The disagreement between the IRS and Renaissance traces back at least to 2010, when the IRS publicly criticized an unnamed hedge fund for using the strategy. It was referring to Medallion, the people said.
Simons, 75, retired from Renaissance that year as one of the best-performing managers of all time and now serves as non- executive chairman.
Testing ‘Lucifer’
While working for the nonprofit Institute for Defense Analyses at its research center in Princeton, New Jersey, in the 1960s, Simons was a code breaker for the National Security Agency. In 1973, he helped International Business Machines Corp. test a cipher, named “Lucifer,” that its researchers had developed.
A philanthropist and former math professor who has championed better math and science education, Simons has a fortune estimated by the Bloomberg Billionaires Index at $12 billion. He didn’t respond to a written request for comment.
The IRS contends that Medallion’s arrangement 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. Renaissance takes the position that the trades were not tax-motivated, were consistent with current law and were done for legitimate business reasons, according to a person with knowledge of the matter.
Private Dispute
The dispute hasn’t spilled over into a public forum such as U.S. Tax Court. Unless they prompt litigation, taxpayer conflicts with the IRS are handled in secret and often take years to resolve. It couldn’t be determined whether Renaissance is still using the strategy, and how much the IRS wants investors to pay in back taxes.
A former Renaissance employee, who spoke on condition of anonymity, said it notified him years after he left 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.
Renaissance assured him that the trade was a common and legitimate technique and that the IRS was trying to rewrite the rules retroactively, the former employee said.