Hedge Fund Plan for Minimizing Taxes Sparks Battle With IRS

They don't care that it's legal; it's embarrassing

A former Cold War code breaker may have cracked the tax code for hedge funds.

James H. Simons, who became a billionaire when he turned his extraordinary mathematical ability from defense work to investing, has deployed an unusual strategy at Renaissance Technologies LLC to skirt hundreds of millions of dollars in taxes for himself and other investors, said people with knowledge of the matter.

The Internal Revenue Service is challenging the technique, which it called "particularly aggressive," without identifying the hedge fund in the dispute. It is demanding more tax payments from investors in Renaissance's $10 billion Medallion fund, the people said.

Renaissance sought to convert profit from Medallion's rapid trading into long-term capital gains, said the people, who spoke on condition of anonymity because the dispute hasn't been made public. The top federal rate on long-term gains is about half that on short-term.