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Comment by vmception | Hacker News Reader

IRAs can be shareholders in anything. They can be 100% shareholders as well. They can even form their own companies from the beginning.

Being a minor shareholder in a corporation isn't a prohibited transaction or run afoul of self dealing regulations.

Even in circumstances that they would, you having less than X% of voting shares mitigates that, the X depending on what type of tax deferred or exempt entity is in question. SOME tax deferred/exempt entities have stricter self dealing regulations and even they wouldnt have had an issue here as Peter Thiel was one of several co-founders.

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But if you work for a company owned mostly by your Roth IRA, that's easily abused.

Suppose you're a consultant and your one-person consulting company is owned by your Roth IRA. You could deliberately draw a very small taxable salary, so that most of your work goes towards increasing the company's untaxed value in your IRA.

You're basically making your earnings tax free.

Obviously, your Roth IRA's company employing you at below market rate isn't a fair, arms length transaction.

Okay. Don't mess it up.

The problem would be buying the company with the roth, not the wages afterwards.

It is completely legal to own a company and pay yourself below market rate, or even not at all. In fact, it is how many small business work.

In your example, the company still has to pay corporate tax, even though it is owned by the IRA.

The only tax advantage to your consulting scheme would come at the time you sold it to someone else, or liquidated it.

It is not legal to own an USA S-Corp and pay yourself a below market rate.

That is a good point. S-Corps are an exception, because the corporations do not handle income tax the way a C-corp would.

>But if you work for a company <i>owned mostly by your Roth IRA</i>, that's easily abused.

As I understand it, you can't own a company that you(or a relative) own a controlling interest in with your IRA. I can see the sense in this because if own 20% the person(people) who own the other 80% have an incentive to make sure I'm not playing any kind of games with the finances.

In the case of Thiel, it seems like he took $2000 and made a moonshot investment in Paypal. At that point his investment could have just as easily went to $0 as it was to hit $5 billion. He took the risk, why shouldn't he have gotten the reward?

> He took the risk, why shouldn't he have gotten the reward?

And he should get the reward, minus capital gains tax.

This country provided an environment for that investment to turn into five billion. He couldn't have done the same thing in Somalia, or Vietnam, or Greece. Why shouldn't it reap its share?

Nearly everyone else pays their fair share of taxes.

He invested a tax advantaged $2000. If he had invested that $2000 in the S&P 500 in 1995 he would have a tax advantaged $25,000. He would have been out that tax advantaged $25,000 if paypal didn't take off. Instead he decided to make a much longer shot bet and for him it paid off.

I can understand adding legislation that would tax distributions on Roth IRA's for billionaires. Thiel would be fine if he had to pay taxes on that windfall.

I just think that it is a mischaracterization that he isn't paying his fair share of taxes. To me, it doesn't seem like he did anything wrong. He took advantage of a system that is accessible to everyone.

The issue is as far as people can tell he illegally invested 2000$ from an IRA. You’re not allowed to invest in a company with an IRA if:

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) https://uscode.house.gov/view.xhtml?hl=false&edition=1994&re...

Being the CEO clearly qualifies. That said, the statute of limitations means you can often get away with things if they go unreported for long enough. It may be he’s currently in the clear.

The article says he was audited.

> In 2011, Thiel caught the attention of the IRS. The agency launched an audit, tax records show. The records don’t spell out what the IRS was looking at or if it involved Thiel’s Roth. Whatever the case, the audit was closed years later and Thiel didn’t owe any more taxes, tax records show.

He was CEO of PayPal until 2002, which means in 2011 this would presumably be past the statute of limitations for many things. It’s unclear if this falls under Tax Fraud or not.

> That said, the statute of limitations means you can often get away with things if they go unreported for long enough.

What I find most interesting in regards to this is that by the time there was any reportable gain (2002 sale), and thus any reason it would even be looked at, the 3 year statute of limitations would be up on the initial prohibited transaction. Which is... interesting.

> Nearly everyone else pays their fair share of taxes.

It seems the whole point of these Roth IRA is so people don't have to pay their fair share of taxes. I'd blame the government for creating that.

I think the problem is these IRAs were not designed to shield the super rich from taxes. It's meant to help the average person. Implemented properly it should have an upper limit, probably under a million dollars. Letting it grow to five billion tax free is a loophole that shouldn't exist and does not benefit society at large.

> IRAs can be shareholders in anything. They can be 100% shareholders as well. They can even form their own companies from the beginning. > Being a minor shareholder in a corporation isn't a prohibited transaction or run afoul of self dealing regulations.

Yes, obviously, and is exactly how the real estate example I provided works. The IRA opened a company. Obviously it is a company in order to financially benefit the owner of the IRA. That's literally the whole point of investing, and is not what I am debating here.

It is different when you are then taking an active role in the day-to-day management and/or operation of that business, which is obviously what Thiel did at PayPal.

Oh by property that to you meant real estate, I didnt catch that

Peter Theil did not have 100% voting shares of Paypal, and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.

That would work now as well, but it is also possible that it worked better 22 years ago as the IRS may have lacked clarity back then.

> Peter Theil did not have 100% voting shares of Paypal,

First, that's not the requirement.

> and if he did that went away very soon after with the other co founders and investors diluting him fast enough for it to satisfy IRS regulations.

Your argument here is "even if he made illegal investments into a tax-advantaged account that has set him up to not pay taxes on 50000000000 dollars, we should ignore it because if he made the investment later it wouldn't have been illegal".

By that logic let's just throw out insider trading laws. "Well if he made the investment after the information was public, it would have been fine"

> the IRS may have lacked clarity back then.

They didn't. It was still explicitly not allowed for a officer/director of a company, someone with a similar role, > 10% share-holder, etc to make investments like this with a Roth IRA.

Peter Theil was a 3.5% shareholder in 2002 when it was sold to Ebay

He likely was within the thresholds back in 1999 or very quickly after

its director && >= 10%

not or

but feel free to split hairs about that nuance, this isnt an area the IRS is splitting hairs, they go with the percent ownership

Owning 3.5% after a acquisition by/merger with x.com, and raising $200M in funding is not anywhere near the same thing as owning 3.5% at the time of the Confinity founding (which is apparently why $0.001/share is valid?).

It doesn't matter if the ownership percentage changed quickly throughout the year of 1999

These kinds of sanctions are based on the result by time of reporting or audit, not by their mere action

and as we’ve already gone over, he very well may have chosen to pay a self reported penalty if his accountant’s tax software just spit out that additional number of $2000

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