TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, April 16, 2018

WSJ: Hedge-Fund Star John Paulson Owes $1 Billion In Taxes Tomorrow

Wall Street Journal, Worried About Your Tax Bill? Hedge-Fund Star John Paulson Owes $1 Billion:

John Paulson won fame after he made one of the greatest financial bets of all time. What comes next? One of the largest-ever personal tax bills.

By April 17, the hedge-fund manager must make federal and state tax payments of about $1 billion, on top of roughly $500 million in taxes he paid late last year, said people close to the firm. That sum is so big it dwarfs the maximum amount the Internal Revenue Service will allow any single taxpayer to pay with a single check. (That’s $99,999,999, in case you’re wondering.)

Mr. Paulson bet big against subprime mortgages ahead of last decade’s financial crisis, earning about $15 billion of profits for his funds and approximately $4 billion for himself. He deferred the bulk of the taxes on these profits, using a tax provision available at the time to hedge-fund managers, said the people close to the firm. Now the bill is due. ...

“It is safe to say it is one of the largest tax bills on earned income in history,” said Henry Bregstein, co-global head of the financial services group at the law firm Katten Muchin Rosenman LLP. Billionaires in the technology and private-equity worlds usually achieved the bulk of their wealth through the appreciation of shares, he said, not from earned income. Mr. Paulson declined to be interviewed for this article.

As with most hedge funds, Paulson & Co. enjoys profits from fees amounting to 20% of gains generated for investors. For decades, tax authorities allowed managers of hedge funds to defer receipt of this income. The IRS generally permits businesses to let executives defer compensation because that tends to lower the firms’ compensation costs, forcing them to pay higher taxes on profits. That offsets income taxes not immediately paid by the employees.

But in the case of offshore hedge funds that don’t pay offsetting U.S. taxes, including some operated by Mr. Paulson, the Treasury lost out. A 2008 tax change mandated by Congress gave Mr. Paulson and other hedge-fund managers until tax day of this year to pay taxes on money accumulated before the law changed. Other hedge-fund managers facing enormous tax bills include Steven Cohen, David Einhorn and Daniel Loeb, the Journal previously reported, citing people familiar with the matter. ...

Mr. Paulson has been turning to his Credit Opportunities fund—one of several funds he operates—for the money, the people close to the firm said. This fund held about $3.5 billion in assets late last year, the bulk represented by Mr. Paulson’s own interests. He pulled about $500 million from the fund late last year to make an initial tax payment and will pay another $1 billion from the fund by April 17, the people said. Mr. Paulson is the largest investor in the fund, which gained 10% last year, one of these people said. ...

Paying the tax bill may itself be something of a chore for Mr. Paulson. He could wire the money but may wish to pay by check if he’ll earn interest on the money until tax authorities cash the check. If so, the IRS accepts only checks or money orders of less than $100 million. He could submit multiple payments, though tax attorneys note that clients can have problems fitting such huge numbers onto the line on a check.

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