Renaissance Employees Could Face Clawbacks Over Hedge Fund’s Tax Maneuver Firm allowed staffers to invest in its hedge funds through their retirement accounts without paying fees Jim Simons, founder of Renaissance Technologies, is considered by many to be the most successful moneymaker in the history of modern finance. Photo: Clint Spaulding/Patrick McMullan By Gregory Zuckerman and Richard Rubin Updated Dec. 18, 2019 9:54 am ET Jim Simons’s Renaissance Technologies LLC has produced the greatest investment returns of any hedge fund. Now, it also may be facing an unusually painful tax headache. Last week, Renaissance sent a letter to its current and former employees warning that the Internal Revenue Service could force them to pay back taxes and penalties because they invested in Renaissance’s hedge funds through the firm’s 401(k) plan and individual retirement accounts, or IRAs, without paying fees. The warning could affect other investment firms with similar plans. At issue is a creative strategy undertaken starting in 2012 that enabled employees to invest in Renaissance’s hedge funds—including its market-beating Medallion fund—through their retirement accounts in a tax-advantaged, fee-free fashion. SHARE YOUR THOUGHTS Should Renaissance employees be allowed to invest in its funds through their retirement accounts in a tax-advantaged, fee-free fashion? Why? Join the conversation below. The letter, reviewed by The Wall Street Journal, said Renaissance now believes the IRS could determine that the forgone fees should be counted as taxable income and as contributions beyond the annual limits to retirement plans. The letter surprised current and former employees, some of whom may have to come up with millions of dollars if the IRS pursues a case. It has caused confusion and even frustration within the firm, as groups of employees huddle to debate their potential liability, according to current and former employees. In the letter, Renaissance said its caution came after an internal analysis, though it didn’t say what prompted that analysis. The firm advised employees to seek professional tax assistance. The IRS doesn’t normally comment on disputes with particular businesses or individuals. If penalties are levied, they may not outstrip gains from the funds. Even so, the consequences could be severe, said Steve Rosenthal, senior fellow at the Tax Policy Center, a research group, in Washington. “This is not the kind of situation IRS would be particularly sympathetic to,” Mr. Rosenthal said. ”It’s a deliberate plan to try to funnel more money into an IRA or 401(k) than contemplated by Congress.” “We believe the better view is that the fee-free nature [does] not give rise to deemed compensation,” the Renaissance letter said. “However, there is no regulatory guidance directly addressing the situation, and the IRS has not addressed these issues with us in the context of an audit or otherwise.” The Medallion fund has enjoyed average annual returns of about 66% before fees since 1988, a performance unmatched by other sizable funds. Renaissance, which has about 320 staffers, recruits top mathematicians and scientists. Access to Medallion is one way the firm retains its talent. Mr. Simons, 81 years old, is considered by many to be the most successful moneymaker in the history of modern finance. Since 1988, Medallion has racked up trading gains of more than $100 billion. The combination of fee-free investing and Renaissance’s outsize annual returns means employees have sizable balances. At the end of 2018, the company’s 401(k) plan held $238.1 million and the IRA plan held $825.6 million, with average balances exceeding $3 million, according to documents filed with the Labor Department. Newsletter Sign-up The Medallion fund, which is only available to employees, charges hefty annual management fees of 5% of all assets and as much as 44% of all of the fund’s gains, suggesting that the forgone fees could be substantial. Renaissance and its lawyers have reached out to the IRS to begin discussions about the issue, according to the letter. Compounding employee concerns: Renaissance continues to deal with a separate tax dispute with the IRS about the firm’s use of options to turn short-term gains into lower-taxed long-term capital gains and avoid taxes that a 2014 Senate report said amounted to more than $6 billion. Some facing potential liabilities believe those taxes likely will have to be paid in full. If the IRS comes after Renaissance’s employees, it could send a message to other investment firms that also allow employees to invest fee-free in their funds, said Lenny Witman, a partner at Witman Stadtmauer PA, a law firm in Florham Park, N.J. He doubts the IRS will force those employees to pay taxes and penalties, arguing that such a move would open up “a Pandora’s box to everyone they’ve given exemptions to with the same basic purpose.” In 2010, Renaissance ended its previous 401(k) plan and placed employees’ holdings in IRAs. Many employees converted those accounts into Roth IRAs. They paid taxes related to those conversions but held the accounts in Renaissance investments that can grow tax-free without fees. Renaissance received permission for the maneuver from the Labor Department, which oversees retirement plans with an eye toward protecting workers’ interests. Funds usually face conflict-of-interest limits restricting investments in in-house funds because such investments can benefit the firms. Renaissance argued that its employees would ultimately benefit by getting access to the firm’s funds. The Labor Department granted an exception for the Roth accounts and later for a new version of Renaissance’s 401 (k) plan on the condition that it wouldn’t charge the investor fees. The exemptions don’t address a key question now in play: When an employer doesn’t charge fees for a valuable service, should those forgone fees potentially be considered taxable income? If so, employees have been underreporting their income for years and would owe back taxes plus interest on that. In addition, annual contributions to 401(k) plans and IRAs are capped. If the forgone fees are considered contributions, they could trigger penalties of as much as 6% for every year that those extra contributions remained in the retirement account—in addition to payments related to an employee’s higher balance thanks to the forgone fees. Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Richard Rubin at richard.rubin@wsj.com https://www.wsj.com/articles/renais...er-11576679101?mod=searchresults&page=1&pos=1
This is what happens. Simons already has his, and now he has sent the IRS after the rest of 'em. I went through this type of thing once too. Very little you can do to "win". Best to make it painful for the IRS and settle.
Come on man, Simons didn't send the IRS after the own people investing in his fund, that is only a bad thing for him and his peeps. Get outta here with that!!!
Have you dealt with the IRS? If you make it easy for them to collect from others, they may go easier on you. Of course, the settlement (if any) with Simons would be confidential. Needless to say, this is speculation.
%% Yes sir; +always be polite. Thats a tough call= FORD motor co doesnt get taxed on a lower profit or no profit, giving employees a reaL deal//LEASE on thier autos.I have not seen Ford's books,LOL; but the IRS is like a mortgage co- they like a bigger % on an audit, so someone may have to pay a few bucks?? Just a guess Mr Simmons, if he like to read, has one of those tax lawyer books which shows IRS patterns; more you make, or deduct past a certain % , more likely you are to be audited..................................................................................................