Way back in 2008, the IRS issued some guidelines to a strategy they called the Rollover as Business Startup (ROBS). Reading between the guidelines (sorry, couldn’t resist) it was apparent the service didn’t like the idea one bit. If you want to learn more about the ROBS program this is a link to the IRS guidelines.
Today the IRS formally released a PLR that was years in the making and appears to come to the conclusion that the ROBS program is not valid, and the retirement plan or self directed IRA used in the strategy isn’t valid either.
Here’s the backstory. The taxpayer received a distribution from his old retirement plan. At the same time he decided that he wanted to get involved in a healthcare franchise. (Franchise brokers love telling people about ROBS programs because now people who couldn’t afford to purchase the franchise have instant bucks. Since franchise brokers make a commission on the sales of the franchise, voilà, an instant love affair.) During the course of his investigation into the business, the taxpayer met with an attorney who gave the typical attorney advice, there were red flags, but the IRS hadn’t flat out said the ROBS program was illegal. . . yet. Seeing that as a green light, the taxpayer decided to roll his retirement funds into a new plan, with that plan purchasing stock in the new franchise.
About a year later the taxpayer’s accountant suggested the taxpayer should get a second opinion with another attorney. Apparently that attorney was a bit scarier than the first with the result that the taxpayer decided to scrub the whole plan. Tiny problem though, the tax code only gives you 60 days to rollover your retirement assets in a tax free manner, and by scrubbing the ROBS program, the taxpayer would fail the 60 day limit.
Fortunately for the taxpayer, there’s a law on the books that says that if the reason for not making the 60 day rollover wasn’t your fault, then the IRS can grant you a longer time period. In this case, the initial distribution was June 5, 2009, with the final waiver of the 60 day time limit being granted in June of 2012. Apparently the IRS was of the belief the taxpayer was hoodwinked and so the service did grant the waiver on the 60 day rollover period.
How doe we know the service thinks the taxpayer was hoodwinked? Here’s a quote from the PLR:
“The information presented and documentation submitted by Taxpayer A is consistent with his assertion that his failure to accomplish a timely rollover of Amount A was caused by his reliance on the combined advice provided by Company C, Attorney D and Law Firm F, which resulted in Amount A retroactively being held in other than a qualified plan rollover IRA.”
Seems like a clear cut assertion that the ROBS wasn’t considered a valid retirement plan. If you’ve set up a ROBS program this seems like a good time to be eyeing your exit strategy.