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I was just listening to a recording of a conference call this morning where a financial planner began his presentation with this premise:

Taxes will be increasing in the future

I haven’t listened to the rest of it because I had to pause it and write this post. I’m sure when I go back this guy will paint a whole picture based on the assumption of taxes increasing in the future.

Really?

Maximum Taxes

Well, first, let’s admit to ourselves that there is a very real, hard maximum taxation point. That’s 100%. A taxpayer cannot pay more in taxes than he has. Beyond that is impossible.

Second, let’s admit that there is effectively a maximum taxation point that is well below 100% of what a taxpayer has. Taxes going beyond this point is improbable. Let me explain…

Whether you may realize this or not, you probably pay 60%, 70% or more of every dollar that has ever been “yours” in taxes. Income taxes, property taxes, sin taxes (on booze), gas taxes, sales taxes, excise taxes, franchise taxes, death taxes, etc. Some of these taxes show up on paper that you can see, and some of these taxes are never declared to you at the point at which you pay them.

Where the Line is Drawn

So with the majority of the money that was ever yours already going to these direct taxes, how much more taxation can you take? Imagine a scenario where we go from systematically losing 70% of our money to losing 90% of our money.

Do you think hundreds of thousands of Americans would march to Washington, D.C. with guns to shoot at our government? Probably.

Do you think millions of Americans would simply stop paying taxes? Undoubtedly.

Do you think underground markets would develop where Americans could work and spend money outside of the government system? Surely.

…and the government knows this. That’s why it has been drastically increasing its taxation on us without us even knowing and without us even paying it directly.

Of course I speak of the most disastrous tax: inflation. Inflation is a hidden tax that takes wealth away from every American without permission or awareness.

The Secret Government Funding Source

It’s the secret government funding program. Without inflation, taxpayers would have never funded the trillions in boondoggles that our government has become famous for. You see, we don’t vote on whether or not to print up money and give it to the government for their wasteful programs. That’s why it’s the easiest tax to collect.

And with our government schools making dummies out of everyone, our populace is almost completely ignorant to the inflation tax.

To me, the government has already shown its cards. It knows it can’t directly tax us as much as it wants to or else we would fire it, kill it, and replace it (or maybe not replace it but that’s another blog post).

Since 1913, the dollar has lost over 95% of its value. The message is clear: we are near the point of maximum direct taxation. There are millions of republicans with an itchy trigger finger ready to make a big stink if Obama raises direct taxes.

The Government Wants to Survive

Obama, his advisors, and his puppet masters are not dumb enough to raise direct taxes significantly. They will do what the last men in power did. They will cover the bulk of their bankruptcy through borrowing and inflation… and the borrowing will eventually be paid back through inflation or war (kill the lender and the loan goes away!).

So next time a financial advisor wants to talk to you about distribution planning and prefaces the entire game with the idea that taxes will be increasing a lot in the future, I think you should walk out on him (or hang up the phone) and start looking for someone who will acknowledge what’s really going on.

Oh, and I almost forgot. The most exciting part is that once you acknowledge what’s really going on… investing, wealth building, and wealth protection become MUCH easier. Stay tuned for future posts that address the “Okay, what now?” voice in your head 

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.

[This is a continuation of a previous post. You should read that one first so this makes sense.]

The IRS Responds

For the first time ever, the IRS actually addressed the “financing a small business with an IRA or 401(k)” strategy. They called it “ROBS” for “roll over business startup,” and issued a letter on October 1, 2008. This letter basically stated:

• We know about the ROBS strategy
• We are concerned about it for several reasons

Celebrate and Ignore

Most ROBS promoters spun the IRS ROBS letter as a long-awaited government blessing for the strategy. They said that the concerns that the IRS listed were administrative errors, such as not filing the plan’s annual valuation report, not telling the corporation’s employees that they can also participate in the plan, and not ever launching a bona fide business in the first place. “These can be avoided. Read between the lines here.”

According to ROBS promoters, what was between the lines is that the IRS implied that the ROBS strategy was legitimate in the first place.

You would think my quest for a final answer to “Is the ROBS strategy legal or illegal?” would lead me to the IRS building in Washington, D.C… Not so. What ROBS promoters were ignoring (or unaware of) is that a strange, mostly unknown Presidential move from the 70s placed this matter outside of the IRS and onto a different government agency. In fact, the IRS letter talked around the core ROBS issue and never faced “Is the ROBS strategy legal or illegal?” head on—because, after the move in the 70s, they actually don’t have the legal authority to comment or decide on the issue.

What Now?

Determined to get to the bottom of this, I went to the other government agency.

Oh yeah, let me tell you why this matter is so important: If the ROBS promoters are wrong, everyone who believed them will be subject to a tax of at least 115% of the amount of funds involved in the strategy. OUCH!

Continue to Final/Part-3 of this post