and other universities may have to change the way they invest their endowments, but no legislation has been introduced as of yet.

According to current federal tax law, institutions like Harvard are exempt from paying taxes on earnings from investments.

But they are subject to taxes on investments with hedge funds that operate within the United States.

The law, however, allows offshore hedge funds to convert profits earned from investments into dividends, which are not taxed.

Jill Kozeny, press secretary for Sen. Chuck Grassley (R-Iowa)—the ranking GOP member of the Senate Finance Committee—said discussions are still in the early phases.

“It’s something that the senators have their staffs examining, but no conclusions have been drawn about this particular issue,” Kozeny said yesterday. “It’s premature to say what will happen next.”

Jack G. Gaine, president of the Managed Funds Association—a special interest group that supports the hedge fund industry—said he sees these discussions as a sign that the federal government is scraping for funds.

“There is a desperate search for revenue for the federal budget, and several tax rules are undergoing review,” Gaine wrote in an e-mailed statement.

Gaine, a Harvard Law School graduate, also warned that Harvard’s students could see the repercussions of these committee discussions, although he doubts these talks “signal an immediate change.”

If legislation does indeed result from these talks, “it would have an adverse impact on income flows for Harvard and other universities and make it difficult to manage operations without raising tuition,” he said.

Although Harvard has taken advantage of this technicality for many years, according to Gaine, “it would be difficult to lose the opportunity to improve performance and reduce risk through the implementations of absolute return strategies,” he said.

University spokesman John D. Longbrake declined to comment on the Senate talks because Harvard does not publicly comment on individual investments or investment strategies.

—Staff Writer Nathan C. Strauss can be reached at strauss@fas.harvard.edu.