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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

#61

Post by tanderson92 »

dragonwriter wrote: post #59
tanderson92 wrote: post #36

Earlier quoted context omitted.

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 hypot…

> The parallels to the IRS case should be obvious Please point the specific provision(s) of law parallel to the one in your hypothetical, both as to the unlimited discretion and as to the discretion to decide what constitutes criminal punishment. Because I don't think the parallels are at all obvious.

Exactly, my hypothetical would universally not be allowed and is forbidden (esp. by the nondelegation doctrine). The point is that the two situations are very similar in spirit.

I never said the discretion was unlimited; rather, I think that any retroactive decision in guidance/policy/interpretation is prohibited by the constitution. The words are just semantics.

IRS tax avoidance constitutes criminal punishment.

Thanks for the downvotes, everyone.

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

#62

Post by gphil »

auntienomen wrote: post #60
gnopgnip wrote: post #39

Earlier quoted context omitted.

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

You haven't done the math. Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances. RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binar…

This is still the wrong math. I'm not qualified to come up with a great model here, but given that the S&P 500 has only lost value in 5 of the last 25 years the chances of having no losses in the last 25 years are a lot greater.

I've been investing for almost a decade, was lucky enough to sit out the worst in 2008, and I haven't had a down year in 10 years myself. This outcome was mostly luck on my part.

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

#63

Post by JoshTriplett »

dragonwriter wrote: post #54
JoshTriplett wrote: post #30

Earlier quoted context omitted.

There's a massive difference between the long-term and short-term gains rates. And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing, and cannot afford to pay higher taxes.

> And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing Raise them prospectively based on the date of asset purchase, starting some specified time after the date the change is adopted. Problem solved.

That would only solve the problem of not penalizing existing retirees. It would force all people currently saving for retirement to save 10-15% more to pay this new pile of tax. And what, precisely, do they get in return for that added tax burden?

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

#64

Post by tanderson92 »

dragonwriter wrote: post #58
tanderson92 wrote: post #51

Earlier quoted context omitted.

> Then this would be an unconstitutional delegation of legislative authority to the executive And yet this is what we seem to be experiencing in this case, where the IRS can make a policy interpretation retroactively to the tune of $6 billion for a single taxpayer. Your source indicates that congress allows the IRS to decide tax policy, but since tax evasion is itself a crime it seems to indirectly violate the ex pos…

> And yet this is what we seem to be experiencing in this case No, Congress passing a law saying that "IRS can set taxes at any level they want" is not what we are seeing. If you want to argue that the actual laws Congress has passed are unconstitutional delegations, please, point to the specific laws, and make that argument. > but since tax evasion is itself a crime it seems to indirectly violate the ex post facto l…

> Evasion is a different thing than non-payment. No act that occurred in the past that was not evasion when it occurred becomes evasion as a result of this change in application.

Incorrect, but I can see how you might think so. It is the same because if I disagree with the IRS and refuse payment then according to https://www.law.cornell.edu/wex/tax_evasion, I have committed tax evasion.

So yes, since the IRS can adjust my tax burden retroactively, tax evasion is involved. Suppose in 2012 I filed my tax returns and was fully honest. The IRS agreed, but now in 2015 they change the 'interpretation', and if I disagree with the new tax they are levying on me, presto chango! I can now be convicted of tax evasion for refusing to pay this arbitrary retroactive tax.

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

#65

Post by auntienomen »

gphil wrote: post #62
auntienomen wrote: post #60

Earlier quoted context omitted.

You haven't done the math. Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances. RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binar…

This is still the wrong math. I'm not qualified to come up with a great model here, but given that the S&P 500 has only lost value in 5 of the last 25 years the chances of having no losses in the last 25 years are a lot greater. I've been investing for almost a decade, was lucky enough to sit out the worst in 2008, and I haven't had a down year in 10 years myself. This outcome was mostly luck on my part.

Consider the probability of beating the S&P instead. Same math applies. If that doesn't convince you, look up their monthly returns and do the same calculation.

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

#66

Post by dragonwriter »

tanderson92 wrote: post #61
dragonwriter wrote: post #59

Earlier quoted context omitted.

> The parallels to the IRS case should be obvious Please point the specific provision(s) of law parallel to the one in your hypothetical, both as to the unlimited discretion and as to the discretion to decide what constitutes criminal punishment. Because I don't think the parallels are at all obvious.

Exactly, my hypothetical would universally not be allowed and is forbidden (esp. by the nondelegation doctrine). The point is that the two situations are very similar in spirit. I never said the discretion was unlimited; rather, I think that any retroactive decision in guidance/policy/interpretation is prohibited by the constitution. The words are just semantics. IRS tax avoidance constitutes criminal punishment. Tha…

> The point is that the two situations are very similar in spirit.

You keep asserting that, but you have failed to even begin to argue that.

> rather, I think that any retroactive decision in guidance/policy/interpretation is prohibited by the constitution.

You are welcome to think that, however, that's not consistent with the history of the use "ex post facto law", which was a legal term of art already in existence at the time the Constitution was written, and whose scope of meaning in the Constitution since, practically, the ink was still wet on the Constitution.

> IRS tax avoidance constitutes criminal punishment.

No, tax avoidance (which is structuring activities in awareness of the law so as not to incur tax liability) isn't something that is subject to criminal punishment; it is perfectly legal.

Nonpayment of tax isn't legal, but isn't generally criminal either.

Tax evasion is criminal, but involves things like false representation to avoid tax liability being correctly assessed. Following the then-current IRS guidance isn't evasion, and doesn't retroactively become evasion when the guidance changes, even though the change in guidance may change the IRS's computation of tax due.

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

#67

Post by dragonwriter »

JoshTriplett wrote: post #63
dragonwriter wrote: post #54

Earlier quoted context omitted.

> And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing Raise them prospectively based on the date of asset purchase, starting some specified time after the date the change is adopted. Problem solved.

That would only solve the problem of not penalizing existing retirees. It would force all people currently saving for retirement to save 10-15% more to pay this new pile of tax. And what, precisely, do they get in return for that added tax burden?

> And what, precisely, do they get in return for that added tax burden?

They get the relative burden of taxation shifted off the of other sources of income, including the source they are using to get money to pay for retirement. (The specific effect depends on how that relative shift is used.)

In any case, if the current favorable treatment of capital is inequitable, there is no entitlement for people to expect it to continue going forward.

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

#68

Post by dragonwriter »

tanderson92 wrote: post #64
dragonwriter wrote: post #58

Earlier quoted context omitted.

> And yet this is what we seem to be experiencing in this case No, Congress passing a law saying that "IRS can set taxes at any level they want" is not what we are seeing. If you want to argue that the actual laws Congress has passed are unconstitutional delegations, please, point to the specific laws, and make that argument. > but since tax evasion is itself a crime it seems to indirectly violate the ex post facto l…

> Evasion is a different thing than non-payment. No act that occurred in the past that was not evasion when it occurred becomes evasion as a result of this change in application. Incorrect, but I can see how you might think so. It is the same because if I disagree with the IRS and refuse payment then according to https://www.law.cornell.edu/wex/tax_evasion , I have committed tax evasion. So yes, since the IRS can adj…

> It is the same because if I disagree with the IRS and refuse payment

Nonpayment and refusing payment are different things. The act of refusal would happen after the policy change, therefore, the only act that might even arguably be criminalized is an act that would occur after the change, and no retroactive criminalization has occurred.

No act before the policy was adopted is criminalized, even by your characterization.

Now, if the actual law allows arbitrary changes to tax calculation by the IRS, you could argue a nondelegation doctrine violation, rather than an ex post facto violation. But to argue that, you'd actually have to point to the provision of law at issue.

Or you could argue that the policy change is inconsistent with the law Congress has adopted. But, again, you'd have to actually point to the specific provisions that are violated to do that.

If, finally, the IRS simply failed to correctly apply the law as Congress wrote it previously, and the change in guidance is simply closing a gap between IRS policy and the law written by Congress, then you can maybe fault what the IRS was doing before (though, of course, no taxpayer would challenge an overly lax application of the law -- or even have standing to do so), but not what they are doing now.

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

#69

Post by JoshTriplett »

dragonwriter wrote: post #67
JoshTriplett wrote: post #63

Earlier quoted context omitted.

That would only solve the problem of not penalizing existing retirees. It would force all people currently saving for retirement to save 10-15% more to pay this new pile of tax. And what, precisely, do they get in return for that added tax burden?

> And what, precisely, do they get in return for that added tax burden? They get the relative burden of taxation shifted off the of other sources of income, including the source they are using to get money to pay for retirement. (The specific effect depends on how that relative shift is used.) In any case, if the current favorable treatment of capital is inequitable, there is no entitlement for people to expect it to…

Alternatively, if the goal here is to stop hedge funds from taking advantage of long-term capital gains, perhaps it would make more sense to cap the amount of gains exempted as long-term and make the rest short-term. Set a cap well above what the vast majority of individuals would hit, and below what any aggregate fund would hit. For instance, "long-term capital gains can only be applied to the first $150k of gains per year; gains above that are always taxed at the short-term rate".

> They get the relative burden of taxation shifted off the of other sources of income, including the source they are using to get money to pay for retirement. (The specific effect depends on how that relative shift is used.)

You say that as though an increase in taxes here will be used to decrease taxes elsewhere. That does not match the reality of changes to tax law; tax revenue will simply increase, with no changes to taxes elsewhere.

> In any case, if the current favorable treatment of capital is inequitable, there is no entitlement for people to expect it to continue going forward.

There is no entitlement for government to apply arbitrary taxes and expect people to bear it, either, without providing a commensurate improvement in value.

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

#70

Post by ssanders82 »

auntienomen wrote: post #41
Tycho wrote: post #40

Earlier quoted context omitted.

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).

One other wibble: the 35% isn't the average, but rather the smallest annual return.

"average annual return of more than 35 percent"

I don't think they meant every year was greater than 35%, I interpreted it as the overall average is more than 35%.

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