Have you been damaged as a result of a basket options transaction recommended to you by a brokerage firm?

On July 14, 2015, the IRS issued Notice 2015-47, which classified certain “basket option contracts” used by hedge funds to avoid or reduce their tax liabilities as “listed” tax shelter. Devotees of basket option contracts – usually hedge funds, including high volume trading funds, take the position that short-term gains, interest, dividend and other ordinary periodic income from the performance of the notional basket are deferred until the basket option contract ends. According to that view, if the basket option contract is held for more than one year, then the entire gain is treated as long-term capital gain at the lower capital gains tax rate.

The government, however, considers these structured transactions to be tax avoidance vehicles created to defer income recognition and to convert ordinary income and gains into long-term capital gains.  According to a Senate Report released in March of this year:

The basket options sold by Deutsche Bank AG starting in 1998, and by Barclays Bank PLC since 2002, produced a total of more than $35 billion in trading profits, of which at least $34 billion came from options exercised after more than one year. Most of those profits came from assets which were held for less than one year but which were treated by the hedge funds holding the options as having produced long-term capital gains taxable at the lower long-term capital gains rate. The options were also used by the participating hedge funds to trade on borrowed funds using a leverage ratio of as much as 20:1, versus the much lower federal leverage limit of 2:1 that normally applies to brokerage accounts held by U.S. broker-dealers for their clients. These financially engineered products – which relied on high volume trading, leveraged funds, and artificially lowered tax rates to produce their profits – warrant greater attention from federal tax, securities, and banking regulators to prevent their continued misuse.

In this investigation, the Senate Subcommittee likely has or will subpoena records from Deutsche Bank AG, Barclays Bank PLC, Renaissance Technologies, George Weiss Associates, and BDO Seidman (all entities allegedly involved in the tax strategy). The Banks – first Deutsche Bank and later Barclays – developed and marketed structured financial products called MAPS and COLT to at least 13 hedge funds, which used them to avoid federal taxes and leverage limits on buying securities with borrowed funds. While such funds and its investors may now be exposed to hundreds of millions of dollars in back taxes and penalties, Deutsche Bank and Barclays have generated fee revenue of $570 million and $655 million respectively.

The White Law Group is investigating the liability that Deutsche Bank and Barclays may have for these Basket Options Transactions.  If you believe you or the fund you invested in may have issues arising from the new treatment of Basket Options Transactions by the IRS, please contact the securities attorneys of The White Law Group at 312/238-9650 for a free consultation.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Franklin, Tennessee.  The firm represents clients throughout the country in claims against brokerage firms.

For more information on the firm, visit http://whitesecuritieslaw.com.

For a copy of IRS Notice 2015-47 go to:  http://www.irs.gov/pub/irs-drop/n-15-47.pdf

For related stories, see:  http://www.nytimes.com/2015/07/09/business/dealbook/irs-cracks-down-on-hedge-fund-tax-strategy.html?_r=0

http://www.bloomberg.com/politics/articles/2015-07-08/irs-moves-against-hedge-fund-maneuver-once-used-by-renaissance