A major hedge fund avoided over $6 billion in taxes through "abuse of structured financial products," Senate investigators write in a new report.
The report, from the bipartisan Permanent Subcommittee on Investigations, says that Renaissance Technologies bought "basket option contracts" from banks "to avoid federal taxes and leverage limits on buying securities with borrowed funds." The report says that "in essence, the banks loaned the hedge funds money to finance their trading." While several hedge funds bought these contracts, Renaissance was the largest participant.
Though these were short-term transactions and should have been subject to the income tax rate that applies to most daily trading, the report says, Renaissance instead often cast them as long-term capital gains. The long-term capital gains tax rate (currently 20 percent) is much lower than the top income tax rate (currently 39 percent). So Renaissance's practices resulted in "estimated tax avoidance of more than $6 billion," the report says.
The Senate report characterizes these tax practices as "abusive," but doesn't allege any illegality. A spokesperson for Renaissance told Marketwatch that the fund's actions were "appropriate under current law."
Two top figures at Renaissance were among the 10 biggest spenders on federal elections for the 2012 cycle. Renaissance's founder, billionaire James Simons, spent $9.8 million to help Democrats — and this year, he's given $2 million to the main Super PAC trying to help Democrats retain control of the Senate. Meanwhile, the firm's co-CEO Robert Mercer spent $5.8 million to help Republicans, and funded ads criticizing the planned "Ground Zero mosque" in 2010.
In the book More Money Than God, journalist Sebastian Mallaby wrote that Renaissance is "perhaps the most successful hedge fund ever." Forbes estimates Simons's net worth as $12.5 billion.