US federal tax authorities are seeking data from Citigroup and Lehman Brothers to determine whether complex derivatives trades they engineered for hedge-fund and other clients were designed primarily to avoid taxes, reports the Wall Street Journal, citing people familiar with the matter.
Citi and Lehman have received information document requests, or so-called IDRs, from the Internal Revenue Service relating to the use of derivatives by offshore investors, including some big hedge funds, to sidestep withholding taxes on US stock dividends, these people say. Many US hedge funds have offshore hubs, reports the Journal.
At issue are derivatives trades where securities firms buy stocks from offshore hedge-fund clients, and in return pay them the return of the stocks and any dividends they generate.