The End of Small Business Financing with IRA and 401k Funds? (Part 3)


Ok, now it’s time to solve the mystery. (Final Post) [see previous here]

In 1978 Jimmy Carter reorganized the government with this order, and this took the issue of retirement account prohibited transactions away from the domain of the IRS and gave it to the Department of Labor (DOL).

This fact was unknown to (or possibly ignored by) the ROBS promoters who claimed the IRS ROBS letter confirmed the validity of the ROBS strategy. The truth is that the IRS letter did not say whether or not the ROBS strategy creates a prohibited transaction because the IRS didn’t have the authority to say it. It was the authority of DOL. Ah, what fun bureaucracy can be.

Speaking with the Proper Authority

Now, I’ve known about this transfer of authority ever since the creator of the IRA LLC (late attorney Debra Buchanan) told me about it back in 2004. So I’ve been in close contact with DOL employees for several years. Here’s where the bureaucracy gets funny (or scary, depending on how you look at it).

A couple of weeks after the IRS ROBS letter came out, I called my friendly DOL contacts to ask, “What do you think of the ROBS strategy that the IRS just wrote a letter about?” They responded with, “What letter? What is ROBS?”

[If my friends at the IRS and DOL are reading this now, don’t take offense. Everyone knows that government agency intercommunication is kind of like Big Foot and the Loch Ness Monster. It’s not your fault.]

So I faxed the IRS ROBS letter over to DOL. I was happy to do this for the IRS because I know they are really busy.

Finally… the Meeting

My annual trip to Washington, D.C. was scheduled for about six weeks later. So this gave DOL plenty of time to review the letter so we could discuss it at our meeting.

When the meeting came in December, all of the mystery surrounding ROBS collapsed with a couple of straightforward sentences out of the mouths of the decision makers at DOL (paraphrased):

The ‘qualifying employer securities’ exemption means that transaction of the plan acquiring stock from the C corporation is exempt. BUT, this exemption doesn’t throw the rules out the window for looking at the whole strategy. This whole strategy generally provides an ‘outside-of-the-plan’ benefit to the participant, who is a disqualified person. Thus this strategy creates a prohibited transaction.

Bear in mind this unofficial conversation is, well, not official. What would make it official is if I (or anyone else) submitted a written request for a DOL “Advisory Opinion” letter that explains whether the ROBS strategy is a prohibited transaction.

These DOL guys indicated that such a request would be met with an Advisory Opinion declaring ROBS illegal.

Don’t Kill the Messenger

There it is, folks. End of story. ROBS is a prohibited transaction. Many people and attorneys can disagree, but it comes down to 4 guys at this government agency in Washington, D.C. to provide the interpretation of the prohibited transaction law. In other words, it doesn’t matter what anybody thinks except for them. And they think you owe the government a 115% tax (on the amount of money involved in the scheme) if you do a ROBS.

Up until this meeting, I was just as hopeful as anyone that ROBS would come out of the gray area in a favorable conclusion. I don’t want to end this topic on an disappointing note, so I will be throwing out some ROBS alternatives in a future post.

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