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Imagine your employer offered you access to a magical black box that promised to nearly triple your money every two years or so. Now imagine it figured out a way to make at least some of the money pouring out of that black box tax free.

Well, Renaissance Technologies built that black box, and for the last two decades has limited access to it exclusively to people who work at Renaissance Technologies: It’s called the Medallion Fund. And then it did indeed figure out a way to make at least some of the money Medallion mints tax free, by getting the Labor Department to sign off on Medallion as a place those employees could invest their Roth IRA contributions.

The thing is, even with all of the above, RenTech still didn’t think Medallion was making RenTechers quite enough money. So first it came up with a cute options trick to make any gains, no matter how quickly achieved, taxable as long-term capital gains—cutting the tax bill in half. Then it decided to waive its fees on the aforementioned tax-advantaged contributions entirely, essentially doubling the amount Medallion made for them every year.

The other thing is, though, the Treasury Department, and more specifically the Internal Revenue Service, isn’t quite as forgiving as the Labor Department. And waiving fees that can approach 50% annually looks to it an awful lot like either an effective breach of contribution limits to tax-advantaged retirement plans and foundations, or a massive—and, as far the IRS is concerned—taxable bonus. Or both. And so, less than a year after having to pay 80% of the tax they would have owed if not for the options gambit, RenTech’s got some more bad news for those not really familiar with the term: Medallion investors.

The firm cashed out investments in its Medallion fund that employees had made through certain tax-advantaged retirement accounts and private foundations, according to a regulatory filing…. The IRS has been arguing that these fee waivers could be considered taxable compensation to employees or as additional contributions to their IRA accounts -- and therefore subject to either income or excise taxes.

The good news is those employees still get to invest in Medallion, rather than, say, in one of RenTech’s other funds. And if those funds are ever able to turn a profit again, the geniuses in East Setauket still won’t have to pay their fair share of tax on their part of it.

Renaissance Hedge Fund Ends No-Fee Investment Perk After IRS Complaints [Bloomberg]

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