Bob's Daily Buzzword: `UBIT'

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Aug. 9 (Bloomberg) -- Bob Rice, general managing partner with Tangent Capital Partners LLC, explains "UBIT." (Source: Bloomberg)

Bob is joining us.

It is the unrelated business income tax.

It is an interesting thing.

It causes trillions of dollars to be invested by u.s. investors offshore back into u.s.-based private and hedge equity funds.

The whole point and idea makes sense.

It is aimed at charities that run commercial enterprises.

If a charity has a department store or bookstore, they are making money on it.

Is a commercial enterprise.

That should be taxed.

It is unrelated to the charitable purpose of the charity.

That is what the ubit is aimed at.

The unintended consequence is hedge funds and private equity funds are normally structured as partnerships.

The airflow through entities.

The activities of the partnership are attributed to the partners.

If a tax-exempt entity wants to invest in hedge fund, they have to be worried the hedge fund might be doing things that would create unrelated taxable income.

I would become taxable.

I do not want to file tax returns so i do not want to do that.

A lot of tax-exempt investors that invest in hedge and private equity funds.

How are they avoiding the problem?

The whole point is they can avoid the problem and to avoid the problem by running the money first through an offshore corporation usually in a tax haven like the cayman islands, and then bringing the money back into the united states to make the investment.

It is totally normal.

Mitt romney caught all sorts of flak for this sort of thing during the campaign.

It is standard operating procedure.

Last we checked, he is not a tax-exempt entity.

He is a human being.

You are right.

His ira is a tax-exempt entity.

Individual investors also have to pay attention to the issue.

If they want to invest through the tax-exempt ira, they have to worry about it.

Does this mean the taxman comes knocking?

If they are careful, he does not come knocking.

It is a very weird unintended consequence.

Trillions of dollars are being funneled overseas and back into the united states for no particularly good reason.

What is a not particularly good reason?

This is aimed at not at hedge funds or alternative investing.

It is aimed at charities running taxable commercial enterprises.

The consequence of the application is the money has to go offshore in order to come back on shore.

This text has been automatically generated. It may not be 100% accurate.

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