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A Lavish Tax Dodge for the Ultrawealthy Is Easily Multiplied

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This is the story of the incredible cloning tax break.

In 2004, David Baszucki, fresh off a stint as a radio host in Santa Cruz, Calif., started a tiny video-game company. It was eligible for a tax break that lets investors in small businesses avoid millions of dollars in capital gains taxes if the start-ups hit it big.

Today Mr. Baszucki’s company, Roblox, the maker of one of the world’s most popular video-gaming platforms, is valued at about $60 billion. Mr. Baszucki is worth an estimated $7 billion.

Yet he and his extended family are reaping big benefits from a tax break aimed at small businesses.

Mr. Baszucki and his relatives have been able to multiply the tax break at least 12 times. Among those poised to avoid millions of dollars in capital gains taxes are Mr. Baszucki’s wife, his four children, his mother-in-law and even his first cousin-in-law, according to securities filings and people with knowledge of the matter.

The tax break is known as the Qualified Small Business Stock, or Q.S.B.S., exemption. It allows early investors in companies in many industries to avoid taxes on at least $10 million in profits.

The goal, when it was established in the early 1990s, was to coax people to put money into small companies. But over the next three decades, it would be contorted into the latest tax dodge in Silicon Valley, where new billionaires seem to sprout each week.

Thanks to the ingenuity of the tax-avoidance industry, investors in hot tech companies are exponentially enlarging the tax break. The trick is to give shares in those companies to friends or relatives. Even though these recipients didn’t put their money into the companies, they nonetheless inherit the tax break, and a further $10 million or more in profits becomes tax-free.

The savings for the richest American families — who would otherwise face a 23.8 percent capital gains tax — can quickly swell into the tens of millions.

The maneuver, which is legal, is known as “stacking,” because the tax breaks are piled on top of one another.

“If you walk down University Avenue in Palo Alto, every person involved in tech stacks,” said Christopher Karachale, a tax lawyer at the law firm Hanson Bridgett in San Francisco. He said he had helped dozens of families multiply the tax benefit.

Early investors in some of Silicon Valley’s marquee start-ups — including Uber, Lyft, Airbnb, Zoom, Pinterest and DoorDash — have all replicated this tax exemption by giving shares to friends and family, according to people who worked or were briefed on the tax strategies.

So have partners at top venture capital firms like Andreessen Horowitz, who have figured out ways to claim tens of millions of dollars in tax exemptions for themselves and relatives year after year, according to industry officials and lawyers.

Representatives of those companies declined to comment or didn’t respond to requests for comment. A Lyft spokesman said the company’s two co-founders didn’t take the tax benefit. A Roblox spokeswoman declined to comment.

The story of the tax break is in many ways the story of U.S. tax policy writ large. Congress enacts a loophole-laden law whose benefits skew toward the ultrarich. Lobbyists defeat efforts to rein it in. Then creative tax specialists at law, accounting and Wall Street firms transform it into something far more generous than what lawmakers had contemplated.

“Q.S.B.S. is an example of a provision that is on its face already outrageous,” said Daniel Hemel, a tax law professor at the University of Chicago. “But when you get smart tax lawyers in the room, the provision becomes, in practice, preposterous.”

Manoj Viswanathan, who is a director of the Center on Tax Law at the University of California, Hastings, estimates the tax break will cost the government at least $60 billion over the coming decade. But that doesn’t include taxes avoided by stacking, and so the true cost of the tax break is probably many times higher.

The Biden administration has proposed shrinking the benefit by more than half. But the plan wouldn’t restrict wealthy investors from multiplying the tax break.

The likely result, said Paul Lee, the chief tax strategist at Northern Trust Wealth Management, would be even more tax avoidance. “You’ll end up having more people doing more planning to multiply the exclusion,” he said.

Stacking has become so common that it has spawned other nicknames. One is “peanut buttering” — a reference to the ease with which the tax benefit can be spread among the original investor’s relatives.

The idea for this tax break came from the venture capital and biotech industries in the early 1990s. Venture capital firms were raking in huge profits from early investments in high-flying start-ups like Gilead Sciences and MedImmune.

That stuck them with hefty capital-gains tax bills. The Q.S.B.S. exemption would shield at least a chunk of their future profits from taxation.

With the economy in a recession, Democrats branded the tax break as a boon to small businesses and an engine of job creation. In Congress, an original backer was Senator Dale Bumpers, and he had the support of the National Venture Capital Association. “This is a modest tax incentive that holds great promise for hundreds of thousands of small firms with good ideas but not enough capital,” he said in early 1993.

Mr. Bumpers was friends with his fellow Arkansas Democrat, President Bill Clinton, whose new administration embraced the cause within weeks of taking power.

The exemption became law in August 1993. It allowed investors in eligible companies to avoid half the taxes on up to $10 million in capital gains (it would later be changed to eliminate all taxes on the $10 million) or 10 times what the investors paid for their shares.

There were a few restrictions. To be eligible for the tax break, investors had to hold the shares for at least five years. Industries like architecture and accounting were excluded. And, at least in theory, the companies couldn’t be big: They had to have “gross assets” of $50 million or less at the time of the investments.

That number wasn’t picked at random. At the time, a new professional hockey team, the Mighty Ducks of Anaheim, had just been created with a price tag of $50 million. The team was owned by the Walt Disney Company. Lawmakers feared that if Disney stood to benefit from the tax break, it risked a public backlash, according to a congressional aide who worked on the legislation.

The Internal Revenue Service doesn’t publicly disclose data on how frequently the tax break is used. But tax lawyers said it was slow to gain popularity. It would be decades before Silicon Valley figured out how to fully exploit it.

A few years after graduating from Stanford University in 1985, Mr. Baszucki started a software company, Knowledge Revolution. He sold it in 1998 for $20 million.

Around 2004, after a brief detour into radio, Mr. Baszucki teamed up with a former colleague, Erik Cassel, on a new venture. Mostly using Mr. Baszucki’s money, they spent two years writing the computer code that would become an early version of Roblox, which they publicly introduced in 2007.

Roblox was a hub for players to find and play video games featuring virtual pets and murder mysteries and much more. The platform allowed users to create games and receive a portion of whatever revenue the games generated.

About a decade ago, after outside investors had begun kicking in millions of dollars, Mr. Baszucki and his wife, Jan Ellison, gave Roblox shares to their four children and other family members, according to people familiar with the matter.

The gifts appeared to be the product of estate planning. If Roblox ever became a Silicon Valley powerhouse, the Baszuckis could avoid hundreds of millions of dollars in future gift and estate taxes because they gave away shares when the company wasn’t worth much.

And because Roblox met the criteria for the small-business tax break, the gift recipients could also become eligible for millions of dollars in profits free of capital gains taxes.

In the past few years, a procession of blockbuster tech I.P.O.s has showered Silicon Valley in well over $1 trillion of new wealth, according to Jay R. Ritter, a finance professor at the University of Florida. The unprecedented explosion — and the corresponding tax bills — has made the Q.S.B.S. tax break more enticing.

Tax experts had discovered a big loophole. While the law said that the benefit was off-limits to people who bought shares from other investors, there was no similar restriction on people who received the shares as gifts.

If investors gave shares to family or friends, they, too, could be eligible for the tax break. And there were no limits on the number of gifts they could make.

Stacking was born — and it became a rite of passage for a select slice of Silicon Valley multimillionaires, according to lawyers, accountants and investors.

One tax adviser said he was helping a family, whose patriarch founded a publicly traded tech company, avoid any taxes on more than $150 million in profits by giving shares to more than seven of his children, among other maneuvers.

Mr. Karachale, the San Francisco tax lawyer, said he jokes to clients that they should have more children so they can avoid more taxes. “It’s so expensive to raise kids in the Bay Area, the only good justification to have another kid is to get another” Q.S.B.S. exemption, he said.

Investment banks like Goldman Sachs and Morgan Stanley and law firms like McDermott Will & Emery have advised wealthy founders and their families on the strategy, according to bankers, lawyers and others.

In 2015, Rachel Romer Carlson helped found an online education company, Guild Education, that was eligible for the tax break.

Guild was recently valued at nearly $4 billion, and Ms. Carlson owns about 15 percent of the company. She will face an enormous capital-gains tax bill if and when she sells her stake. To mitigate that, she said, a tax adviser urged her to distribute her shares into trusts to multiply the exemptions.

“You can then take this an infinite number of times,” she recalled the lawyer saying. The adviser, whom she wouldn’t identify, told her that some lawyers will recommend creating 10 or more trusts but that his more-conservative advice was to limit the number to five.

Ms. Carlson said she rejected the advice because she thought the strategy, while perfectly legal, sounded shady. “I believe paying taxes is an act of patriotism,” she said. (When she sold about $1 million worth of Guild shares last year, the exemption saved her roughly $200,000 in taxes.)

Venture capitalists who invest in start-ups — the same group that pushed for this tax break in the first place — potentially have the most to gain.

The founder of a successful start-up might get this tax-free opportunity once in a lifetime. At large venture capital firms, the opportunity can present itself several times a year.

Partners at venture capital firms often acquire shares in the companies in which their firms invest. For each Q.S.B.S.-eligible company that a partner has invested in, he can avoid capital gains taxes on at least $10 million of profits. If he gives shares to family members, those relatives get the tax break, too.

In a good year, partners at a large firm can collectively rack up more than $1 billion in tax-free profits, according to former partners at two major venture capital firms.

As the tax break’s popularity has grown, the strategies for exploiting it have grown more aggressive.

The benefit is limited to either $10 million in tax-free capital gains or 10 times the “basis” of the original investment. The tax basis is the cost of an investment — the money you spent or the assets you contributed in exchange for shares. One way to expand the value of the tax break is to find ways to inflate the basis.

The strategy is called “packing.”

Say you invested $1 million in a Q.S.B.S.-eligible business called Little Company. Your basis would be $1 million, which means you’d be eligible to avoid taxes on $10 million of future profits.

But let’s say you want to save more. Here’s how you can pump up the basis. Little Company developed software patents, and you put those patents into a new company that you also own. The patents grow to be worth $5 million. Then you merge the two companies. The basis for your investment in the original Little Company has now soared to $6 million. That means you are eligible to avoid taxes on 10 times that — $60 million — even though your out-of-pocket investment remains $1 million.

One tax lawyer said he recently used such a strategy to help a pair of clients completely avoid taxes on more than $100 million in capital gains.

Another increasingly common strategy has been to put shares into multiple trusts that benefit the same children.

In August 2018, the Trump administration’s Treasury Department proposed regulations to curb such tax avoidance. The rules included hypothetical examples of abusive transactions in which children were given multiple trusts.

But opposition mounted quickly. The next month, the American College of Trust and Estate Counsel, a trade group of tax lawyers who advise the wealthy, wrote to the I.R.S. that the proposal was “overbroad” and “an impermissible interpretation of the statute.”

By the time the Treasury’s rules were completed in early 2019, the proposed crackdown on trusts had been watered down.

It was, the accounting giant EY declared in an online alert, a “welcome relief.”

Roblox says that more than 47 million people use its platform each day. It has branched out beyond gaming, becoming a venue for virtual concerts by the likes of Lil Nas X.

In early 2020, Andreessen Horowitz and others invested $150 million in the company, valuing it at about $4 billion. Shares of tech companies were racing higher, and Roblox planned to go public in late 2020 or early 2021.

The Baszuckis were about to become billionaires.

The family took steps to help insulate their fortune from future federal taxes.

Giving away the shares before the I.P.O. — which was likely to drive the stock’s value higher — would make it easier to avoid federal gift and estate taxes.

Mr. Baszucki and Ms. Ellison had already given away so many shares that future large gifts would be subject to the 40 percent gift tax. (A married couple can give about $23 million over their lifetime without incurring the tax.)

But Mr. Baszucki’s mother-in-law, Susan Elmore, had not. In the fall of 2020, she began giving away Roblox shares to about a dozen relatives, including Mr. Baszucki’s four children, according to people familiar with the matter.

Ms. Elmore’s nephew, Nolan Griswold, said he was among those to receive shares last fall.

Ms. Elmore’s shares were eligible for the Q.S.B.S. exemption; now that exemption was replicated for the recipients of her gifts.

In March 2021, Roblox went public. Its market value hit $45 billion.

That day, Mr. Baszucki’s brother Gregory, whose large Roblox stake made him a billionaire, began selling shares. The resulting capital gains taxes could be defrayed in part by the exemption.

David Gelles and Kellen Browning contributed reporting. Kirsten Noyes and Kitty Bennett contributed research.



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Fashion Nova Is Fined for Suppressing Negative Reviews

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Retailers may want to think twice before removing negative reviews from their websites.

The Federal Trade Commission said on Tuesday that Fashion Nova, a popular fast-fashion clothing site, will be required to pay $4.2 million to settle allegations that it had suppressed customer reviews that gave products less than four out of five stars.

The agency said the case was its first involving a company’s efforts to conceal negative reviews.

Fashion Nova used a third-party product review system that held lower-starred reviews for approval before they could be posted, the F.T.C. said in a complaint. As early as 2015 and as late as 2019, Fashion Nova automatically posted four- and five-star reviews to its site but did not approve or publish hundreds of thousands of lower-starred, more negative reviews, according to the complaint.

While e-commerce has boomed, particularly during the pandemic, the ecosystem of online reviews remains relatively crude. The F.T.C. has sought to police companies like the skin-care brand Sunday Riley for posting fake reviews online in recent years, though this is the first instance of the agency challenging “review suppression.”

These actions by the F.T.C. tend to act as warning signals to other companies. The agency said on Tuesday that it had sent letters to 10 companies that offer review management services, telling them they cannot avoid collecting and publishing negative reviews.

In addition to the fine, Fashion Nova is barred from misrepresenting customer reviews or other endorsements.

“Deceptive review practices cheat consumers, undercut honest businesses and pollute online commerce,” Samuel Levine, the director of the F.T.C.’s Bureau of Consumer Protection, said in a statement.



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They Need Legal Advice on Debts. Should It Have to Come From Lawyers?

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The Rev. John Udo-Okon, a Pentecostal minister in the Bronx, has a lot of congregants who are sued by debt collectors and don’t know what to do.

Like most of the millions of Americans sued over consumer debt each year, Pastor Udo-Okon’s congregants typically cannot retain a lawyer. When they fail to respond to the suit, they lose the case by default.

“They don’t know how to fight back; they just give up, only they find out that their credit has been destroyed,” Pastor Udo-Okon said.

Pastor Udo-Okon would like to become a volunteer counselor and help people defend themselves against these suits by participating in a training program created by Upsolve, a financial-counseling nonprofit. The program would teach him how to walk people through the first steps of contesting a consumer debt lawsuit.

But there’s a catch: Offering tips on how to fight a suit would probably be illegal. Rules in New York, as in most states, forbid practicing law without a license, and giving individualized advice on how to respond to litigation is generally considered practicing law.

On Tuesday, Upsolve took a step aimed at undoing the catch: It filed a lawsuit against the state attorney general’s office in federal court in Manhattan, arguing that barring nonlawyers from giving the kind of basic advice Upsolve would teach them to offer would violate the First Amendment. Pastor Udo-Okon is a co-plaintiff.

Upsolve says a ruling in its favor would clear the way for thousands of lay professionals — social workers, clergy members, community organizers and the like — to help correct a gigantic imbalance in the legal playing field.

According to a 2020 Pew Charitable Trusts report, at least four million Americans a year are sued over consumer debt. Less than 10 percent retain lawyers, and more than 70 percent of cases end in default judgments against the defendant.

In 2018 and 2019, a total of 265,000 consumer debt suits were filed in city and district civil courts in New York State. Over 95 percent of the defendants were not represented by a lawyer, and of those, 88 percent did not respond to the suit, according to figures from the state court system.

Upsolve’s founder, Rohan Pavuluri, called the situation a “fundamental civil rights injustice.”

“What we have isn’t legal rights under the law,” he said. “What we have is legal rights if you can afford a lawyer.”

The office of New York’s attorney general, Letitia James, did not immediately respond Tuesday morning to a request for comment on the suit and to a question about whether the help Upsolve wants to offer would violate rules on the unlicensed practice of law. The New York State Bar Association, which represents lawyers, said it would not comment on pending litigation.

In America, consumers are served with suits alleging failure to make payments of all kinds, whether for phone bills or fish tanks. The most common subjects of debt collection suits include medical bills, credit card balances and auto loans.

Americans do not legitimately owe most of the debt they are sued for, according to consumer advocates. A 2010 report by the Legal Aid Society found that in more than one-third of debt-collection cases reviewed, the debt had already been paid or had resulted from mistaken identity or identity theft; the statute of limitations on collecting the debt had expired; or the debt had been shed in bankruptcy. ACA International, a trade group for debt collectors, did not immediately respond on Tuesday to a request for comment on the Legal Aid Society’s report.

Marshal Coleman, a veteran consumer lawyer in Manhattan, said that most consumer debt suits were over matters of a few thousand dollars. “Typically, if a client like that comes to a lawyer,” he said, “a lawyer’s not going to be able to help them because the fees will exceed the value of the services.”

There are legal aid organizations that offer free representation to low-income people, but they tend to focus their very limited resources on other matters, like domestic-violence protection orders, evictions and foreclosures. Legal Services NYC, the city’s biggest provider of free civil legal services, has 450 lawyers on staff. Only one concentrates on consumer debt suits.

Faced with the daunting prospect of fighting a suit on their own, many people simply ignore it and hope it goes away.

A New York State law requires a summons announcing a lawsuit to include a statement containing no fewer than 14 exclamation points: “THIS IS A COURT PAPER — A SUMMONS! DON’T THROW IT AWAY!!” it shouts. It later continues, “IF YOU CAN’T PAY FOR YOUR OWN LAWYER, BRING THESE PAPERS TO THIS COURT RIGHT AWAY. THE CLERK (PERSONAL APPEARANCE) WILL HELP YOU!!”

The summons does not include information about a multiple-choice form that you can fill out with 24 possible defenses. Some, like “I dispute the amount of the debt,” are simple. Others are more lawyerly and contain terms like “unconscionability” and “laches.” The form is available only in English.

This is where Upsolve hopes to come in. The nonprofit has produced an 18-page “justice advocate training guide” for volunteer counselors. The guide includes a script that explains each of the boxes on the state form in plain language and instructions for helping the defendant fill it out.

New York’s judiciary rules make it a criminal misdemeanor for someone who is not a registered and licensed attorney to practice law. Upsolve’s suit argues that coming together to provide and receive free legal advice is a form of speech and association covered by the First Amendment.

The suit does not seek to overturn the rules. Rather, it asks the court to evaluate Upsolve’s volunteer-counselor program and carve out protection for it. The suit notes that New York lets nonlawyers who pass an exam represent workers’ compensation claimants.

Upsolve also argues that applying the unauthorized-practice-of-law rules to its volunteer counselors would “impede the very interests” the rules are meant to advance: protecting consumers from being fleeced and safeguarding the integrity of the justice system.

Laurence Tribe, the liberal legal icon who headed an access-to-justice initiative in President Barack Obama’s Justice Department, said in an interview that demanding a law degree to help someone fill out a simple form serves largely to protect lawyers from competition. He said of Upsolve’s suit, “If you want a test case to bring sanity as well as constitutional values to a process in which the legal profession has edged out both, this is it.”

Upsolve’s suit contains affidavits from people who say they would have benefited greatly from free legal help.

Liz Jurado of Bay Shore, N.Y., received a notice in 2019 from the Suffolk County sheriff’s office concerning a bill for an epidural she had been given during labor more than a decade before.

Ms. Jurado, 45, who works at DoorDash, said she had never been served with a lawsuit, yet the notice said there had been a default judgment against her and that she owed an anesthesiologist over $12,000.

When she gave birth, doctors “didn’t give me an option and say, ‘Oh, by the way, this is not covered’ — there was no talk about insurance,” she said.

The debt forced Ms. Jurado into bankruptcy. She said that even if she had known about the suit before the default judgment was entered, she could not have afforded the thousands of dollars a lawyer would have charged to help her fight it.

“If I could afford the lawyer fees, I would have just paid the bill,” she said.

Christopher Lepre, 48, a technician at a power plant on Long Island, sent “multiple emails to many lawyers” seeking help after he received a default judgment demanding nearly $16,000 for a loan for a used, warranted S.U.V. he had bought.

None called back, he said.

His wages have been garnished by over $1,000 per month since early last year for the S.U.V., which stopped working three months after he bought it.

“In a couple more months, it’ll be paid off, but I’m still out all that money,” Mr. Lepre said. “I’ll never get it back.”



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OSHA withdraws its workplace vaccine rule.

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The Biden administration is withdrawing its requirement that large employers mandate workers be vaccinated or regularly tested, the Labor Department said on Tuesday.

In pulling the rule, the Labor Department recognized what most employers and industry experts said after the court’s ruling — that the emergency temporary standard could not be revived after the Supreme Court blocked it earlier this month.

“It’s their admitting what everyone had been saying, which is that the rule is dead,” said Brett Coburn, a lawyer at Alston & Bird.

The Supreme Court’s decision, which was 6 to 3, with the liberal justices in dissent, said the Labor Department’s Occupational Safety and Health Administration, or OSHA, did not have the authority to require workers to be vaccinated for coronavirus or tested weekly, describing the agency’s approach as “a blunt instrument.” The mandate would have applied to some 80 million people if it had not been struck down.

The Labor Department’s decision to withdraw the rule means that the outstanding legal proceedings will be dropped. The case was headed back to the U.S. Court of Appeals for the Sixth Circuit in Cincinnati for further consideration, though that court most likely would have followed the Supreme Court’s lead and struck it down.

OSHA could still try to move a version of the vaccine-or-test standard forward through its official rule-making process, such as one focused on high-hazard industries like meatpacking, but that would likely still face legal challenges, according to David Michaels, a former OSHA administrator and a professor at George Washington University.

Without the Labor Department’s standard in effect, employers are subject to a patchwork of state and local laws on Covid-19 workplace safety, with places like New York City requiring vaccine mandates and other governments banning them.

“OSHA continues to strongly encourage the vaccination of workers against the continuing dangers posed by Covid-19 in the workplace,” the Labor Department wrote in the notice of its withdrawal.



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