Tax planners started using derivatives to convert hedge funds’ short-term gains to long-term gains in the 1990s, said Alex Raskolnikov, a tax professor at Columbia University Law School. Congress tried to close the loophole in 1999, enacting a law allowing the IRS to disregard the tax effect of some derivatives, such as swaps and forwards, if they were economically akin to owning the fund directly.

‘End Run’

As described in the 2010 IRS memo, the basket option contract used by Renaissance represents an “end run” around the 1999 law, said Robert N. Gordon, president of Twenty-First Securities Corp., which advises clients on the tax implications of investments. Although the transaction is technically an option, it’s structured in such a way that it is economically almost identical to owning the portfolio, he said.

“We would love to have something to get long-term gains out of a hedge fund,” Gordon said, adding that the option described in the memo probably runs afoul of the 1999 law. “This thing doesn’t work.”

Autism Research

Since his retirement, Simons has focused on philanthropy. He is a major funder of autism research and is the founder of Math for America, which seeks to improve math education in public schools.

Simons has homes in Manhattan and on Long Island’s north shore, and owns a 222-foot yacht, Archimedes, named for the ancient Greek mathematician.

Simons and his wife, Marilyn, gave $9.6 million to Democratic groups in 2012, including a “super-PAC” that backed President Obama, according to data compiled by the Center for Responsive Politics.

During the same election cycle, Robert L. Mercer, the firm’s co-chief executive officer, gave $5.4 million to mostly Republican groups, the data show.

Renaissance has spent more than $2 million since 2002 lobbying Congress and the Treasury Department on taxes, according to lobbyist disclosure forms. Some of the lobbying has been for unspecified “tax issues affecting hedge funds.” None of the disclosure forms mention the IRS dispute.

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