November 19, 2019 - Douglas Myser

Tax dispute one of largest by IRS. A little known decision by the Internal Revenue Service's appeals unit may spell trouble for legendary investor Jim Simons, who's embroiled in a multi-billion dollar tax dispute with the agency. Reviewing the audit of an investment manager in Connecticut, the IRS Office of Appeals rejected a tax-avoidance maneuver involving so-called basket options. That's the type of transaction at the heart of a separate, larger case involving Simons's Renaissance Technologies hedge fund. The decision, made public in a court filing in May, could offer a preview of the tax agency's reasoning in the Renaissance case. Tax dispute one of largest by IRS.

The Renaissance dispute is one of the largest ever handled by the IRS, potentially involving almost $6.8 billion in back taxes, according to an estimate by U.S. Senate investigators. The list of those who would probably foot the bill includes Simons, the billionaire Renaissance founder dubbed, "The Man Who Solved the Market", in a book published this month, and Robert Mercer, a former co-chief executive officer of the firm and a backer of President Donald Trump. In a confidential decision in December, the IRS held that GWA, a Hartford, Connecticut, based company run by hedge fund pioneer George Weiss, had under reported ordinary income in 2009 and 2010 by a total of $527 million through the use of basket options. The decision wasn't made public until Weiss challenged the action in U.S. Tax Court this year. That case is pending.

Weiss's firm or its investors could face a tax bill of more than $100 million if they lose, based on the amount of income involved and tax rate estimates used in the Senate report. They may also face interest and penalties and a 20% accuracy penalty. Sheri Dillon, a lawyer for Weiss, declined to comment. The Weiss case is almost identical to the one involving East Setauket, New York-based Renaissance, arguably the most successful hedge fund in history.

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