WSU Foundation included in Paradise Papers leaks

WSU is one of several investors in an energy capital hedge fund based in Cayman Islands

JESSICA ZHOU, Evergreen assistant news editor

WSU was one of more than 100 educational institutions listed in the client database of offshore law firm Appleby in the Paradise Papers leaks early last month.
In international news, these documents have revealed information related to the elaborate structures wealthy individuals around the world use to avoid paying higher taxes.

The WSU Foundation is an investor of Energy Capital Fund IX-C, according to the leaks, a hedge fund based in the Cayman Islands. The fund feeds to a Houston, Texas, subsidiary, EnCap Investments, self-described as the “leading provider of venture capital to independent oil and gas companies,” and one of the world’s largest private equity companies.

Though the WSU Foundation doesn’t disclose investments publicly, Gil Picciotto, interim vice president of advancement, said the use of blocker corporations, a practice scrutinized by the media in the past month, is common among university foundations to avoid administrative bloat and prevent others from copying investments, not to evade taxes.

Picciotto said the university files for unrelated business income taxes with K-1 forms for any investment, and that income generated by the blocker is taxed at a standard corporate rate of about 35 percent.

This allows the many investors involved to delegate the duty of filing taxes to the blocker so they can file them all at once, he said.

“Most blockers are a means whereby groups delegate tax payments and tax through a third party,” he said. “The option would be all 100 people could own the fund. We could, through this vehicle, have the taxes done once.”

Blocker corporations are commonly used for higher equity or hedge funds, said Jeffrey Gramlich, director of the Hoops Institute of Taxation Research and Policy at WSU.

In the context of corporations, Gramlich said public companies, like Ben and Jerry’s, have a fiduciary duty to their shareholders to maximize wealth, which can extend to reducing taxes, a legal practice that can also be a gray area.

Picciotto said WSU is in good company, pointing to other universities around the country like Ivy League institutions and other leading private and public schools.

“The vehicle is very common,” he said. “There are taxes being paid. They’re being paid as an aggregate.”

However, there may be a tax-related reason for universities to use offshore vehicles, wrote Norman Silber, a researcher at Yale Law School and professor at Hofstra Law School, in a paper he co-authored in 2015.

As nonprofit organizations, universities’ incomes are generally tax-exempt, although they may face unrelated business income tax when investing with borrowed money. Unrelated business income tax is a U.S. tax on any revenue not related to the primary purpose of a nonprofit organization.

“I would venture to say most universities with sizable endowments will choose to avoid the [unrelated business income tax] by using this kind of device, though this is not the only way,” Silber said in an interview with the school’s student newspaper, the Yale Daily News.

To avoid the unrelated business income tax, Silber said, universities can choose to become a shareholder or a limited partner in a corporation created in a low-tax jurisdiction, such as the Bahamas or the Cayman Islands. Within this structure, the shareholder is not taxed for unrelated business income, as the investment return is channeled back as a dividend.

While the practice is legal, experts point to transparency concerns associated with the use of offshore vehicles.

Eleven other U.S. universities and colleges are also investors in EnCap, which has invested almost $20 billion into oil and shale gas exploration and production throughout the country.

Picciotto said people have asked whether the foundation has invested in corporations some find morally objectionable, such as Nike and fossil fuel companies.

The answer isn’t that simple, he said. For example, electric industries may look appealing to someone who is interested in clean energy, but they are depleting the Earth’s rare minerals. Someone might be interested in investing in a tire company, but then realize the use of petroleum in its production.

“We’re trying not to make that our issue,” he said. “We think rational people can have good opinions on both sides.”

He said it is impossible to please everyone through investment choices. He brought up a hypothetical situation in which a “Nazi-producing” company would be unequivocally off-limits. In reality though, it isn’t as easy to make such clear-cut decisions about what not to invest in.

“On an aggregate,” he said. “I’m trying to make sure that I’m making the best return.”

However, the foundation does allow donors to provide specific directions on where their money can be invested.

He said WSU foundation’s endowment is almost $500 million. He did not confirm or deny whether the foundation invested in clean energy, saying oil prices have been low lately and it would be naive to think the foundation was exclusively investing in oil.