Paulson Owes Billions In Back-Taxes On Big Bet Against Subprime

It's been a bad year for 'famed' hedge fund manager John Paulson... and it's about to get a lot worse.

After seeing his AUM plunge, amid crashes in some funds in January, Paulson axed a number of senior staff including his heads of equity and credit trading and then started returning money to investors in a number of his funds in March.

But none of that compares to what Paulson is facing now, as The Wall Street Journal reports, he is facing his largest-ever personal tax bill, stemming from his infamous bet against subprime mortgages.

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.)

After reaching a peak of $38 billion in AUM in 2011, of which roughly 50% was contributed by outside clients, Paulson now runs about $9 billion, 80% of which is his own money... so he will not be penniless after paying his taxes but he will be not be as flush as he once was.

WSJ reports that Paulson's tax bill is due from his 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.

To generate enough cash to let Mr. Paulson withdraw his money, Paulson has been selling investments including shares of Caesars Entertainment Corp. , people close to the firm said.