David Schultz (Bloomberg), Highland Capital Says IRS Wrongly Taxed Great Recession Hedge:
A troubled securities trading firm says the IRS is improperly taxing a more than $166 million hedge it made at the outset of the Great Recession.
Highland Capital Management filed a petition in US Tax Court Aug. 7 after the IRS readjusted its income for the 2008 tax year to add this $166 million to its total short-term capital gains. The Dallas-based firm said this money was not a gain but, rather, a hedge against the possibility that a market downturn would take a huge chunk out of its performance-based fees.
Highland Capital said this hedge worked as intended because the ensuing downturn was “as bad as, if not worse than, Highland Capital Management had expected,” with its performance feeds declining by 85% by the end of 2008.
The firm said it deferred the realization of income from this hedge for 10 years, as allowed by Treas. Reg. § 1.446-4, and therefore shouldn’t have to pay back taxes and penalties for its 2008 tax year.
Highland declared bankruptcy in 2019 and emerged with a reorganization plan two years later. But the firm has been embroiled in litigation ever since against its co-founder and one-time CEO, James Dondero. Earlier this summer, the US Supreme Court declined Highland’s cert petition that asked the justices to review a bankruptcy court’s authority to screen lawsuits and shield certain restructuring professionals from liability.
Highland is represented by Morgan, Lewis & Bockius LLP. The IRS did not respond to questions in time for this story.
The case is Highland Cap. Mgmt. v. Commissioner , T.C., No. 6949-26, petition, 8/7/26.
