I guess I should tell you that I’ve been physically ill since last weekend, but Obama’s speech isn’t helping. It was way too reminiscent of the scenes in the book (or movie) 1984 where the public is forced to participate in mass hate and love demonstrations for their enemies and leaders.

The Painter Announces He Will Install the Plumbing

The first thing that blows my mind about what was spoken on the topic of economics is the absolute retardation of reason. Nobody in the government knows anything about economics. Time and time again, they make predictions and statements that turn out to be completely wrong. These people (Congress, the President, and other bureaucrats) are not economists (and they only acknowledge the economists who support the philosophy of never-ending increases in government spending and power).

They are not the bringers of solutions. If our problems went away, then they’d lose their jobs because we’d have no need for them. They are problem-creators. They are hired to fail.

We are expected to celebrate an announcement that the stimulus worked? Hey didn’t the last President announce our swift victory in Iraq? Why do we forget so easily that talk is cheap no matter how smooth it sounds?

Rally Against The Enemy!

The next elephant in the room is the government’s dedication to deal with “Wall Street.” What a farce. The government created Wall Street. How else do you think something so unnatural, hated, and powerful could come into being in a so-called free market?

Wall Street is created by government regulation. The stock market crashed in 1929. Then the government created the Securities Act. The Securities Act regulates investment. Regulation creates a cost to doing business. Cost means big, well funded ventures can deal with the regulation while small businesses (the engine of our economy according to Obama) cannot. Ultimately, investment into small businesses is nearly illegalized while regulation steers virtually all the investment capital into the hands of… well, the regulators’ friends.

So let’s put this story together. The government created Wall Street. In fact, Wall Street and the government are really the same organization. Those in charge simply swap titles from one year to the next as they go back and forth between being an executive and a government official. But the titles are just semantics. It’s all one big organization.

So the big organization sucking up power, authority, and resources, and destroying prosperity says it will start to get the enemy (itself) under control. Well, golly, everyone on the TV screen is standing up and applauding so this must be it. Finally! Somebody said they would fix our problems!

I hate to spoil the fun, but there is a long history of government saying it will fix the problems of society, and the history of them actually doing it just doesn’t exist.

America is the story of the most enormous and rapidly-built prosperity in the history of humankind. And it wasn’t the government that made it happen. It was the lack of government. We did a little experiment in freedom and spent so much time celebrating the outstanding results that we lost our freedom when we weren’t looking.

The Hidden Meaning

So if your job has been destroyed in the process of creating half of one phony stimulus job, you were just in the wrong industry. You should have paid attention to the phony demand the government would create with its spending of the new money it just printed up in its basement.

If your business has been destroyed in the process of “stimulating” Obama’s friend’s business, you made the wrong friends.

The hidden meaning behind Obama’s recent telepromtedly-smooth speech is that the government is out of its mind and nobody is stopping it. Don’t think they are so moral that they won’t inflate you into poverty and steal your retirement fund from the bankers who you are letting possess it.

Think for yourself. Question authority.

What now? Well, don’t fret. Just quit leaving your savings and retirement funds in the hands of government-regulated oligopolies. Take control. Put your wealth back into your own hands, literally. Avoid dollar-based assets like the plague, and you won’t get sick.

I’m going to go throw up now, and I’m not sure if it’s from my cold or the State of the Union address. But no matter how sickening viruses and bureaucrats can be, I feel at ease for knowing my hard-earned wealth is safe and protected.

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

Guidant calls it Audeo. Benetrends calls it Rainmaker. SDCooper calls it ERSOP. It goes by many names and it’s gotten a lot of attention from the franchise industry and, as of about a year ago, the IRS. The IRS calls it “ROBS” for Roll-Over Business Startup.

What is it?

It’s a strategy where a person with retirement funds:

1. Forms a C corporation.
2. Uses the new C corporation to adopt a 401(k) or profit-sharing plan.
3. Performs a rollover from existing retirement funds (IRA, 401k, etc) into the new 401(k) plan.
4. Directs the new 401(k) plan to invest into the new C corporation by purchasing shares of stock.
5. Now this person has a C corporation with some or all of their retirement funds in it, and they are told they can use the funds to run the corporation, launch a venture, buy a franchise, and even pay themselves a salary.

Special Powers – For Good or Evil?

This is a tremendously powerful strategy. The problem? Many attorneys think it’s illegal because of the prohibited transaction rules. Those rules say that the accounthoder (a.k.a. plan participant) is classified as a “disqualified person,” meaning that the retirement plan can’t transact with him or do things designed to benefit him outside of growing the plan.

To complicate matters, many other attorneys think it’s legal and on very solid ground. Why the disagreement? The pro-ROBS attorneys say that a special exemption throws the prohibited transaction rules out the window when you classify the transfer of the C corporation stock as “qualifying employer securities.”

A Quest for the Final Answer

About a year ago, my phone was ringing off the hook from people saying, “Some say it’s legal, some say it’s illegal. What’s the truth? I don’t want to risk my retirement fund on something sketchy!”

So I set out to get to the bottom of it, and the outcome will surprise you. Stay tuned for the tale of my trip to Washington, D.C. to meet with the guys with whom the buck stops.

Continue to Part 2 of this post