This is the story of the tax break for cloning.
David Baszucki started a small video-game company in 2004. 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.
Mr. Baszucki's company, which makes one of the world's most popular video-gaming platforms, is worth about $60 billion. Mr. Baszucki is worth $7 billion.
He and his family are benefiting from a tax break for small businesses.
Mr. Baszucki and his relatives have been able to take the tax break multiple times. According to securities filings and people with knowledge of the matter, Mr. Baszucki and his family are poised to avoid millions of dollars in capital gains taxes.
The exemption is called the Qualified Small Business Stock. It allows early investors in companies to avoid taxes on at least $10 million in profits.
The goal was to get people to put money into small companies. It would be contorted into the latest tax dodge in Silicon Valley over the next three decades.
The tax-avoidance industry has made it possible for investors in hot tech companies to enlarge the tax break. It is possible to give shares in those companies to friends or relatives. Even though these recipients didn't put their money into the companies, they still inherit the tax break, and a further $10 million or more in profits becomes tax-free.
The savings for the richest American families can quickly swell into the tens of millions if they face a capital gains tax.
The tax breaks are piled on top of one another, which is known as stacking.
Christopher Karachale, a tax lawyer at the law firm Hanson Bridgett in San Francisco, said, "If you walk down University Avenue in Palo Alto, every person involved in tech stacks." He said he helped many families with their Q.S.B.S. tax benefit.
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Early investors in some of Silicon Valley's marquee start-ups, including Uber, have replicated a tax exemption by giving shares to family.
People who worked or were briefed on the tax strategies say that early investors in some of Silicon Valley's marquee start-ups have all replicated this tax exemption by giving shares to friends and family.
Industry officials and lawyers say that partners at top venture capital firms have figured out ways to claim tens of millions of dollars in tax exemptions for themselves and their families year after year.
Representatives of those companies did not respond to requests for comment. A spokesman for the company said that the two co-founders didn't take the tax benefit. A spokeswoman for Roblox wouldn't comment.
The story of the tax break is a big one. A loophole-laden law was enacted by Congress that benefits the ultrarich. Lobbyists don't like attempts to rein it in. Tax specialists at law, accounting and Wall Street firms transform it into something much more generous than what lawmakers had thought.
Daniel Hemel, a tax law professor at the University of Chicago, said that Q.S.B.S. is an example of a provision that is already outrageous. The provision becomes preposterous when you get smart tax lawyers in the room.
The tax break will cost the government at least $60 billion over the next decade according to a director of the Center on Tax Law at the University of California, Hastings. The true cost of the tax break is probably many times higher because that doesn't include taxes avoided by stacking.
The Q.S.B.S. benefit is being proposed by the Biden administration. The plan wouldn't prevent wealthy investors from taking advantage of the tax break.
Paul Lee, the chief tax strategist at Northern Trust Wealth Management, said that the likely result would be more tax avoidance. He said that you will end up with more people doing more planning.
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Senator Dale Bumpers was an original congressional backer of the tax break.
The idea for a tax break came from the venture capital industry. Early investments in high-flying start-ups like MedImmune and Gilead Sciences were raking in huge profits for venture capital firms.
They had hefty capital-gains tax bills. The Q.S.B.S. exemption would protect them from taxation in the future.
Democrats said the tax break was a boon to small businesses and an engine of job creation. The National Venture Capital Association supported Senator Dale Bumpers in Congress. He said in early 1993 that the tax incentive held great promise for hundreds of thousands of small firms with good ideas but not enough capital.
Mr. Bumpers was friends with President Bill Clinton, who embraced the cause within weeks of taking power.
The exemption became law. It allowed investors in eligible companies to avoid half the taxes on up to $10 million in capital gains if they paid their shares in full.
There were some restrictions. To be eligible for the tax break, investors had to hold the shares for at least five years. Accounting and architecture were not included. The companies had to have less than $50 million in assets at the time of their investments.
That number was not randomly picked. The new professional hockey team, the Mighty Ducks of Anaheim, was created with a price tag of $50 million. The team was owned by the Disney company. The congressional aide who worked on the legislation said that Disney risked a public backlash if it were to benefit from the tax break.
The Q.S.B.S. tax break is not publicly disclosed by the IRS. Tax lawyers said it was slow to gain popularity. It would take decades for Silicon Valley to fully exploit it.
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About a decade ago, Mr. Baszucki and his wife, Jan Ellison, gave their four children and other family members a share in the company.
Mr. Baszucki started a software company after graduating from college. He sold it for $20 million.
Mr. Baszucki and his former colleague, Erik Cassel, formed a new venture after a brief detour into radio. They spent two years writing the computer code that would become an early version of Roblox, mostly using Mr. Baszucki's money.
Roblox was a place for players to find and play video games featuring virtual pets and murder mysteries. The platform allowed users to make games and make money from them.
The Baszucki family gave their children and other family members Roblox shares about a decade ago after outside investors began pouring in millions of dollars.
The gifts appeared to have been planned. The Baszuckis could avoid hundreds of millions of dollars in future gift and estate taxes if they ever became a Silicon Valley powerhouse.
The gift recipients could be eligible for millions of dollars in profits without capital gains taxes if they met the criteria for the small-business tax break.
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. The tax break has become more attractive because of the explosion.
The tax experts had found a big loophole. The benefit was off-limits to people who bought shares from other investors, but there was no restriction on people who received the shares as gifts.
If investors give shares to family or friends, they could also be eligible for the tax break. There was no limit on the number of gifts they could make.
Lawyers, accountants and investors say that Stacking became a way of life for a small group of Silicon Valley millionaires.
A tax adviser said he was helping a family that founded a publicly traded tech company avoid taxes on more than $150 million in profits by giving shares to more than seven of their children.
Mr. Karachale said he jokes to his clients that they should have more children so they don't have to pay taxes. He said that the Q.S.B.S. exemption was the only good reason to have another child.
Investment banks and law firms have advised wealthy founders and their families on the strategy.
Stacking has become so common that it has spawned other nicknames. The tax benefit can be spread among the original investor's relatives, which is referred to aspeanut buttering.
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Rachel Romer Carlson did not use the tax break because she thought the strategy was shady.
The Q.S.B.S. tax break was available to Guild Education, which Rachel Romer Carlson helped found.
Ms. Carlson owns 15 percent of the company. If she sells her stake, she will face a huge capital gains tax bill. She said that a tax adviser told her to distribute her shares into trusts.
She recalled the lawyer saying that she could take this for an infinite number of times. She was told by the adviser 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 thought the strategy sounded shady. She believes paying taxes is an act of patriotism. The Q.S.B.S. exemption saved her $200,000 in taxes when she sold $1 million worth of Guild shares last year.
The same group that pushed for this tax break in the first place may have the most to gain.
The founder of a successful start-up might get a tax-free opportunity once in a lifetime. The opportunity can be presented several times a year at large venture capital firms.
The partners at venture capital firms often own shares in the companies they invest in. He can avoid capital gains taxes on at least $10 million of profits if he invests in a Q.S.B.S.-eligible company. If he gives shares to his family, they will also get a tax break.
In a good year, partners at a large firm can collectively rack up more than $1 billion in tax-free profits.
The strategies for exploiting the tax break have grown more aggressive.
The Q.S.B.S. tax break is limited to either $10 million in tax-free capital gains or 10 times the original investment. The tax basis is the cost of an investment, which is the money you spent or assets you contributed in exchange for shares. One way to increase the value of the tax break is to inflate the basis.
The strategy is called packing.
You invested $1 million in a business called Little Company. You can avoid taxes on $10 million of future profits if your basis is $1 million.
Let's say you want to save more. Here is how you can increase the basis. You own a new company that you own Little Company's software patents. The patents will be worth $5 million. You combine the two companies. Your investment in the original Little Company has grown to $6 million. Even though your out-of-pocket investment remains $1 million, you are eligible to avoid taxes on 10 times that amount.
A tax lawyer recently helped two clients completely avoid taxes on more than $100 million in capital gains.
Multiple trusts that benefit the same children have become a common strategy.
The Treasury Department proposed regulations to curb tax avoidance. There are examples of abusive transactions in which children are given multiple trusts.
The opposition mounted quickly. The American College of Trust and Estate Counsel, a group of tax lawyers who advise the wealthy, wrote to the I.R.S. saying that the proposal was impermissible.
The Treasury's rules on trusts were completed in early 2019.
It was, the accounting giant said in an online alert.
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The New York Times has a story on the Roblox Developers Conference in San Francisco.
More than 47 million people use the platform each day. It has become a venue for virtual concerts by the likes ofLil Nas X.
The company was valued at about $4 billion in early 2020. Roblox was going to go public in late 2020 or early 2021.
The Baszuckis were going to become billionaires.
The family took steps to protect their wealth from federal taxes.
Giving away the shares before the I.P.O. would make it easier to avoid federal gift and estate taxes.
Mr. Baszucki and Ms. Ellison had already given away so many shares that they would have to pay a 40 percent gift tax on future large gifts. A married couple can give $23 million over their lifetime without paying tax.
Mr. Baszucki's mother-in-law had not. People familiar with the matter say that she began giving away Roblox shares to her relatives in the fall of 2020.
Nolan Griswold said that he received shares last fall.
The exemption for Ms. Elmore's shares was replicated for the recipients of her gifts.
In March of 2021, Roblox went public. Its market value was $45 billion.
Gregory Baszucki, Mr. Baszucki's brother, began selling shares. The Q.S.B.S. exemption could be used to defray capital gains taxes.
David Gelles and Kellen Browning were involved in the reporting. The research was contributed by Kitty Bennett.
