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I'm not a finance guy, but I think the idea is this:

Ren says "we bought an option and held it for a year". The option's counterparty was a bank, I guess, so they just form a company to hold the bag, and the company that is created reports to the IRS that they don't have any assets, just a basket of assets to offset the option they're responsible for.

At the end of the contract (and there can be more than one of these going on at the same time) the assets can be sold, and would be sold, in order to pay for the option contract which was now held for a year. Some money would go to the broker for executing the trades over time, etc. but much less than the taxes that would otherwise be paid.

So, the part that has the tax man scratching his head is that if Ren was directing the buying and selling of the assets in the basket constantly, is that really holding on to an asset, or is it just a lie? They say they got a tax lawyer to sign off on it, so it goes to court to see if it's a defensible position. If not, they'll probably pay a slap on the wrist and won't get to do it again.

It's not done in isolation IIRC. This sounds a lot like how I understand swaps are done, so it may be that this is only slightly unusual.




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