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David

ROBS used in C Corp

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Client used a ROBS to start his C Corp. The company has NOLs most years of operation.

The owner is considering dissolving the corporation. Of course the company stock in the 401K account has no value. 

It appears from my research that when the corporation is dissolved there are no tax ramifications for use of the the 401K funds used to start the business - the owner was able to use 401K funds tax free. 

Is my understanding correct regarding this or am I missing something. 

Thanks. 

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David, The bottom line is that the plan ends up owning the worthless C corp stock. No tax consequence, except they won't have to worry about paying tax on the retirement money they otherwise would have received.

By any chance did this corporation buy into a franchise?  There are some out there that lure individuals to use a ROBS to buy in.

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Dissolving the corporation?

Is he shutting down the business, or converting it to a different type of operation?  What created the NOL's?  Did your client take a salary?

Is the only who made any money on this ROBS the company that helped your client set it up?

Rich

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15 hours ago, Edsel said:

Just so you can inform the ignorant...can you tell me what a ROBS is?  Is it like a thief?

Edsel:

The IRS uses the Acromyn ROBS to described folks removing money from their IRA, rolling it to a self-directed IRA, and then using those funds to purchase the Shares of a C-Corp that is owned by the same person. Can you do it?  Sure.

Can it blow up in your face?  Absolutely.

That may have happened to the OP's client.

Rich 

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Thanks CPAMan.  I thought it was illegal to use IRA funds to finance such personal business.  You say it can be done.  If it can be done I guess it's no worse than a ESOP with Enron.

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Basically it works like this:

Joe needs $100,000 to start a business, let's say to buy a franchise.

He sets up a C corp. which initially has no assets.

The corp. sets up a 401(k) plan which specifically allows the plan to invest in employer stock.

Joe rolls over $100,000 from his retirements account to the 401(k) plan.

The 401 purchases 100 shares of the corp. stock with a par value of $1,000.

The corp. now has $100,000 available to purchase the franchise.

Then after several years of losses as in the case of David's client, the corp. dissolves leaving the plan with the worthless stock of the corp.

They have been around for awhile and are legit as long they are properly structured and executed.  There are tax court rulings against some who were not.

I mentioned franchise because some work with promoters to encourage ROBS.

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DANRVAN, Is there a way to get out of the ROBS c corp if it still has assets and value. I would like to retain the Real estate and Trailer Park I purchased with my Self directed IRA but get out from under the C-Corp and self directed IRA. I started in 2011. I bought a storage rental business and a small trailer park. I sold the storage rental a couple of years ago and bought an old theater that I'm trying to rehab. I realize now that I wish I had just taken the money out of my 401k and paid the early withdrawal penalty and then purchased my income property. Guidant is the plan admin and they aren't helpful at all with this line of questioning. I don't even know where to begin finding information about doing this.

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5 hours ago, Coopedup said:

DANRVAN, Is there a way to get out of the ROBS c corp if it still has assets and value. I would like to retain the Real estate and Trailer Park I purchased with my Self directed IRA but get out from under the C-Corp and self directed IRA. I started in 2011. I bought a storage rental business and a small trailer park. I sold the storage rental a couple of years ago and bought an old theater that I'm trying to rehab. I realize now that I wish I had just taken the money out of my 401k and paid the early withdrawal penalty and then purchased my income property. Guidant is the plan admin and they aren't helpful at all with this line of questioning. I don't even know where to begin finding information about doing this.

@Coopedup - This forum is for tax professionals only, most of whom use one particular brand of tax software.  We do not help the general public here. I'd suggest that you consult with a tax professional or tax attorney that is familar with ROBS. 

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I think these ROBS arrangements are aptly named. Based on the few I've seen, all were land mines I wouldn't go anywhere near.  Just one little misstep blows the whole setup,  triggering a lump sum withdrawal with full taxation (and penalties if applicable).  Plus, the underlying business is often a loser, as if the case here in the OP.  I would just change one sentence - instead of "the owner was able to use the funds tax-free", I'd suggest "the owner was able to LOSE the funds tax-free."

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I had to come back and post a personal experience on this issue from several years ago.  I had a long-time client who told me he was looking into a ROBS to convert his existing business to a franchise operation.  I told him I wasn't keen on the idea.  A few weeks later he called back to tell me he had decided to move forward with the plan and that I'd better bone up on the ROBS arrangements.  I spent about a half hour on the franchise web site, plus an equal amount of time reading some hair-raising stories about how these things went south, usually over minor details.  So I called him back and told him if he went through with it, he should immediately start looking for a good accountant/tax preparer knowledgeable in this area because I wouldn't be working with him on that plan or business in any manner.  

I also thanked him for pushing the idea, because it forced me to do some serious research.  I had learned enough that if anyone else ever mentioned this to me again, I could  immediately tell them what I had just told him.

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