In 2012 I reviewed Mitt Romney’s IRA for Mark Maremont of the Wall St. Journal, explaining the mechanics regarding how he amassed $100 million in this tax deferred account. This and related follow up stories in other publications after Maremont broke the story prompted the Senate Finance Committee to commission the Government Accounting Office (GAO) to analyze how IRA balances could exceed $100 million when the annual contribution limits are so modest.
Parish & Company later provided extensive analysis, commentary and guidance to the GAO and must say that I was thoroughly impressed with the organization’s professionalism. competence and independence. The following September 9, 2014 Bloomberg story by Margaret Collins and Rich Rubin is based upon the GAO report findings released in early September.
Less impressive is the cottage industry of legal and accounting firms promoting this tax evasion scheme.
Here is a summary of my comments provided for the story:
If you’re an entrepreneur, you can create more than one share class of stock at your company and put $1,000 in a standard or Roth IRA, said Bill Parish, president and chief investment officer at Parish & Co., an advisory firm based in Portland, Oregon. If some shares are valued as low as $0.000001, as Yelp Inc. reported in its S-1 filing with the Securities and Exchange Commission in 2012, that buys a chunk of equity. The key is that you transfer the stock directly from the company to your IRA,” Parish said . As the securities appreciate, investors can sell and diversify into other holdings tax-free until they withdraw funds. Or, in the case of a Roth IRA, the gains aren’t taxed at all, Parish said.
The story was well written by Collins and Rubin and the math is simply incredible. For example, if you value your stock at .000001, you can then put 10 million shares into your Roth IRA for a total cost of $10. It seems so ridiculous that you might pull out your own calculator to confirm this “wild claim.” And so while ordinary workers conform to standard limits on contributions, top executives at many start up companies like Yelp are using multiple classes of stock with one class valued artificially low in order to “stuff” their retirement accounts.
This September while enjoying a quiet lunch in Paris while my wife visited a museum a guy next to me tried to coach me how to order. It was an interesting conversation in French in which he noted that he was a Luxemborg born “tax specialist” that had a firm designed to help EU citizens hide their assets in bank accounts under his firms name in Asia. Perhaps he only confided in me upon realizing that I was an investment advisor, thinking I would think good for you.
I’ve got an interesting tax scenario for you, I replied, and proceeded to articulate how Yelps’s founder amassed a Roth IRA far in excess of $200 million using two classes of stock, one being artificially low valued yet still convertible 1 to 1 with the other class. What do you think, I added. Well, that is a ridiculous fraud he replied. Coming from the source, that struck me as rather interesting. Never knew his name, received his card nor wanted to.