The End of Small Business Financing with IRA and 401k Funds? (Part 2)


[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

Reader Interactions


  1. Cred,

    Everything you need to know about ROBS is covered in this 3-part post. Part 3 (the final installment) is coming soon.



    p.s. If you haven’t already done so, you can subscribe via RSS or Email by using the big buttons on the top right, and this way you’ll get notified of each new blog post right away.

  2. There is no need to “read between the lines”. The IRS’s opinion on the matter is clear:

    “Although we do not believe that the form of all of these transactions may be challenged
    as non-compliant per se, issues such as those described within this memorandum
    should be developed on a case-by-case basis.”

    “For purposes of this
    memorandum, these arrangements are known as Rollovers as Business Startups, or
    ROBS. While ROBS would otherwise serve legitimate tax and business planning
    needs, they are questionable in that they may serve solely to enable one individual’s
    exchange of tax-deferred assets for currently available funds, by using a qualified plan
    and its investment in employer stock as a medium. This may avoid distribution taxes
    otherwise assessable on this exchange.”

    Remember that tax AVOIDANCE is 100% legal. It is tax evasion that is illegal.

  3. Al,

    The IRS’s opinion doesn’t matter on this issue, believe it or not. Because of Presidential Reorganization Act No.4, interpretations of prohibited transaction issues are the exclusive domain of the Department of Labor (DOL).

    While it may just seem like a bunch of confusing bureaucracy, it does matter. The IRS isn’t allowed to opine on this issue (prohibited transactions of retirement plans specifically) with any more authority than Joe Blow down the street.

    The DOL’s stance is clear. Read all three posts on this subject and you should have it all cleared up.




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