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He lied about the value of the PayPal shares he put in. That’s a problem.

No. If anything he exaggerated the value of those PayPal shares at the time of contribution. Assuming he made the contribution for tax year 1998, then PayPal hadn't yet raised any money and had no external valuation. The company was worthless at the time and the price-per-a-share was a formality of the initial incorporation. This is similar to most other early stage startups that are similarly worthless at founding.

You're splitting hairs. Treating gains from startup founder stock like gains from an investor who put in substantial amounts of money is just silly, and that part of the tax code should be fixed. It's just as abusive as the carried-interest provision.

If the person who started the company had zero access to capital, then claiming the company had no value at the beginning would be credible. Peter had substantial access to capital even in 1998-99. There was no question he was going to raise a boatload of money quickly after starting the company. Contributing shares of such a company to an IRA by claiming they're worth $1700 is just an abuse of the system.

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