Jim Simons, one of the world’s most successful investors, has just been handed a rare defeat.
The founder of quantitative hedge-fund manager Renaissance Technologies and his colleagues will pay billions of dollars in back taxes, interest and penalties to resolve one of the biggest tax disputes in U.S. history, under the terms of a deal reached by the firm and the Internal Revenue Service.
Renaissance Chief Executive Officer Peter Brown disclosed the agreement Thursday in a letter to investors seen by Bloomberg. While it doesn’t disclose how much money will be paid, U.S. Senate investigators in 2014 pegged potential unpaid taxes in the case at $6.8 billion, before interest and penalties.
The IRS has long contended that Renaissance mischaracterized profits from its flagship Medallion Fund, using a complex options arrangement to transform short-term capital gains into long-term gains, which are taxed at a lower rate.
Medallion is owned almost exclusively by current and former employees of the East Setauket, New York-based firm. Renaissance funds that are open to outsiders, such as the institutional equities fund, aren’t part of the tax dispute.
Under the terms of the deal, Simons and six other current and former members of Renaissance’s board will pay 100% of the additional tax that would have been due if they had characterized the gains as short-term, as the IRS said they should.
That group includes Brown as well as Robert Mercer, a former co-CEO and noted conservative political donor who was a prominent backer of former President Donald Trump. The board members will also pay unspecified interest and penalties.
Other Medallion investors will pay 80% of the additional tax for short-term gains, along with interest.
Separately, Simons, who served as chairman of Renaissance during the period when the options were in use, paid an additional $670 million to the IRS, according to the letter. That resolves another problem that the IRS identified with the options arrangements, involving dividend withholding tax.
The board opted for a settlement “rather than risking a worse outcome, including harsher terms and penalties, that could result from litigation,” Brown wrote. He said the firm spent years engaging with the IRS’s Office of Appeals. If a taxpayer can’t reach a resolution there, a dispute typically moves to U.S. Tax Court or another federal court.
Seven years ago, the Senate Permanent Subcommittee on Investigations revealed that, for more than a decade, Renaissance used options sold by Deutsche Bank AG and Barclays Plc to shelter some $34 billion of income in Medallion, cutting the rate paid by fund investors by as much as 20 percentage points.
Brown and other Renaissance executives defended the transactions at a hearing in Washington, arguing that the firm had entered into the deals for non-tax reasons and that they complied with the law.
Medallion is one of the best-performing funds in history, returning about 40% annualized since its formation in 1988.
— With assistance from Katherine Burton
