> Thiel had under 10% ownership of PayPal quick enough that year to comply with regulations (he had 3.5% ownership in 2002 when it was sold)

If you're arguing that these stock units were purchased when the "company" was created in 1998, then you're talking about Confinity (not "PayPal"), which only had 3 founders. Thiel was clearly a >10% shareholder at the time. Or are you trying to argue that Thiel had a 0% stake, because his IRA had all of his stake?

You're using a 3.5% number from 3 years later, after merging with x.com, and raising ~$170M.

> OR Thiel paid the penalty of $2,000 (100% penalty if transaction not undone) and didnt unwind the transaction, and still appreciated all the upside

This is the biggest cop-out excuse of "valid". By this logic I can sell myself (into my Roth) all of my assets every year for $1, pay a $1 penalty, and everything is a-okay.

Yes, you can use that logic, its up to you to make that valuable. Unless you have a market of VCs or massive liquidity lined up it is a big and bad bet.

The other side of the logic is that the ownership percentage can be bound to the tax year instead of just the moment of the transaction. So you would be using an average % ownership which could have changed rapidly.

And of course there is the simple reality that he paid a $2000 fine

The financial engineering has always been available, obviously for 20+ years, many people just hadnt been inspired to do it until now. There are plenty of similar possibilities available that considers multiple state paths of value to generate massive returns.

Buying even one founder share in your startup is self-dealing and a prohibited. The penalty is the whole account loses tax advantaged status, not a measly $2000.

But tax details are private and between Thiel and the IRS.

There is alot of flexibility in avoiding the loss of tax advantage status, which is why I point out the other penalties

Not according to the legal advice I received when I founded my company and attempted the Thiel trick.

Then you should have had your lawyer present case studies and real world examples of consequences and let that help you synthesize the outcome you wanted to follow

Are you a tax lawyer?