Exempt Organizations Advisory - Bill Would Provide Exception From UBIT Rules For Exempt Organizations Investing In Hedge Funds

By: Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com)
Randal T. Evans (revans@steptoe.com)

On September 7, Rep. Sander Levin (D-Mich) introduced a bill (H.R. 3501) to amend the Internal Revenue Code of 1986 to provide that, subject to certain restrictions, exempt organizations which are limited partners in a partnership which incurs debt to acquire or carry securities and commodities will not be subject to UBIT.  Under current law, pension plans and other tax-exempt organizations are subject to UBIT on income from investment property that is acquired with debt.  Currently, to avoid UBIT on debt-financed income from hedge funds and other partnerships investing in securities and commodities, pension plans and other exempt organizations invest in such hedge funds through offshore corporations referred to as "blocker entities."