THE BOLD MATERIAL IS MINE.
Monika, do you want to move into ROBS?
M. Templeman: Yes, why don't we do that? As Colleen was saying, with the Gulf Coast Preparer Project it was one that was a little bit analogous or close to the insurance type scheme, but it was a tailored project regionally and those abuses actually had consequences that we not only shut down the promotion but shut down the promoter. So that was excellent.
The next area I'm going to go into is slide eight and it deals with Rollovers as Business Startups or the acronym ROBS. Now, I know there have been a lot of pre- submitted questions about this particular arrangement and we will talk about that later. But I'm going to basically deal here with the overall concept of what a ROBS is and what some of the watch out areas are. It is a concern. Now, ROBS are not an abuse per se. ROBS is an arrangement that can lend itself to problems. So I wanted you to take that in that context. It is not something that we consider a listed transaction or an abusive scheme per se.
Rollovers as Business Startup arrangements were basically created to secure available funds held in a tax deferred savings, usually under a prior employer's plan, and an aspiring entrepreneur will want to use this without incurring resulting tax liabilities that ordinarily apply when you have a distribution. So ROBS is an arrangement that allows you to do an end run around that tax liability.
While the form of ROBS transactions is not abusive per se, as I stated at the onset, we are concerned in the IRS about these transactions because of compliance issues that do arise. These transactions are accomplished without any imposition of taxes that ordinarily happen when distributions from retirement plan savings accounts are involved.
Distributions would normally be subject to the treatment as ordinary income, taxable at the individual's personal tax rate, with possible additional taxes in the form of early distribution penalties. That penalty is totally avoided, as are any of the tax liabilities, when you use the ROBS setup. The Service became concerned with these transactions for several reasons; one, because they purport to facilitate the transaction, as I said, without the imposition of taxes; and two, because the transaction is one that has a lot of compliance issues that we've seen when we have been doing the examination.
Colleen, why don't you talk about some of what we've found when we analyzed these?
C. Patton: Again, as Monika said, ROBS are not inherently wrong. However, the majority that we have looked at upon examination have had issues involved with them. For instance, that the stock that's contributed to the plan ends up being allocated only ... entrepreneur, a highly compensated individual, the person for whose behalf the stock was moved as their prior benefit, and that it is set up in such a way that no current or future employees will ever have an opportunity to share in an allocation in employee stock. That's a possible violation of our non-discrimination rule.
The other item of fairly significant concern is that the stock is exchanged and there's never any independent effort made to determine the value of the stock. The stock is deemed to be valued at whatever it is exchanged for. There's no independent appraisal done to determine an accurate valuation, and that could lead to a potential for a prohibited transaction.
M. Templeman: I wanted to add one thing, Colleen, before we go on to the next topic under ROBS, and that's that Michael Julianelle, who's the Director of the Employee Plans, issued examination guidelines that were posted to the Web on the compliance issues that we're finding in ROBS, and that was dated October 1, 2008. They're still viable and still valid and still on the Web site, so you may want to check those out.
Again, while we do not find these transactions abusive per se and you can have a textbook ROBS that is pretty much problem-free, we're not basically seeing that when we're looking at our examination look at these cases. And once there are employees involved then there are inherent problems seen to arise compliance wise, and though we judge them on a case by case basis, there are a lot of issues, including a lot of these plans going belly up and not doing well. So there are concerns, definite concerns, in the ROBS arena, and we'll address those a little bit later as well.
