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The IRS Releases Their Robs Report.

By Tim Berry, JD - Email Editor

Date : November 18, 2008

Dear Valued Reader,

I think it’s a safe assumption that readers of this newsletter are aware of the Robb Report magazine.  Basically it’s a catalog of the good life for the wannabe rich and famous. 

The steps are fairly simple.  The individual creates a new corporation and says it is a valid, operating, business.  The business then sponsors a retirement plan.  The individuals “old” retirement accounts are then rolled into the new retirement plan. The pièce de résistance is that the new retirement plan then uses all of its newfound assets to fund the new business.   The retirement plan owner has now effectively used their retirement assets as a venture capital investor to capitalize a business that will now employ the retirement plan owner.

In short, it theoretically allows an individual to use their retirement plan assets to fund their new business. 

While this has been going on for years, the silence on this subject from the IRS has been deafening.   There were a couple obligatory comments at pension conferences saying the IRS was looking into the transaction, but no guidance was issued.  On a recent continuing education teleconference, a group manager for the Tax Exempt and Government Entities Division of the Internal Revenue Service, made a comment that while they had over a hundred cases ready, they were on hold until an official pronouncement came from above. 

The official pronouncement has been issued.

On October 1st, Michael D. Julianelle, Director, Employee Plans issued “Guidelines regarding rollovers as business start-ups”.   In the memo, Mr. Julianelle says that the ROBS concept is not “non-compliant per se”  but then goes on to list a number of factors that examiners should review to make sure that the structure is established properly.   While a number of issues were raised in the memo, the main 2 methods of attack seem to be:

  1) Violation of non-discrimination requirements in that their plans are designed primarily to benefit the founder of the business, and not all of the employees;

 2) The transaction was a prohibited transaction based upon the theory that the company had little if any value on day one.  By directing the retirement plan to purchase shares of the corporation, the founder was causing the plan to overpay for the stock. 
 
So what could happen if the IRS  comes knocking on your door?  You should probably get legal representation immediately.  The penalties involved can be pretty draconian.  At a minimum you could be looking at between 15  and 100% excise taxes.  At the most extreme, the service could assert that you never had a retirement plan as you used the funds for personal use.  In that case you would be looking at back taxes, penalties and interest relating back to the date you engaged in the transaction.  In addition, if your ex-retirement plan assets are considered distributed, you’ve lost all that wonderful asset protection provided by retirement plans. 

If you think you can bury your head in the sand and the problem will go away, think again.  The memo specifically laid out a plan for finding those who have engaged in the ROBS transaction.  They are planning on reviewing the 5,500 returns filed by the retirement plans.  Also, the promoters of the concept have asked the IRS for determination letters that the plan document (not the strategy itself) was valid.  Mr. Juilianelle’s memo said they will review the determination letters issued to the promoters’ clients and track ROBS clients in that manner. 

If you’ve established a retirement plan for the purpose of funding your new career, you better make sure the plan has loan provisions as you are probably facing some hefty attorney fees in the years to come. 

 

Happy Holidays.   

By Tim Berry, JD
TrustMakers.com

 

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