July 9 (Reuters) - The U.S. Internal Revenue Service iscracking down on hedge funds, challenging a tax strategy called"basket options" that is used to claim billions of dollars intax savings, the New York Times reported.
Hedge funds using the options must declare them on their taxreturns and they will be penalized if they fail to do so, thenewspaper reported, adding the new requirement was beingbackdated four years. (http://nyti.ms/1IKOUGL)
The head of a powerful U.S. Senate panel presented thefindings of a year-long probe into basket options last July,accusing Deutsche Bank AG and Barclays Plc of helping hedge funds avoid taxes and calling for tougheraction from the authorities.
The products offered by the banks were styled as options inan account that was nominally held by the bank, but was in factcontrolled by the hedge funds, which bought and sold the assets,and profited from taxable short-term trading, the panel said.
The hedge funds then paid the lower tax rate on long-termcapital gains, arguing that profits came from exercising theoption, rather than from the underlying short-term trades. Butthe options were fictional, the panel found.
The IRS said in 2010 that basket options do not functionlike an option and should not be treated as such, but thatopinion has no status as an official rule, and the IRS has notyet pressed any cases.
The new IRS guidance will apply retrospectively totransactions back to Jan. 1, 2011, the NYT reported. (Reporting by Supriya Kurane in Bengaluru; Editing by GopakumarWarrier)
Barclays (BARC)