A Renaissance Technologies LLC hedge fund’s investors probably avoided more than $6 billion in U.S. income taxes over 14 years through transactions with Barclays Plc and Deutsche Bank AG, a Senate committee said.

The hedge fund used contracts with the banks to establish the “fiction” that it wasn’t the owner of thousands of stocks traded each day, said Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations. The maneuver sought to transform profits from rapid trading into long-term capital gains taxed at a lower rate, he said.

“It meant enormous profit for both the banks and the hedge funds,” Levin told reporters yesterday in Washington. “Ordinary Americans had to shoulder a tax burden of billions of dollars, a burden that was shrugged off by those hedge funds.”

The panel urged the Internal Revenue Service to collect taxes from the fund’s investors at the higher rate that Americans pay on wages and salaries. It said Congress should remove legal obstacles to audits of hedge funds and other large partnerships, whose returns the committee said are rarely questioned.

Executives Testifying

Executives from Renaissance, founded by billionaire mathematician James Simons, are set to testify at a hearing today in Washington about the transactions, as are representatives of Barclays and Deutsche Bank. The report was issued by Levin and Senator John McCain of Arizona, the subcommittee’s top Republican.

“Americans are tired of seeing Wall Street firms playing by a set of rules other than those applying to ordinary citizens,” McCain said at the hearing.

In a statement today, Renaissance said it “is comfortable that its tax treatment of the options is correct under current law” and that it expects to prevail in a dispute with the IRS over the matter. It said its decision to use a product known as basket options wasn’t driven by the tax benefits.

Deutsche Bank in 2010 stopped selling versions of the basket option that had tax-saving features, after the IRS publicly challenged the practice.

Barclays stopped in 2013, although Renaissance is still using three options from the bank that were provided before the policy change, the subcommittee said.

Apple, Caterpillar

Levin’s subcommittee doesn’t have authority to impose penalties, and it often examines business practices with an eye toward recommending changes in law. Recent hearings have focused on tax-avoidance maneuvers by Apple Inc. and Caterpillar Inc.

Renaissance, based in East Setauket, New York, compiled one of the best records in investing history by using advanced mathematics and computer algorithms to identify mispriced securities. Its Medallion fund, open almost exclusively to Renaissance employees, returned more than 35 percent annualized over more than two decades.

The fund manager has created fortunes for its top executives, who are also among Medallion’s biggest investors. Simons’s fortune is estimated at about $15.5 billion, according to the Bloomberg Billionaires Index. He’s a prominent political donor, contributing more than $9 million to Democratic causes in the 2012 election cycle.

The panel’s report focuses on basket options, which a hedge fund would buy from a bank. The value of the option would fluctuate based on the performance of a basket of underlying securities, and the hedge fund manager could buy and sell the stocks in the basket.