IRS Challenges RenTech Tax Strategy

Jul 1 2013 | 12:27pm ET

Renaissance Technologies has used a “particularly aggressive” technique to shield itself and investors in its flagship hedge fund from taxes, the U.S. Internal Revenue Service has alleged.

The tax agency first challenged Renaissance’s method three years ago, publicly challenging the then-unnamed hedge fund’s use of basket options contracts, which allowed it to pay the much-lower long-term capital gains rate on returns. That hedge fund is Renaissance, and the dispute is ongoing, Bloomberg News reports.

It is unclear how much the IRS wants from Renaissance and investors in its Medallion Fund, which since 2005 has managed money only for employees. One former Renaissance employee told Bloomberg that the firm warned him he could face a $90,000 tax bill, but assured him that it believed it had done nothing wrong.

The IRS has taken issue with Renaissance’s arrangement with Barclays, in which the bank bought securities Renaissance wanted to trade, then hired Renaissance to manage the portfolio. Then the hedge fund, which had complete control over the portfolio, bought a two-year option linked to the portfolio, allowing it to claim returns as long-term capital gains. The capital gains rate is currently just over half the short-term tax rate, and was formerly less than half the rate.

Renaissance has said that its strategy was not tax-motivated and was employed for legitimate business reasons. It is unclear whether the firm continues to employ basket contracts.

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