Media Coverage
Source: Hedge Fund Law Report
Media Coverage
Press Contacts: Erik Cummins, Matt Hyams, Taina Rosa, Olivia Thomas
09.16.25
On April 16, 2025, the U.S. Tax Court ruled against hedge fund GWA LLC, finding it was the tax owner of basket securities tied to options from RBC and Deutsche Bank and owed taxes on annual gains. GWA, which filed for bankruptcy in 2024, had argued that the gains were long-term and taxable only upon exercise of the options. The court rejected that position and the decision may signal increased IRS scrutiny of hedge funds using leverage and basket options. For our fulsome analysis of the decision, click here.
In an interview with the Hedge Fund Law Report, tax partner Mark Leeds discussed the issue of beneficial ownership in connection with the IRS’s approach in the case.
To determine the true owner of the basket securities—and the associated tax liability—the IRS looked beyond the banks’ nominal ownership and considered a wide range of facts and circumstances, Leeds observed. In challenging the IRS, GWA sought to focus on the fact that it bore the credit risk of the option counterparty, an approach narrower in scope than a full consideration of all relevant facts and circumstances might have warranted.
“Beneficial ownership, or tax ownership, is based on the totality of the facts and circumstances,” he said. “In this particular case, GWA exercised so much power over the securities within the basket that it would have been anomalous for the court to conclude that it wasn’t the owner.”
One factor the court considered was the “knockout feature,” which would terminate the contract and liquidate the securities if their value fell below a certain threshold. From GWA’s perspective, that feature could have suggested its ownership was conditional and limited. Leeds, however, noted that this claim falls apart under scrutiny, as GWA had the ability to prevent the knock-out by providing additional collateral.
Leeds further noted that the bank was indifferent to the performance of the securities.
“The bank wasn’t in the business of taking an actual view on the underlying securities,” he explained. “The bank was acting as a dealer—just attempting to earn a dealer’s income from the writing of the option.”
The bank was unwilling to keep the transaction open if it would have experienced a loss. “It just wanted to buy from X and sell to Y,” Leeds added. “So, if the [transaction] value started to experience a loss, that’s not a dealer transaction.”
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