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I.R.S. Cracks Down on Hedge Fund Tax Strategy

nytimes.com

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Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#31

Post by mahyarm »

gohrt wrote: post #15
tanderson92 wrote: post #7

Earlier quoted context omitted.

The need to clarify the point implies that it was interpreted differently in the past. So this change in interpretation being applied retroactively is what the OP is concerned with.

but OP's concerns don't matter. The Constitution's concerns matter. "Battery" is a crime. If the state decides that "smacking someone's back" meets the definition of battery, they can prosecute people who committed that act before the clarification, as long as a judge finds their interpretation to be consistent with the wording of the law. Law is not computer code that fully specifies a simulation in advance.

So rule decider type B (judges) can effectively create retroactive laws/policies. An interpretation that is enforced is as good as a law.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#32

Post by tanderson92 »

dragonwriter wrote: post #13
tanderson92 wrote: post #7

Earlier quoted context omitted.

The need to clarify the point implies that it was interpreted differently in the past. So this change in interpretation being applied retroactively is what the OP is concerned with.

Interpretation isn't law, so in any legal dispute over the IRS actions under the current interpretation, the law which would be controlling is not retroactive. Not to mention that there is solid precedent that retroactive taxes are not, in general, ex post facto laws in the first place, such that even if this was Congress adopting a retroactive tax law , it still wouldn't fall afoul of the ex post facto prohibition.

> Interpretation isn't law, so in any legal dispute over the

> IRS actions under the current interpretation, the law which

> would be controlling is not retroactive.

This is to me a very weak argument (not that I disagree that this may be the standard that is applied in practice). If the Congress passed a law saying "the IRS can set tax code as it sees fit" and the IRS proceeds to levy taxes all the way back to 1980 on people as however it so desires, you should not be allowed to use that law as grounds for not having violated the ex post facto requirement. If this is the current understanding of what is allowed, I must vigorously object to whichever judgement left this precedent.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#33

Post by dragonwriter »

mikeyouse wrote: post #16
pcurve wrote: post #14

Maybe all cap gains should just be taxed at the same rate. 1 year threshold his so artificial.

I think this is a fine idea.. Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion, but it'd go a long way toward removing complexity.

> Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion

Well, their accountants and financial advisers might, since their work of structuring things to make sure most gains are long-term and in the right categories would be less valuable. But cutting taxes for all taxpayers -- including the rich -- on short-term games, and for most taxpayers on several categories of long-term games, may not that widely object to by people paying capital gains taxes in the first place.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#34

Post by jsprogrammer »

dragonwriter wrote: post #26
gohrt wrote: post #10

Earlier quoted context omitted.

The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions. I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock? It's even the same word: A retail business sells its stock (product), and sells it's stock…

> Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Trading an asset vs. holding it is a non-fictional concept very much grounded in reality. Attributing significance to it is, in a sense, arbitrary in the same sense that any assignment of significance is, but its definitely not a fictional concept divorced from reality.

"Trading an asset"

What exactly are you trading? Bits in a database that mark ownership of a fraction of a fictional entity?

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#35

Post by Tycho »

gphil wrote: post #29
discardorama wrote: post #24

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.

That's completely incorrect... the chances of a fund having that record through luck alone are astronomically low.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#36

Post by tanderson92 »

gohrt wrote: post #15
tanderson92 wrote: post #7

Earlier quoted context omitted.

The need to clarify the point implies that it was interpreted differently in the past. So this change in interpretation being applied retroactively is what the OP is concerned with.

but OP's concerns don't matter. The Constitution's concerns matter. "Battery" is a crime. If the state decides that "smacking someone's back" meets the definition of battery, they can prosecute people who committed that act before the clarification, as long as a judge finds their interpretation to be consistent with the wording of the law. Law is not computer code that fully specifies a simulation in advance.

I would set up the situation more like the state passing a law saying that an agency, call it the Battery Protection Agency (BPA), can decide what constitutes battery. Then the BPA decides in 2015 that verbal abuse and insults constitutes battery, and prosecutors proceed to arrest people for insults going back 5 years before the BPA's 2015 decision.

The parallels to the IRS case should be obvious, and the above hypothetical scenario is very much what the constitution was meant to protect against.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#37

Post by Tycho »

discardorama wrote: post #24

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

Nobody really knows how they've done it.

But in order for markets to be efficient there needs to be lots of constant arbitrage, and anyone who pulls off an arbitrage trade makes a profit. So maybe the Medallion fund just does a lot of the arbitrage that makes markets so efficient.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#38

Post by dragonwriter »

tanderson92 wrote: post #32
dragonwriter wrote: post #13

Earlier quoted context omitted.

Interpretation isn't law, so in any legal dispute over the IRS actions under the current interpretation, the law which would be controlling is not retroactive. Not to mention that there is solid precedent that retroactive taxes are not, in general, ex post facto laws in the first place, such that even if this was Congress adopting a retroactive tax law , it still wouldn't fall afoul of the ex post facto prohibition.

> Interpretation isn't law, so in any legal dispute over the > IRS actions under the current interpretation, the law which > would be controlling is not retroactive. This is to me a very weak argument (not that I disagree that this may be the standard that is applied in practice). If the Congress passed a law saying "the IRS can set tax code as it sees fit" and the IRS proceeds to levy taxes all the way back to 1980…

> If the Congress passed a law saying "the IRS can set tax code as it sees fit"

Then this would be an unconstitutional delegation of legislative authority to the executive. [0] Rendering the consideration of whether any executive action under it would constitute an ex post facto law moot -- if Congress purports to delegate enough power to the executive that retroactive executive action under it would be an ex post facto law, than the whole scheme is an unconstitutional delegation of legislative power whether or not it is applied retroactively.

Heck, even though retroactive taxation isn't generally ex post facto law (which is retroactive criminalization or enhancement of criminal penalties), the law you propose would be an unconstitutional delegation.

> If this is the current understanding of what is allowed

Its not, its just the prohibition that prevents it has nothing to do with (and is much broader than) the ex post facto law prohibition.

[0] See, e.g., https://en.wikipedia.org/wiki/Nondelegation_doctrine#United_...

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#39

Post by gnopgnip »

Tycho wrote: post #35
gphil wrote: post #29

Earlier quoted context omitted.

Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.

That's completely incorrect... the chances of a fund having that record through luck alone are astronomically low.

Survivorship bias. The funds that do not have great records are eventually closed leaving only the ones that are successful

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#40

Post by Tycho »

throwaway6497 wrote: post #19

This made my jaw drop: "Its Medallion fund, which now manages money for its employees only, was the most prolific user of basket options. The fund has earned an average annual return of more than 35 percent for two decades." $25 billion is all employees money; Even if we exclude Simon's money ($14 billion) it is a ton. 35% avg annualized returns for 20 years. Simply stunning.

Actually the Medallion fund is only about $6 billion I believe. The rest of the money is managed in funds which are open to non-employees (and those ones don't make anything close to 35% annualised returns).
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