A U.S. Senate investigative panel will hold a hearing July 22 to probe tax maneuvers by Renaissance Technologies LLC, the hedge fund started by billionaire James Simons, according to two people familiar with the matter.
The hearing will focus on a trading strategy Renaissance used that converted its profits from rapid trading into lower-taxed, long-term capital gains. The strategy, which involved transactions with banks such as Barclays Plc (BARC) and Deutsche Bank AG, is also being questioned by the Internal Revenue Service.
Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, has been probing tax avoidance moves by wealthy individuals as well as corporations such as Apple Inc. (AAPL) and Caterpillar Inc. (CAT)
Renaissance said in a statement that the tax treatment under Senate scrutiny “is appropriate under current law.”
“These options provide Renaissance with substantial business benefits regardless of their duration,” according to the statement. “The IRS already has been reviewing these option transactions for over five years, and Renaissance has cooperated fully with both reviews.”
Gordon Trowbridge, a spokesman for Levin, declined to comment. Mark Lane, a spokesman for Barclays in New York, declined to comment. Michele Allison, a spokeswoman for Deutsche Bank, declined to comment.
Under current law, profits from short-term capital gains are taxed at marginal federal rates of up to 44.4 percent, compared with a 23.8 percent top rate for long-term capital gains.
For some of the years in question, the two rates were 35 percent and 15 percent, respectively.
The IRS contends that the arrangement Renaissance’s Medallion fund had with the banks, in which the fund owned option contracts rather than the underlying financial instruments, is a ruse and that the fund investors owe taxes at the higher rate.
Because Medallion could claim that it owned just one asset -- the option -- and held it for more than a year, investors could declare their gains to be long-term investments.
Simons, the Renaissance founder, is the 64th richest person in the world, with a net worth of $15.5 billion, according to the Bloomberg Billionaires Index. The 76-year-old is a former mathematics professor whose trading strategy uses quantitative modeling.
The East Setauket, New York-based firm manages about $25 billion, including its flagship Medallion fund, which is run mostly for fund employees, and other funds that are open to outside investors. Medallion is famed for one of the best records in investing history, returning more than 35 percent annualized over a 20-year span.
During the 2012 election cycle, Simons and his wife, Marilyn, donated $3.3 million to political causes and candidates, making them the fifth-most prolific donors among those making publicly known contributions, according to the Center for Responsive Politics in Washington. Almost all of their money went to Democrats.
Robert Mercer, the firm’s current co-chief executive officer, and his wife, Diana, ranked 15th on the political giving list, with all of their donations backing Republicans.
A former Renaissance employee, who spoke on condition of anonymity, said last year that it notified him years after he left the firm that the IRS was challenging the tax technique, and he might have to pay more than $90,000 in additional taxes if the firm loses.
To contact the editors responsible for this story: Jodi Schneider at email@example.com Laurie Asseo