Game-making platform and young metaverse Roblox made the news yesterday at the center of a New York Times Report of a tax cut from the 1990s that got out of hand. The Qualified Small Business Stock (QSBS) was originally created to encourage small business investments.
I would say it seemed like a good idea at the time, but it really wasn’t. The 1993 Qualifying Small Business Stock Exemption was introduced to encourage more people to invest in startups by shielding a portion of a company’s profits from taxation. Originally, the exemption meant that an investor would be shielded from paying taxes on half of profits up to $ 10 million, but that was eventually changed to exempt the entire 10 million.
When Roblox Corporation was founded by David Baszucki in 2004, the company met all of the requirements for the QSBS exemption, mainly that the company had assets of $ 50 million or less. The New York Times notes that the 50 million figure was introduced because by the time the exemption went into effect, Disney had just formed the Mighty Ducks of Anaheim hockey team worth 50 million and lawmakers wanted to make sure it was a Disney -Businesses don’t apply for an exception for small businesses because that would be stupid.
But the US tax system is also stupid, coordinating a loopholes-laden exemption that would ultimately be abused in such a way that participation would be viewed as a right of passage for the ultra-rich of Silicon Valley. The problem with the QSBS exception is that it can be cloned. All you need is giving away shares to friends and family. Even though they didn’t invest in the company, they still qualify for the exemption, so you can ensure that large amounts of money stay in close proximity to your control without paying taxes on that cash.
According to financial reports and the New York Times‘ Sources, Roblox Founder David Baszucki was able to multiply the leave of absence 12 times by giving shares to his wife, four children and various other relatives. In autumn 2020, months before Roblox went public, Baszucki’s mother-in-law began giving away shares to relatives. Since they were given, these shares were also eligible for the exemption. In March 2021, Roblox went public with a value of 45 billion.
While this all sounds terrible and super-fraudulent, there is nothing illegal about this practice at all. It has a name, stacking, but is also known as peanut butter, an indication of how easily the exception spreads. Another example in the story is a tax advisor who helped his client avoid taxes on $ 150 million in profits by gifting stock to his seven children. A tax attorney jokes that he advises his clients to have more children in order to avoid more taxes.
Attempts have been made to modify the QSBS exemption, which is said to cost the government more than $ 60 billion over the next decade. Most recently, the Biden government proposed cutting the leave benefit by more than half, though such a move would likely only result in even more stacks to make up the difference.
While New York Times History used Roblox As a prime example, stacking occurs wherever super-rich business owners who started out small have family and friends to give a little bit of stock to. A tax bill passed nearly 30 years ago has turned into an amazing tax break over time that qualified businesses would not avail. Thank you Congress.
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