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michael webster's picture

Good Advice from CPA Guest

Guest writes: "I assume he is referring to ROBS plans. I read the WSJ article and I believe he is inappropriately linking the article to ROBS. I believe the article is referring to 412(i) and 419 plans, both of which are listed transactions and as such must be reported to the IRS. Failure to do so can be a serious and costly ommission. As far as I can see, the article has nothing to do with ROBS and ROBS are not a listed transaction."

Thanks for clearing this up.

You are correct in noting my mistake.

I did confuse the two, without even knowing I made that mistake.  But, and this is not a defence, I recently came across a well known franchise blog that was simply flogging a ROBS without taking the time to even mention that the details CPA Guest wants us to look at.

The takeaway here should be that if an experienced franchisee attorney can make a serious mistake about a "techincal and specialize[d] area of retirement plan design", but fortunately get it corrected with hours of posting, what are the chances that the ordinary franchisee will get it wrong?

Thanks again for the clarification.



WSJ Article Cited by Michael Webster

Mr. Webster cites a Wall Street Journal article and states that "this rollover plan is attracting a lot of IRS penalties". I assume he is referring to ROBS plans. I read the WSJ article and I believe he is inappropriately linking the article to ROBS. I believe the article is referring to 412(i) and 419 plans, both of which are listed transactions and as such must be reported to the IRS. Failure to do so can be a serious and costly ommission. As far as I can see, the article has nothing to do with ROBS and ROBS are not a listed transaction. As a CPA, I will not comment on whether or not entering into a ROBS transaction is good, bad, right or wrong. I will tell you that I have read the IRS' Field Examiner Guidelines on the subject and have listened to the IRS' Director of Employee Plan Examinations discussion of ROBS at the January 2009 ASPPA conference in L.A. I highly recommend reading the Guideline and ordering a copy of the ASPPA presentation to get a better understanding of the issues that surround ROBS, and in the case of the ASPPA conference the opinions (at the begining of the presentation it is clearly stated that the views expressed are the opinions of the presentor and do not represent the IRS' position) before opining on this techincal and specialize area of retirement plan design.

michael webster's picture

New Work For Bruce Schaeffer

According to the WSJ, this rollover plan is attracting a lot of IRS penalties because people relied entirely on the IRS comfort letter, not realizing that it was only a partial comfort level.

"Five years ago, car-wash owner Orman Wilson set up a pension plan for himself and six employees. For that, he may owe the IRS a $1.2 million tax penalty.Mr. Wilson, the owner of 19 coin-operated car washes in Houston, says he relied on four advisers, including a certified public accountant, to set up a plan that received approval from the Internal Revenue Service. Then, in late 2007, the IRS found fault with the plan and assessed it $250,000 -- plus special penalties of $1.2 million.The penalties "would wipe us out," Mr. Wilson says."

RichardSolomon's picture

My goodness you have lots of delusional beliefs

A good investment is an educated guess that the risks associated with te investment are known and that you have the skills and the capital to handle them. There is a difference between investing and gambling.

Markets offer no guarantees whatsoever.

If you die before being able to accerss "your" money, your surviving heirs will enjoy spending it - especially your wife.

The IRS isn't keeping you from anything that you have a right to. Your statement to the contrary is simply false.

There are no rules in any market. There is the appearance of rules, but they are honored in the breach. If you don't protect your own self you are simply out of luck.

You are not required to trust this or any other governhment. Go wherever you please if you don't like it here. Please write and tell us whether your next location is any better.


Odds and Odds Makers

Question, what exactly constitutes a good investment? Next what garranties does the market offer? Next how does one use their hard earned money if it's  unable until you no longer need it or your no longer alive. Not everyone lives to use their retirement money nor does a great opportunity come along everyday. So I'm suppose to be okay with the IRS doing everything in their power to keep me away from what rightfully belongs to me? All due to what I might or might not be able to pay in taxes in the next 15 years... who knows what we're going to have available then? All I know is I want to use it now to start a business I believe in what is the real problem here.... Laws, rules and taxes the market,  won't assure my furture nor will the Government or the banks or the IRS all we have is ourselves....that's it! So you want to take that away too...??? And all in the name of playing by the rules? Who's rules??? If I want to use the money I have in my 401K to start a business and I believe in it and don't plan to or attempt to misuse the money for anything other then business....than what is the problem? Oh yeah that's right you can't trust me we are alol thieves and just can not be trusted...but we must trust you the government and the banks...yeah right!!!

Moved: Off Topic

This comment was off the topic of this article and has been moved to our forum area, here.

"Legality" is not the right word

I agree that the subjects raised by Mr. Carpenter do not deal with the merits of buying a franchise but I don't think the issue is one of "legality" either.

Mr. Steinberg said:

The legality of using 401(k) money to buy a franchise is the issue. That is what the IRS is concerned about.

The IRS is not suggesting that a ROBS transaction is "illegal." The IRS is simply saying that the substance of a typical ROBS transaction may require ignoring its "form." In other words, they are saying "You (the IRA 401(k) account holder)got the money and we want our taxes." Its that simple. So, while the form of the transaction is "legal" and not "illegal" the substance of the transaction is "taxable" and not "non-taxable." I would think it better if we used the term "taxable" instead of "illegal."

Re: ROBS: Franchised vs. non-franchised valuation

Thank you Mr. Steinberg and, again, to Mr Carpenter and Mr Dobrow. I always enjoy a chat, even a virtual one, with folks that are smarter than I am.

With your refinement of this thread to focus on FRANCISE valuation people may begin to notice the real issue here - the unique nature of a franchised business operation, and the consequent unique valuation principles which may be irreconcilable when retirement plan monies are used to purchase a franchised business.

By the way Richard - Touche!

IRS Expert's Warning

We have to thank this IRS expert for this warning, that may be much too late for those who did use their retirment plan savings to invest in franchises, whose franchisors and agents indicated that their franchise would be eligible under the black letter law governing ROBS.

Will the franchisors or the administrators like Guidant be held responsible or liable under the law when the plan is not compliant with IRS laws. Or, will just the owner of the retirement plan be held liable for the 10% penalty, etc....and have no recourse under law for the misrepresentations of the Rollover Industry and the franchisors.

Obviously, those who profit from this arrangement, as identified by Mr. Dodrow, knew that access to these funds without the 10% penalty for early withdrawal would be a crowbar to access the piggy banks of the newly downsized, retired, and unemployed.

RE: IRS, Expert Give Warning to Rollover Industry

Guidant's decision to resume "selling" ROBS doesn't say anything about the content of this article. It only speaks to Guidant's opinion that the plans they install are within the confines of the black letter law. I think this article correctly points out that anyone who chooses to utilize their services needs to be aware that the product that Guidant and others are selling maybe legally flawed.

Paul Steinberg's picture

ROBS: Franchised vs. non-franchised valuation

Guest writes: By dead reckoning it is worth the liquidation value of the non-cash depreciating tangible and intangible asets of the corporation, including, of course, the wasting value of the term franchise agreement.

And this is why Mr. Carpenter is not so far off-base in his valuation of "zero," and why a ROBS invested in a franchised business is particularly problematic.

The most common analogous situation is where a franchisee shuts down or abandons the franchise.

  1. The tangible assets are often trade dress which can only be used in a franchised outlet.
  2. The intangible assets (including the franchise agreement) are only worth what the franchisor says they are, since for various reasons (such as Lanham Act and the personal-services nature of the franchise contract)  these intangibles cannot be readily transfered in the manner in which non-franchised business intangibles may be transfered.
  3. Some franchisors require that the transferee sign the current franchise agreement. Even where this is not the case, collective action clauses (such as in the DAI franchise agreement) may result in a franchise agreement significantly different (and of less value) than the one which was originally entered into.

In fact, just a few days ago there was discussion among franchise attorneys on a different website about what happens when a zee defaults on loans collateralized by the tangible property. The consensus was (and my experience is in accord) that the lender is on the short end of the stick.

Ironically, in bringing ROBS-related issues to the forefront, the companies which promoted ROBS so heavily as a means to purchase franchised businesses may cause the promulgation of regulations which make it less attractive to use ROBS to buy a franchised business than a non-franchised business.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Some Advice to the ROBS "Industry" - Tax Promoter Law 101

1. Never claim thet your bundling of provisions of the Internal Revenue Code and ERISA constitute an "Industry."
2. Never claim thet your bundling of provisions of the Internal Revenue Code and ERISA constitute a "product."
3. Never give what you call a "product" a name.
4. Never imply that your "product" is proprietary. (See items 1 and 2)
5. Never charge fees that are only justified if you convince people that that Item 4 is true.
6. Never use the word "access" in describing what an IRA owner can do with his or her retirement savings.
7. If you describe the business that can be acquired as "your business" you might as well say that you can buy "your new boat."
8. Finally - Give it up! The party has ended.

Just some thoughts, however inconsistent with your business plan!

Finally - Some adult conversation about ROBS!

Thanks to Richard Carpenter for his comments. I have known Richard for a number of years and I assure you that he does not have anything other than an academic dog in this particular hunt. I hope I don't embarrass him by calling him a very close second, maybe even an equal, to Mr. Dobrow in his deep knowledge concerning ERISA and qualified plans. That said, I would also like to thank Mr. Dobrow for fomenting this thread with his original insightful comments. They were exactly on the mark. In any event, both should be commended for elevating this thread beyond "The only good franchise is a dead franchise."

What the IRS is concerned about in the case of most ROBS is a fundamental breach of a tax policy "contract" inherenent in the tax law of deferred compensation, including the tax bargain of qualified plans (and IRAs). It is simply this: Uncle Sam will let you keep the money that you would otherwise have paid in taxes only for so long as you don't get your grubby taxpayer hands on the money for personal benefit. In other words, the money that you have accumulated in your tax deferred vehicle is not all yours. Some of it belongs to Uncle Sam.

So, along comes a deal which "black letter" looks like an investment-Let's call it Qualified Employer Securities so that we can be "compliant" with the black letter of ERISA and the Code. But, if we look a little bit deeper at the "investment" in company stock what do we see? I believe that what the IRS sees is a fundamental flaw in the investment logic. I call it the Warren Buffett analysis. I am confident that if the small business entrepreneur (especially a franchise purchaser) went to Mr. Buffet with a proposition to invest, say $100,000, in a franchise startup, Mr Buffett would not for a moment think that the common stock he received in exchange for that $100,000 was "worth" $100,000. Mr. Buffet, of course, would not make the investment - Unless he was willing to accept the fact that some portion was a "transfer" to the recipient with no expectation of return. NOT!

Therein lies the problem and, as the IRS has made clear as mud, that's why this is a "valuation" problem at heart. By the way, I very respectfully disagree with Mr. Carpenter that the value of the stock issued in a ROBs transaction is zero. By dead reckoning it is worth the liquidation value of the non-cash depreciating tangible and intangible asets of the corporation, including, of course, the wasting value of the term franchise agreement. The difference between the sum those value and the total amount paid - sometimes in a tax euphamism referred to as 'working capital" would most likely be considered a current transfer of value to the IRA/401(k) account owner. Again, that is dead reckoning, but I hope you get the point.

That's Deferred Compensation Tax Law 101. Mr Dobrow, Mr. Carpenter and Mr. Julienelle understand it well.

For further reading see Section 61 and the regulations thereunder. Section 83 is not bad reading either. I might even assign Goldsmith v. Commissioner or Cowden v. Commissioner. These Code sections, regulations and cases will no doubt be cited in the first Tax Court case that the IRS takes up. For the real benefit/tax nerds, the IRS really wants to fix the damage done in the Swanson case! If I'm the IRS, ROBS present the perfect opportunity.

One more thing, especially to the poster seeking a way to "unwind" these transactions. You may want to ask Richard to refer you to a good benefits tax lawyer. He knows the good ones. Come to think of it, you might even get the ROBS promoter who failed to mention all this stuff to pay your fees!

Rudeness is Off Topic as Well

It is my opinion that the IFA does lobby the Congress continually, and is in favor of law and regulation that does allow retirement savings to be used to purchase franchises. Obviously, the Congress didn't provide access to these ROBS plans at the original promulgation of the retirment plans. Someone brought it to the attention of the Congress because they wanted access to this money.

It WAS the IFA who indicated in an article that most in the Congress do not understand the difference between a franchisor and a franchisee. I did insert the word "ignorant" which was, of course, not used in the IFA article.

Unnecessary Rudeness and Arrogance is not on topic, as well, and is usually a sign of insecurity.

Paul Steinberg's picture

Ignorance in eye of beholder

Your headline is conclusory, and the body of your comment has nothing to do with the topic of this thread.

Moreover, I have never heard that "according to the IFA, most of the members of The Congress of the US are so ignorant that they don't know the difference between a franchisor and a franchisee."

Most of the BMM audience is sophisticated enough to see that you just make up "facts" as you go along. There are plenty of nutcase internet sites where you can do this, but BMM is not one of them.

You might wish to post in the Ranter's Soapbox if you can't stay on topic.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

IFA Lobbies for ROBS

Unfortunately, the IFA pretends that it represents BOTH franchisees and franchisors. Apparently, according to the IFA, most of the members of The Congress of the US are so ignorant that they don't know the difference between a franchisor and a franchisee.

This sad state of affairs means that rules and laws are passed by The Congress that favor the interests of the IFA while putting prospective franchisees, who don't know and understand that they need representation, at great risk. .

I'm not sure our forefathes had this in mind!

Paul Steinberg's picture

If Matt Shay is really lobbying...

Guest writes: what about the Trade Organization, the IFA, and the others who lobby to provide law that makes these ROBS legal

I don't think your premise is correct. However...

If the IFA is lobbying to make ROBS legal under the IRC, then I respect them for addressing this issue properly.

I don't think that investing your 401(k) in your own business (franchised or otherwise) is a wise idea.

But the libertarian in me feels that people should be free to indulge their innner idiot, while the economist in me worries about the negative externalities resulting in destitute AARP members swarming Capitol Hill after they buy a Cuppy's Coffee franchise.

I would seek the Oracle of the Rabbit, but on this issue Fuwa has lost his libertarian moorings and has thrown in with Nancy Pelosi's nanny-statism.

A conundrum indeed.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

ROBS --Black letter law

Yes! but what about the Trade Organization, the IFA, and the others who lobby to provide law that makes these ROBS legal.

Who will lobby for those naive and innocent who are sucked into buying unviable and risky franchises through the use of their retirment savings?

Paul Steinberg's picture

ROBS: Kill the messenger?

As Mr. Carpenter points out, the merits of using 401(k) money to buy a franchise is not the issue, and the IRS is not getting involved in this matter because of any concern for the wisdom of the franchisee's business decision.

The legality of using 401(k) money to buy a franchise is the issue.  That is what the IRS is concerned about.

One may take the position that the law should be changed, but the law is what it is.

To blame Bruce Schaeffer or Richard Carpenter or Don Sniegowski for reporting on the black letter law does not change that fact.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

How can I undo this mess?

Is there any way that I can undo this mess of "making rain"? How can I give back what little money I have left in my rollover Plan and terminate this "Rain Plan"? I still own the business but most of the money is gone. But I keep paying large fees for paperwork filing to the IRS. Most of the money would have been gone in this stock market but at least I would not be involved in some seedy-seeming Plan. Thank you.

ROBS Industry Insider’s Posts

The guest (or perhaps guests) who started his posts with “This is another example of journalism at it’s (sic) worst” and “It is shocking that the author . . . “ is obviously screaming because he was hit in the pocketbook. Which of the ROBS firms he or she is connected with is unknown, as the point is to keep his motivations hidden, cloaking himself as just another reader, while casting the most doubt possible on the article. Whoever thought of this hare-brained scheme of shooting the messenger is hardly doing Guidant or the other firms in the ROBS industry any favors.

There have been plenty of doubts expressed about ROBS over the years, and hardly just by Dobrow. Using one’s retirement funds for ends that it was never designed for would give anyone pause. The news about Guidant, the biggest firm in that niche, pulling out, along with the reasons it gave for doing so is more than compelling. SD Cooper’s and BeneTrend’s point of view (guest was carping about an insufficiency of this) was given (they were in compliance and were going to continue their ROBS business), so what’s the problem?

The problem is that guest panicked and started grasping at straws. He (or she) is trying to salvage his livelihood, and, like a bull in a china shop, doing far more harm than good to his cause.

Don, kudos for telling it like it is. The Orwellian double-speaking guest or guests (“black is white,” “good is bad,” “get the real scoop elsewhere,” [not here where it is]) are insulting our intelligence, but an interesting study of what happens when industry insiders lose their cool.

I just noticed that another upset ROBS industry insider (perhaps the same guest?) has been furiously dashing off another comment starting with, “The use of retirement funds as business capital . . . .” and ending with, “ . . . and stay away from sites like this.” Ummm, if insiders don’t want us to read what’s here, I want to see exactly what it is that they don’t want me to know. Thanks for pointing it out, dude.

Rollover Article

I enjoyed the article as well as the comments submitted by other reader. I’ll caveat my comments with the admission that I have known Mr. Dobrow for quite some time. There are not many people on the planet that have a more complete knowledge of ERISA and the IRC regarding retirement plans; he is a technician’s technician.

My comments come from the perspective of someone that has been in the business for over 30 years. Additionally, I have friends that are actively involved in the marketing of these plans. If anyone would like to discuss these plans, feel free to contact me at:

The Rainmaker, Business Owner Retirement Plan (BORSA), Entrepreneur Retirement Stock Option Plan (ERSOP) is in many if not most cases one of those things that is too good to be true.

On October 1, 2008, the IRS issued an Examination Memorandum regarding these plans. The acronym that they use to describe these arrangements is “ROBS” a double entendre that should make the reader aware of their compliance intentions.

Reasonable people can come to different conclusions about the merits of using ones retirement assets to fund a business. The idea that one can use their retirement account to capitalize a new business is almost irresistible. There are some instances where these plans will work; most of them will not.

Here is the problem: Rainmaker, BORSA or ERSOP, as a qualified plan, cannot pay more than fair market value for the stock. The owner would have to have an independent valuation of the stock performed, determining the stock to be worth the amount that he proposes to have the plan pay. If is a brand new company that is not yet operating, it seems extremely unlikely that anyone could value the shares at much more than zero. Fair market value is defined as the price that a willing buyer would pay to a willing seller, when neither is under any compulsion to buy or sell. In other words, it is what he could get for the stock on the open market.

Some of the promoters of these plans tout the existence of their “IRS Determination Letter as proof of the IRS imprimatur on these arrangements. Nothing could be further form the truth. The fact that they have approval from IRS on the plan document is irrelevant. The document does not address issues regarding the determination of fair market value for the stock. In other words, the IRS approval only covers the document itself, it provides no assurance that the plan, in operation, will be considered qualified.

The sale or acquisition of employer stock must be for adequate consideration, as defined in ERISA, in order for trustees to receive automatic exemption from the prohibited transaction rules (ERISA Sec. 408(e)).

Proposed regulations, issued by the Labor Department in 1988, establish a two-part test for determining the adequacy of consideration paid for assets other than publicly traded securities:

1. The consideration must reflect fair market value and

2. The valuation must be made in good faith (ERISA Sec. 3(18)(B); ERISA Prop. Reg. §2510.3-18(b)(1)(i)).

I don’t have any skin in this game. My only recommendation would be to enter the transaction with eyes wide open.

Richard N Carpenter, CPC, CEBS
PO Box 25974
Christiansted, St Croix, US Virgin Islands 00824

Moved: IRS knows this

This comment is off topic and has been moved here.

Re: IRS, Expert Give Warning to Rollover Industry

The use of retirement funds as business capital is a legitimate and legal process provided it is done the proper way. Although some individual at the IRS coined the term "ROBS", these transactions have their basis in law under the ERISA law of 1974. Although not ESOP plans, they are sanctioned by some of the same ERISA and IRC sections that make ESOPS possible. In the IRS' most recently published guidelines on the subject, they had no choice but to stipulate that “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.” Said in a more direct way, these plans when properly designed, do not present a compliance problem, although, if not properly operated, there may be some issues. This is true for any qualified retirement plan. It is also true that using retirement money may not be for everyone. There are many things to consider before making this decision, but these are personal investment and risk decisions that are best left to the individual and their advisors. Those who make blanket statements that using retirement funds to start or buy a business is a bad financial idea do not seem concerned about the market risk and volatility in today's equity markets. Furthermore, those who say you shouldn't bet your "nest egg" on starting or buying a business don't seem to be bothered by borrowing the money from a bank and putting up the "nest" as collateral. Again, this is a personal decision. I am profoundly disappointed in Mr. Dobrow's statements. As a professional and an officer of a trade organization, he should know better than to voice his opinion as if it were the official position of his organization. Several people at my firm are members of his organization and are not aware of its official position on this topic. It also appears that the IRS uses his organization as a soap box for any related topic they want to opine on. I thought trade organizations were supposed to serve the interests of their members. Finally, for those interested in more fact based information on this topic, it does exist. You just have to do some research and stay away from sites like this.

Investing 101 The American Nightmare

Buying a franchise to provide a job and profits with the use of your retirment savings is a GAMBLE and not an investment in one's future. If franchisee prospects must use their retirement accounts, this is too dangerous and too risky and any possible profits do not justify the risk.

Please use common sense here and understand that these are funds that should not be put at risk. The average franchisor doesn't last ten years and so often this "wasting asset" - the franchise - is worth very little at the end of the contract period.

Although the stock market is down, it will eventually rise again.

Read Small Business Trends and Failure Rates and understand that under law and regulation, franchisees are merely resources for franchisors to grow their paper chains and that franchisors CAN survive even as many of their franchisees fail or never earn a dime in profits.

Investing 101

Let's see, If I invested $100,000 in the Dow 25 months ago, I would now have $50,000. Sounds like a great deal, and that is investing with the BEST 30 Companies in the world. By the way, you don't HAVE to invest 100% in your franchise, only what you need. You can keep the rest of the money in whatever investments you want to. Please use common sense here. Downsized people need EVERY avenue they can get their hands on to buy a job to continue living the American Dream!

Yellow Journalism and Code Red Warning for Franchisee Prospects

Blue Mau Mau is a franchise newspaper as well as a blog site that attempts to bring unbiased information to its readers. I would suggest that Don Siegnowski does an excellent job of doing this.

The consensus of opinion of those who blog on this site and other experts with good will is that it is just too dangerous and risky for the franchisee, in terms of any return on his investment, to put all of his eggs into one basket through the use of a 401K or other retirement savings

We can see that the special interests who lobbied for this access to the retirement savings of innocents, who become so called sophisticated investors when they have to incorporate themselves to do business with the franchisor, can have terrible consequences for franchisses.

Those who profit from this process and the access to this money demonstrate their "fear" that this money could dry up and impact their interests, as demonstrated by the above comment.

Re: IRS, Expert Give Warning to Rollover Industry

This is another example of journalism at it's worst. Why can't we ever get balanced reporting.. By the way Guidant Financial REOPENED today! What does that say about this article...

Yellow Journalism

It is shocking that the author of this article did not check any of his facts. If he had followed up with Guidant Financial, he would have learned that they had already resumed operations. If he had bothered to check with SD Cooper and Benetrends (two organizations he cites in his article), he would have heard their position on the October IRS memorandum and all that they have done to comply successfully. Finally, it is perhaps most surprising that virtually all of the quotations in the article are the self-serving statements of one wealth advisor, Mr. Dobrow. The conflict of interest is obvious. Mr. Sniegowski, is it too much to ask for just a small amount of balance in your reporting?

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