Renaissance executives agree to pay around $7B to settle dispute with IRS | Hacker News Reader

Renaissance executives agree to pay around $7B to settle dispute with IRS

reuters.com

125 pointstrimbo86 comments

It's always amazing to me how in the world of high profile white collar criminality you can make billions and your punishment is to pay a few percent of it back.

I wish ordinary theft worked like this. Steal 500 bucks and your punishment is to return 100.

Your figures are sort of backwards. The article claims they saved $6.8B in taxes and will owe $7.7B in fines.

To clarify, the 7.7 billion figure is the 6.8 billion owed plus ~900 million in interest and fines.

Imagine you steal 500 bucks and if caught, the only punishment is to pay back 600 years later.

You'd have be almost certain of getting caught for it to not be a great idea.

Imagine you steal 500 bucks, invest it for 10 years turning it into 1000 dollars, and the punishment is to pay a fine of 700 dollars.

Basically, every ICO, only with much bigger numbers.

That's basically an involuntary loan.

That's true, and a part of me wants the penalties to be much higher. On the other hand, people are already scared enough of IRS audits - penalties would make it so much worse.

They saved 6.8B seven years ago. If they put that money in broad market index, they already made the fine amount by now and then some.

The discount rate is usually based on a risk free asset. They could have put it in an index and ended up with a 30-40% decline in value as well.

The Renaissance group is pretty well known for exactly the opposite of that, however.

After some quick following, the fund had an 71.8% annual return from 1994 through mid 2014. I don't know how the numbers look like nowadays, but assuming that this continued throughout the time in question here, we can conclude that they made a lot of money through this

Id i understood correctly the teick they tried allowed them to treat short term gains as long term. Reducing their tax fron 35% to maybe 20%. So those 6.9 billion was 20% of their profits. Meaning the full amount of their profits were around 35 billion. That's crazy! A money printing machine.

The IRS can not only give you civil penalties like fines. They can also give you criminal penalties. They also have their own courts where you almost always lose.

It's time to tie alll Fees/Fines to 1040 income.

(Patent fees, DMV fees, judicial fines, municipal code citations, school tuition, and even property taxes, etc.)

Get ready to see a lot of poor people ignoring the law just as much as the white collar crowd does then.

A democratic society won't stand for the % of income that these fines and fees are to them being applied to everyone.

> In 2015, the IRS issued guidance here that hedge funds using "basket options" had to report them on their tax returns and correct past returns, which came after a U.S. Senate subcommittee reported some funds were using this to avoid federal taxes.

Tax rules are complicated, and these hedge funds are relying on technicalities to reduce their tax burden. This one didn't work out, but you can be sure their lawyers looked at the code and can say with a straight face that they didn't know how the IRS would rule. That doesn't make you a criminal. It also sounds like they're paying back the entire amount in question, not "a few percent."

That's not really what's happening here. Tax obligations under the law are not clear cut. There's ambiguity. The law is often general in nature and old. It may not be clear how the law applies to a specific business.

A large business could seek out the opinion of ten different tax professionals and get a range of answers of how much tax the law requires them to pay. Even the IRS may not be certain. It's not unusual or unexpected that a business may have a disagreement with the IRS on how to interpret the law. If the taxpayer and the IRS can't come to an agreement, then the only way to resolve it is to take it to court and force a judge to make a call - the ruling then at least provides certainty to other businesses in the same situation.

For most people, their experience of paying tax as an individual has little relevance to the tax affairs of large businesses. Since there are millions of individuals, for any area of the law that's ambiguous, someone has already challenged the IRS and had the matter resolved in court, providing clarity for other individuals. This is not true for some businesses as there may only be a handful of other businesses (or even none at all) in a similar situation.

Except in this case they went too far and the IRS busted them - to the tune of $7B.

Let’s not pretend like they weren’t trying to get away with not paying their fair share of taxes here.

And to OP's point - if the punishment was in proportion to how much they tried to steal - well, you’d probably see a lot less “creativity” in these tax schemes.

Of course they were trying to minimize taxes, just like everyone else, individuals and corporations alike.

In this case it didn't work, but I don't see any parallels with stealing.

This situation isn’t as complicated as you make out. They tried to pay the (lower) long-term capital gain rate for trades with short-term gains. Individuals face the exact same holding requirement and can readily understand that the lower long-term rate is intended to incentivize buy-and-hold investing rather than intraday trading.

Have you missed all the articles about theft in San Francisco going nearly entirely unpunished?

The amount of human capital that has gone into financial engineering is depressing. Thousands of brilliant minds who are designing complex financial products instead of useful technology.

Prompts one to ask what the incentive is?

To quote Margin Call, “The money is considerably better.”

[When a rocket scientist is asked why he joined a Wall Street firm.]

*rhetorically ask ;)

> designing complex financial products

who's to say it wasn't useful? after all, somebody paid for this complex financial products, so objectively speaking, they must have found it useful enough to have paid for it.

No, that isn’t what “objectively useful” means.

Wealthy people pay for this engineering because it helps maintain and increase their wealth. That’s about it. There is zero societal benefit from something like a CDO.

> There is zero societal benefit

> what “objectively useful” means.

what contradictory beliefs you hold.

You are making a subjective value judgement (your own) on what makes something beneficial to society, and yet claim that the actual objective measure - that of using money to measure value - is not what "objectively useful" means.

Value to society isn't an objective measure. Otherwise, social workers and charity would be rolling in money.

Nowhere did I say that “objectively useful = beneficial to society.”

This is obvious if you consider another example. Imagine a marketplace for hitmen. Clearly some people would pay for such a thing. Does that make it useful? Maybe? Does that mean we should think it’s a good thing? Probably not.

All the people who bought houses due to the ability of financial engineers to lower mortgage requirements by quantifying and hedging risk probably disagree.

I mean, they pay for it via salaries, and the people who lose money in the market also pay them.

Why work for society's benefit at the expense of your well-being?

I once asked an Oxford-educated post-doc, who had worked as a quant, "are you going to go back to finance?" He replied that he simply doesn't know. He wants to do mathematical research, but both academia and industry stifle such ambitions. For the former, unless you're in the literal handful at IAS, you'll have to waste the majority of your time teaching, advising, and writing grant proposals. For the latter, one lacks not only the time, but also resources for research (seminars, journal access, colleagues, etc.).

The critical difference is that working in finance (or any ad factory) provides less stress and much more financial stability. Of the professors I've known, many work obscene hours every day of the week. Society will benefit, but at what personal cost?

Yes, one can’t really blame the individuals themselves. Especially when the incomes are double or triple that of academia.

It is a deep structural problem.

That estimate seems … low

Yeah we're easily talking order of magnitude differences here if not even more (if you're not a tenured professor we might even be inching towards two).

try 10x.

Because I fell into an edge case, had I moved from my post-doc to a professorship, I would have faced a 20% pay cut. And that's not because my post-doc was well paid; after I factored in the side-costs of the position I was not that far above minimum wage. And this was at an elite European research group where the professor was doing his best to take care of me.

So I moved to industry.

Yeah, I moved from neuroscience to a hedge fund. Since then I've had individual days where I made more money than my annual salary as a neuroscientist.

Useful technology like ad growth hacking, conversion optimization, engagement optimization and getting kids to open more loot boxes? Lets face it, the majority of white collar workers including software engineers are there for the money. Who can blame them, when they make twice to thrice as much as a lab virologist or three to six times as much as a school teacher?

Frustrating, isn't it? I feel the same way about YouTube celebrities and sports players making millions while actually useful professions make significantly less. From what I've read the better paid doctors make about 300k/year.

I also feel the same way about most consumer technology being developed today. It's mostly advertising and intellectual property exploitation. Nothing particularly useful, really. Yet the people involved are making ridiculous amounts of money. Actually useful technology brings us closer to a science fiction utopia, not some corporate world cyberpunk dystopia.

here is a way to rationalize it (not sure if this helps you)

doctors provide very valuable services to dozens - hundreds of people (treating disease). youtube/sports celebrities provide a small amount of value to 100k - millions of people (amusement or entertainment).

so the value they get back from society is because of the number of people touched, not the depth of value for each person. If we figure out how to scale disease treatment like we scaled entertainment, then (fewer) doctors would be wayyy richer than entertainment stars.

Intersection of supply and demand curves is the only thing needed to understand prices.

That makes sense to me but it still doesn't help... It just doesn't seem right to me that some random person can make a meme video and become a millionaire off of the ads alone. A society that enables these aberrations is sick and needs to be fixed.

I used doctors as an example but engineers are also comically undervalued in my country despite their extremely valuable and necessary contributions to society. It's a joke.

> doctors provide very valuable services to dozens - hundreds of people

I think this scale is a bit off. Doctors see thousands of patients per year.

$300k is median, better paid doctors earn far more than $300k. Although, they do have to sacrifice and risk a lot to get there.

At ren tech’s kind of returns it’s literally cheaper to pay the interest and fine than to borrow from anyone else.

Eh. I feel like they can probably get a cheaper loan from somewhere else.

Here's how they structured their affairs to claim long-term capital gains (via Sen. Carl Levin's testimony [0]):

The key financial product involved in these fictions is called a ``basket option.'' ...basket option basics worked like this: The bank sold its hedge fund client a structured financial product, called an ``option,'' whose payoff equaled the profits generated by a ``basket'' of securities held in a designated account at the bank. The basket here is key. It was an open account with ever-changing contents. Technically, the account and the securities it contained were held in the name of the banks in its own trading account. The hedge fund put up 10 percent of the cash needed to buy the securities, and the bank lent the other 90 percent.

This arrangement included a number of fictions which defied reality, but resulted in big profits for the hedge funds and the banks.

First, though the structure was designed to create the appearance that the bank owned the assets in the basket option account, the hedge fund made all the trading decisions for those accounts--and in fact, used the bank's computerized trading system to execute trades in the account. RenTec estimates that its trading through basket options accounts averaged more than 100,000 trades each day, or about 30 million trades a year. Also, the hedge fund reaped all of the trading profits, even though the financial structure created the illusion that the bank owned the assets. The beneficial owner, the real owner, was the hedge fund.

Now, second, the hedge fund's control of all the trading for the basket option account demolishes the fiction of a legitimate option. So the hedge funds set up new entities, which they controlled, to serve one function, and that was to act as the option holder. The hedge funds would then claim that their control of the option holder was totally independent of their role in making the trading decisions for the basket option account. Documents that we will explore today show the extraordinary lengths to which RenTec and the banks went to perpetuate the illusion that the option holder and trader were somehow independent, when in fact the hedge fund, RenTec, played both roles.

The fictional option was structured so that it could be exercised more than 1 year after it was created. Under that structure, the hedge funds claimed that trading profits from the account were long-term capital gains and thereby qualified for the reduced long-term capital gains tax rate.

The Tax Code gives long-term capital gains a reduced rate on the theory that it provides an incentive for investors to risk their capital on the kind of long-term investments that grow the economy and create jobs. The high-volume trading that, for example, RenTec conducted through its basket options does not meet that test. When securities are held for weeks or days or even seconds, it is surreal to characterize those trading profits as long-term capital gains.

But that is what the hedge funds did. The banks and hedge funds used the fictional option structure to collapse millions of individual trades into one transaction, the execution of an option. As if by magic, the option structure transforms what would be short-term capital gains from an ordinary trading account into long-term capital gains subject to lower taxes.

[0] https://www.govinfo.gov/content/pkg/CHRG-113shrg89882/html/C...

Thanks, this is helpful to understand.

They had to know this was a risky play and trying to dodge taxes based on language written in the law by skirting what "ownership" means.

The bet didn't pay out because it caught the attention of one dogged person.

I'd imagine it did pay off. They are paying 6.8 billion owed plus ~900 million in interest and fines. So they "lost" about 1% annually on this money over the last ten-ish years.

Given the crowd, surely they invested the money. Not in Medallion since it is capacity constrained -- but almost everything in the past 10 to 11 years yielded big money. A funding cost of 1% is pretty amazing, they made a boatload of money off this 1% loan from the US Government.

Based on that description, I do not understand how Rentech clearly did not qualify as a beneficial owner:

https://en.wikipedia.org/wiki/Beneficial_owner

Or was the dispute about whether or not the tax treatments apply to beneficial owners at all?

So why does it matter who is executing the trades? You can get the low tax rate for investing in shares that are brought and sold 100,000 times a day, but only if someone else decides which shares to buy and sell when? And that's somehow better for long-term investment? What nonsense.

Tax all income at the same rate and you'd eliminate this whole class of problems. Get rid of the idea of choosing when to realize your gains while you're at it.

7.7 billion in 2021 dollars must be much less than 6.8 billion in 2010 dollars (2005 to 2015 so figure 2010).

What is a typical rate of inflation, compounded over 10 years from 2010 to 2021?

Wolframalpha is great for things like this

7.7B usd in 2021 is equivalent to 6.33B usd in 2010. [0]

Or the inverse: 6.8 (2010 usd) is 8.28 (2021 usd) [1]

[0] https://www.wolframalpha.com/input/?i=7.7+usd+in+2010

[1] https://www.wolframalpha.com/input/?i=6.8+2010+usd+in+2021

Does anyone know how the Medallion fund has performed taking the tax settlement(s?) into account?

From the WSJ report:

Because the settlement relates to the tax treatment of Medallion’s gains, it doesn’t affect the fund’s historic returns, which top almost every other hedge fund.

For a fun exercise, these activities took place between 2005 and 2015 -- call it 2010 to split the difference. If you assume that they knew they'd likely get dinged for the $7B and just kept that amount in their fund and invested it alongside their employee money - how much profit did they make by litigating this for 10 years to delay the payout?

Is this a new common core 5th grade curriculum maths word problem?

0, the Medallion fund is capacity constrained.

Sure - but they do have a stable of other funds with no such constraints (although with "worse" performance).

Not sure why you say worse in quotes - they are much, much worse.

dated info here, but they've always said the fund is capacity-limited so has to throw off billions in profits per year, it does not get to stay and compound.

Like almost any investment fund, it doesn't pay taxes — its investors pay taxes on their gains

Aside from the technical difficulties (requiring a time machine and all that), is the IRS even authorized levy taxes on executives who lived and died before the US was even founded??

If they did nothing but throw it into a stock market index fund for the last 11 years and compounded it at the standard 8% they would have profited 9 billion dollars. Not a bad way to make a buck. That's at a standard 8%, the stock market returned 9.2% the last 10 years. S&P500 returned ~13%. These guys know what they were doing and were laughing on the way to sign the settlement papers.

Lol this website is for employees of tech companies that are worth billions but never pay taxes either. One day the IRS will come calling.

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I wonder if Vanguards patented way to manage their funds to reduce taxes be affected by this settlement.

Vanguard already gets a blind eye for their management structure’s taxation because they manage the retirement accounts of so many common people without greed.

But they patented it, so other companies (Fidelity, Schwab etc.,) can't use it.

Only for two more years, though. Then Blackrock, Schwab, Fidelity, and anyone else use the same method.

Is there still any benefit for that patent nowadays? I thought it’s all the same between index ETFs and mutual funds. I notice no difference between Vanguard/Fidelity/Schwab/ML/etc offerings.

Non-Vanguard mutual funds might have to throw off capital gains in situations where ETFs would not. ETFs are the same anywhere.

The mechanism is described here: https://www.investopedia.com/how-vanguard-patented-a-system-...

I think that died with John Bogle, unfortunately. They charged me $50 to rollover my employer Vanguard 401k to a Vanguard rollover IRA. With their conscience gone, Vanguard will trend to the norm.

Does anyone have a defence of this basket option business, why it should be treated as a long term capital gain? Is it really just a case of “let’s try our luck?”

Something something can't execute a transaction for the sole purpose of avoiding tax...

Contrariwise, consider the famous quote from Judge Learned Hand:

> Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

That's almost enough to pay for two weeks of the war in Afghanistan!

Largest insider trading ring in history and still running. To agree to 7 billion you can guarantee they are walking away with at least 60 billion squirreled away unseen.

This isn't insider trading. It's tax fraud.

I believe they’re saying that the Medallion fund which RenTech runs is an insider trading scheme, probably due to the incredible rate of return over decades.

And that for RenTech to agree to this penalty implies they have a ton of money sitting around that they shouldn’t, given the capacity constrained nature of the Medallion fund.

On these I have no opinion. I may have misinterpreted the commenter.

> And that for RenTech to agree to this penalty implies they have a ton of money sitting around that they shouldn’t, given the capacity constrained nature of the Medallion fund.

They might know they would definitely lose in court, and end up with a bigger penalty (on top of more legal expenses).

You can do a little math to get a ballpark number. $7 billion includes penalties, the actual tax avoided was closer to $6 billion. Over 10 years (2005-2015), so $600 million per year. If you assume short term capital gains is 37% and long term capital gains is 20%, that (600 / .17) works out to $3.5 billion/year (or $2.9 billion after taxes). $29 billion over 10 years.

Huh, I recall people saying this 5 years ago only to be shouted down. I guess they stand vindicated. Pity they didn't have a way to monetize their correctness.

> Huh, I recall people saying this 5 years ago only to be shouted down.

It was seven years ago, it was (among others) Sen. Levin, and they weren't shouted down; six years ago the IRS publicly agreed that the tax treatment was wrong and notified people how similar cases should be treated and must be reported going forward. What has gone on in the interim was Renaissance fighting that decision being applied to them.

All right then. Perhaps my memory is shit. I recall it being common to downvote anyone here on HN who alleged that Rentech was just a tax fraud.

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