Part 1:

Taxpayers’ “rollover as business startup” account wasn’t valid retirement plan.

Powell v. U.S., (Ct Fed Cl 3/16/2016) 117 AFTR 2d ¶ 2016-515

The Court of Federal Claims has denied taxpayers’ claim for refund, rejecting their argument that their Individual Retirement Account (IRA) withdraws were nontaxable distributions that were rolled over into a “Business Owner’s Retirement Account” or BORSA essentially a variation of  a “Rollover As Business Startup” (ROBS) account. The court found that, because there was no written plan in existence under which the IRA distributions were reinvested, the arrangement couldn’t be a qualified trust under Code Sec. 401.


In general, an IRA is a trust (or custodial account) created for the exclusive benefit of an individual or his beneficiaries on which no tax is paid on the income earned  on the contributions until the retirement savings are distributed.

An IRA requires, among other things a written plan and designation of an appropriate trustee (Code Sec. 408(a), Reg. § 1.408-2(b) ) There is no immediate tax if distributions from an IRA are rolled into another IRA or eligible or other eligible retirement plan (i.e. trust,government Code Sec. 457  plan, Code Sec. 403(a) annuity or Code Sec. (403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA  generally must be re-contributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA (Cod Sec. 408 (d)  (3) )

There are certain requirements for qualification  which must be met by all qualified plans. In general, Code Sec. 401(a) prescribes the requirements for qualification of a trust forming part of a pension, profit sharing or stock bonus plan. One such requirement is that a plan be a definite written program. Failure to meet one of the Code Sec. 408 (a) requirements disqualifies the plan.

We are the most client focused organization providing these services. We strive  to maintain compliance and we would never knowingly expose a client simply to save a dollar. Additionally, since we assume the Trustee, Fiduciary and Plan Administration responsibilities, the IRS and DOL look directly to us in the event a compliance  matter arises with the plan. Thus, we are bound by regulation to support, represent and defend our clients which is significantly greater than any form of guarantee such as the guarantee offered by others.

Remember “focus on retirement development  –  respect the Plan 1st and foremost  and then respect the Plan as an investor not just a conduit if it ends up holding investments in your company.”


Part 2:

IRS’s requested from the Powells documentation on the existence of the IRA which allegedly received the distributions, and specifically sought its written plan and the identity of the trustee, which they failed to provide. At oral argument before the court, Mr. Powell conceded that there was no written agreement and no trustee. He admitted that they purchased the property in their individual capacities and held it individually until 2012, when it was sold to a corporation. The property had never been held in trust or in an IRA account. Mr. Powell’s understanding was merely that any money withdrawn from an IRA and invested in a business still counted as being in an IRA. The taxpayers also conceded that they did not follow the formal steps required for a ROBS. No corporation was created for purposes of running a qualified retirement plan. The entity which appeared to currently hold title to the property was created in 2012.


 Parties’ positions: The taxpayers argued that they had rolled over the $78,000 distribution into a valid retirement plan, making the distributions nontaxable. They argued that this other retirement account was a one-participant plan with less than $250,000 worth of assets which wasn’t required to file an annual report until its final year of existence. On the other hand, IRS argued that the taxpayers failed to show that the real estate investment in question met the requirements of a qualifying IRA under Code Sec. 408 . And, even if their claims were construed to be based on a one-participant retirement plan, they failed to show evidence supporting the existence of such a plan.
Court’s conclusion: The Court of Federal Claims held that the taxpayers weren’t entitled to a refund. There wasn’t a nontaxable rollover of the IRA distributions. Rather, the taxpayers withdrew money from their IRAs to purchase land in their individual capacities. The land was not purchased through or held by another IRA. As no IRA existed into which the taxpayers could have rolled the 2004 IRA distributions, IRS properly classified the distributions as income. The Court agreed with IRS that, under Code Sec. 401 and its regs, one-participant retirement plans need written trust instruments and must meet certain other formalities. And while it may be true that one-participant plans with less than $250,000 worth of assets aren’t required to file annual reports until their final year of existence, to be plans in the first place, such entities need trust instruments and a definite written program and arrangement.
While the Powells may have had a business plan concerning the real estate purchased with the IRA distributions, there wasn’t a written plan for an IRA through which the investment was made. With no written plan in existence under which the IRA distributions were reinvested, the arrangement could not have employed a qualified trust under Code Sec. 401 . The Court also noted that, because the corporation which currently held the investment property wasn’t in existence when the IRA distributions were made and the proceeds reinvested, it couldn’t have played a role in a ROBS transaction.
You can now clearly see that attempting to accomplish something of this complexity on you own can have catastrophic results. You need to seek the expert advise of Walker Advisory.  Contact us today.

The Real Cost Of Using Retirement Plans To Buy A Business

When people become aware of the benefits of intelligently using their retirement plans to finance the purchase of an existing business, the next thing they tend to do is research their alternatives.  Often, the question of cost and expenses comes up.

The following comes from Fred and the Whitlock Advisory Group, who use the ERPA plan and follow all of the compliance measures needed:

  • We are an Independent Trustee/Fiduciary Platform. The competition is not. It is impossible to be independent  in the decisions associated with the Plan and Plan Administration especially when it comes to the prudence of investing in employer stock if the entrepreneur is the Trustee! ERPA is professionally managed and administered with an independent Trustee / Fiduciary platform. This means that the entrepreneur receives ongoing professional support and is not simply left on his/her own after the C corp. adopts the Plan.
  • Investment Portfolio Selections. We are a complete turnkey solution with an existing platform of professionally managed and optimized investment portfolios. The competition does not offer this.
  • Custodial Services. There are no additional custodial services required. A custodian is defined as a financial institution that holds customer’s securities for safekeeping so as to minimize the risk of  theft or loss. A custodian holds securities and other assets in electronic or physical form. The competition does not offer this.
  • Record Keeping and 3rd Party Administration (TPA) are provided as part of the Plan services. The competition does not offer this.
  • Electronic Record Keeping . All record keeping is maintained electronically and fully secured with each person having access to manage his/her account 24 hours a day. The entrepreneur is therefore not burdened with on- going record keeping maintenance. The competition does not offer this.
  • Annual Audit.  The Entrepreneur Retirement Plan of America is audited every year by an independent Certified  Public Accountant. The competition does not offer this.
  • Unlimited Advisory Support. The annual plan maintenance cost includes unlimited compliance support for the entrepreneur’s Tax Preparer, Attorney and any other key advisors at no cost to the entrepreneur. The competition does not offer this.

So are we really more expensive? I don’t think so. When you take into consideration all the services we provide in addition to protecting the entrepreneur and ultimately the lending institution from exposure to the IRS and DOL we are actually less expensive.

For more information please contact us to help you get started.