Comment by runako | Hacker News Reader

Comment by runako | Hacker News Reader

IANAL but this topic is of interest.

Without commenting on whether this was legal at the time Thiel made this transaction, it appears it would not be permissible under current tax law. (Update: the relevant text in the statute appears to have been in effect as early as 1995: https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re...) Specifically, the law explicitly disqualifies anyone who is:

>an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G)

(Source: https://www.law.cornell.edu/uscode/text/26/4975)

So the relatively plain language would almost certainly include anyone who's a co-founder involved in actively managing a company today.

This kind of blatant tax avoidance is going to end badly for our tax regime, which is likely to overcorrect.

I was surprised by that also. Here's what I found and shared in an earlier comment in this submission.

I asked a friend who has a CPA, but doesn't work in tax law. Their first comment after briefly scanning the legal code is that "disqualified person" is only used within the context of "prohibited transaction". The definition of "prohibited transaction" concerning "disqualified person" doesn't seem to address this case. Instead, it seems to focus on dealing with the Roth IRA assets in a manner to benefits ones accounts outside of the Roth.

Very interesting. The Retirement Industry Trust has a long page:

https://ritaus.org/how-to-avoid-prohibited-transactions/

It's also confusing. In their "do's":

> Don’t provide more than ministerial services (e.g., decision-making) to your IRA or IRA owned entity (e.g., no “sweat equity”);

But in the "Don'ts":

"Do consider using an IRA when you, a relative or friend starts a new business."

Here's another writeup around that provision by a CFP:

https://www.kitces.com/blog/self-directed-ira-prohibited-tra...

Key quote:

> "However, if someone establishes a self-directed IRA with the aim to invest IRA dollars into a small private held business that they control or own – such that the business entity, and/or their role in the business, can cause it to be a disqualified person – there is a risk that allocating IRA dollars to own that business can cause the IRA itself to become disqualified (and treated as fully distributed as a taxable event). After all, if the IRA puts money into the business, and the business then uses that money to pay a salary to the IRA owner (as an officer of the business), the IRA owner has effectively used the assets of the IRA to enrich themselves."

That addresses the self-dealing part of a transaction like this that would be a common-sense red flag. This is all clear as mud; I'm definitely confused enough that I'll be asking my CPA for a recommendation.

He was 3.5% shareholder when it was sold to eBay in 2002, he was likely under 10% at the time the IRA made the purchase or shortly thereafter

Director && % must be satisfied simultaneously

The IRS enforces this and thats what they look for

Nobody else is able to interpret that part of the law to cause an action

Solid finding.

Maybe he was already diluted by other investors to under 10%? And usually founders aren’t highly compensated.

"an officer, director (or an individual having powers or responsibilities similar to those of officers or directors)"

Oops I missed that. You are right then. I wonder if this changed since 1999…

I updated my post. This provision appears to date to at least 1995.

(IANAL so again I could be misreading something.)

They're wrong you must satisfy both conditions

The IRS enforces this and they enforce both conditions. Director && >= 10%

So either PayPal was earlier enough that you can make an argument that a "fair price" was $0.001 per share, OR you can make an argument that Thiel owned less than 10% of the company at the time. Seeing as there were only 3 original founders at the time of Confinity incorporation, I highly doubt that Thiel had a <10% ownership.

This is even more clear given that he (apparently) owned ~3.5% of PayPal in 2002, which is after the x.com acquision/merger, and raising ~$200M in VC funds.

Either Thiel has a valid argument for claiming a fair price of $0.001/share, or he owned more than 10% of the company.

You don't get it both ways.

Correct, these are the accurate things to consider

And also must be weighed against the consequences

He very well could have paid the 100% penalty of $2000 that year and still kept the asset in the Roth IRA because the desired consequence was still so much greater and worth it. It was 1999 at the peak of that tech bubble

There is also the possibility that the ownership % state changed so fast within the same year that you could look at the average % and wind up satisfying the condition with no penalty

There is also the possibility that the IRS was asleep and lost their chance to levy a penalty by now

All is possible

Allowing someone to make a prohibited transaction and then simply pay a 100% penalty after-the-fact, especially when the initial transaction was extremely-low-priced to begin with, is clearly open for abuse. What is to stop me from selling myself a couple houses into my IRA for $5 a piece, saying "whoops, I guess that was a prohibited transaction. I'll pay the 100% penalty of $5."

That is why IRC Section 408(e)(2) stipulates that the IRA itself is fully “disqualified” – which means it loses its tax-deferred status, and is treated as though it was fully liquidated in a taxable distribution as of January 1st of the tax year in which the prohibited transaction occurred.

Disqualification notably only occurs with prohibited transactions between the owner/beneficiary. Not entities where the owner is a director, that can only incur a penalty. If the transaction isn’t unwound its a 100% penalty.

Try this source or find a similar source that you respect:

https://www.kitces.com/blog/self-directed-ira-prohibited-tra...

The law itself doesn't make that very clear, thats how its been interpreted and acted upon

Again, we are still starting from two different assumptions: I dont consider earning money to be abusive, I dont consider taking risks with your own private equity in a tax deferred account to be abusive. Its great that these accounts are allowed to take risks.

Its an && statement, not an or

You must be an officer with greater than or equal than 10%

IANAL, but I believe you are misinterpreting the clause - the clause disqualifies an officer or 10% shareholder of (subparagraph G:) a corporation that is >= 50% owned by (subparagraph A:) a fiduciary (owner of the IRA).

But Thiel did not own >= 50% of PayPal.

No reads like a list where each clause there is separate so being a director or officer would be a disqualified person.

That does not make sense. Then the clause would disqualify "an officer" of anything.

No only owning shares in their IRA of the company they're directly an officer in. It's limited in scope to essentially people with significant control in a corporation.

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