September 23, 2021

You’re the Boss Blog: Using Retirement Money to Start a Business

Creating Value

Are you getting the most out of your business?

You’re thinking about starting a company. You’ve decided that the best bet is to buy a franchise. This will give you a leg up because someone else has done the heavy lifting and can give you a road map for success. You’ve discussed opening the business with your spouse, and your spouse is supportive. The only problem is that you need to raise $300,000 to get the franchise off the ground.

You’ve gone to friends, family and your local bank, and they have all turned down your request for a loan. But you really want to do this, and you happen to have saved $500,000 in your Individual Retirement Account. You tell the franchise people about your dilemma, and they tell you that for about $5,000, there is a way you can tap your I.R.A. savings to get the start-up capital you need.

Your franchise company introduces you to a promoter of a strategy known as ROBS, which stands for Rollover as Business Start-Ups. But before you can complete the retirement plan transaction, your spouse says, “Wait just a minute. You’re not doing anything till we check this out.”

This scenario, or a close approximation, is something I often see with my clients. I’ll hear about an idea and a client will ask me to look into it. In this case I decided to do the research without being asked because of two You’re the Boss posts that have appeared in the past year.

I first read about ROBS transactions last June in a post by Barbara Taylor. Then last week there were some comments left on a post written by Ami Kassar about business owners who pay too much for financing. My interest in the strategy was piqued, and I decided to look into whether a ROBS transaction makes sense.

It’s a complicated strategy. First, you need to establish a company with a qualified retirement plan. You then move your I.R.A. money to the new plan in your “shell” company, which takes the proceeds and uses them to buy company stock. Now, you have cash to start a business or, in the example above, purchase a franchise.

Whenever I run across a new strategy that involves retirement plans, I look for a pension administrator who deals in complicated pension issues. In this case I spoke with Tim Voigt from Pension Works in Colchester, Vt. Mr. Voigt told me he had heard of the strategy and thought it was likely to be prohibited, either by the Internal Revenue Service, which often takes the lead on issues like this, or the Department of Labor, which also has jurisdiction over retirement plans. Often, one will rule and the other will remain silent. It may mean only that one agency has not yet reached a conclusion.

I also spoke with Jeff Nabers, of Nabers Financial, who specializes in alternative investments for I.R.A.’s and has spent a significant amount of time researching ROBS. Like Mr. Voigt, he said he thinks the Labor Department might prohibit ROBS transactions — based on conversations he has had with officials there. If the department does rule against ROBS, there are significant penalties that could be levied against those who used the financing tool to start a business.

In 2008, the I.R.S. released a memo that referred to ROBS plans as “questionable” and suggested that they might be used to avoid paying taxes. In February, the agency released a ruling that suggested there is a proper way to do a ROBS plan but didn’t quite put the issue to bed. It did not issue regulations for doing ROBS properly. Nor has it released private letter rulings, revenue rulings or safe harbor rulings on ROBS that would remove any doubt about its legality. Because of that and because the Department of Labor has not ruled on the issue, there is still enough risk to consider ROBS a gray area.

Under the circumstances, I don’t believe I would recommend ROBS for one of my clients. Generally, I find that unless there is specific authority granted, it’s best to stay away from innovative tax plans even if they appear to be legal. And it’s always a red flag for me when the only people I can find to defend a strategy are those who are actively promoting it. And so far, I haven’t found independent accountants and tax attorneys offering support. (If you know of any, please tell us in the comment section below.)

But I also have another concern about the strategy — and that’s what happens when a business owner attempts to exit from a company formed this way. I believe the tax exposure on the sale of the business will be extreme, and I’ll talk about that in my next post.

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

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DealBook: Norilsk Offers Share Buyback to End Long Dispute

Oleg V. DeripaskaSimon Dawson/Bloomberg NewsOleg V. Deripaska is battling with Vladimir O. Potanin, below, for control of Norilsk Nickel.Vladimir O. PotaninAlexander Natruskin/Reuters

MOSCOW — The management of Russia’s largest mining operator, Norilsk Nickel, offered on Friday to buy most of the shares held by one of the company’s two feuding owners and thus resolve the dispute.

Norilsk generates vast profits as the world’s largest producer of nickel and palladium, and is one of the largest producers of copper, platinum, gold, silver and other rare metals. But the two largest owners, who are members of the rich coterie of industrialists known as oligarchs, have been locked in conflict for years for control.

Oleg V. Deripaska, who also owns about half of the world’s largest aluminum company, Rusal, maintains that his co-owner, Vladimir O. Potanin, is trying to force him out and seize full control of Norilsk.

Mr. Potanin, for his part, says he is encouraging the Norilsk management to buy back shares because the company’s proceeds cannot be invested profitably in other mining ventures in Russia, or indeed elsewhere in the world, right now.

On Friday, the company’s Web site said managers had offered Mr. Deripaska’s Rusal company $8.75 billion for 15 percent of the company’s shares. Rusal now holds about 25 percent.

Norilisk said the offer was equivalent to $306 a share, which was a premium of 20 percent above the average market price of the company over the last six months.

Even before the offer, however, Rusal issued a statement saying it was not likely to accept, and accused Mr. Potanin, who owns about 30 percent of Norilsk, of using his influence on the board to compel the company treasury to buy out a rival. This, Rusal said, was harming the interests of minority shareholders.

Rusal says it does not want to sell its share in Norilsk and has rebuffed previous offers. The mine and smelter complex above the Arctic circle in Siberia has been at the center of Russian business intrigues for much of its post-Soviet history.

Mr. Potanin, who is a member of the board of trustees of the Solomon R. Guggenheim Foundation, and Mr. Deripaska have been jostling for control since 2008, when another Russian oligarch, Mikhail D. Prokhorov, sold his stake. Mr. Prokhorov, who now heads a political party in Russia, used a portion of the proceeds to buy the New Jersey Nets basketball team and invest in the Atlantic Yards development in Brooklyn, the site of the team’s planned new arena.

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Fair Game: The Swindler and the Home Loans

That is good news for investors, as these things go. But another, lesser-known case now winding its way through the courts may help others recover losses from lenders who dealt in risky mortgages and claimed that they had no duty to their customers.

The case involves 21 families on Long Island and a convicted swindler named Peter J. Dawson. Mr. Dawson, a self-described financial planner, stole roughly $8 million from his clients, among them elderly parishioners at his church in Uniondale, N.Y. He pleaded guilty in state court in December 2007 and is serving 5 to 15 years in prison.

What does this have to do with mortgage lenders? Home loans were central to Mr. Dawson’s theft. He persuaded people who had paid off all or much of their mortgages to take out new home loans and entrust him with the proceeds. He promised to pay off their new loans with income from investments. Instead, he absconded with their money. Many of his victims lost their life savings and now cannot afford to pay off the mortgages.

Tom Geist is one of Mr. Dawson’s victims. Mr. Geist and his wife, Joy, had paid down their mortgage to $131,000 on their East Meadow, N.Y., home. But on Mr. Dawson’s advice, they took out a new, $280,000 mortgage from IndyMac Bank in May 2003. Mr. Geist was 80 years old and living on Social Security and a small pension.

“I went to Dawson, trusting him, and this started the ball rolling,” Mr. Geist told me. “He left us with nothing. My daughter decided to move in with us and help us out because we couldn’t handle it.”

According to court documents, Mr. Dawson turned to a friend, Michael Laucella, at a mortgage broker called the Custom Capital Corporation, to secure the new mortgages for his clients. Mr. Laucella had served time in prison for state and federal securities and financial crimes before joining Custom Capital as a custodial employee, according to court filings.

In a deposition in the case, Mr. Laucella testified that he became a loan officer at Custom Capital even though, he said, the terms of his federal probation barred him from “opening any ‘new lines of credit.’ ” Mr. Laucella also said he remained at Custom Capital after the company received a letter in September 2005 from the New York State Banking Department directing the company to terminate him “immediately.”

A lawyer for Mr. Laucella and Custom Capital declined to comment.

Mr. Dawson also worked with Alfred Arena, a branch manager of the First National Bank of Long Island, according to court filings and interviews with Mr. Dawson’s former customers. It was at First National that Mr. Dawson kept accounts in which he deposited checks that his clients endorsed over to him. Mr. Dawson testified that Mr. Arena attended more than 50 client meetings at Mr. Dawson’s offices over the years. The Long Island bank also made home equity loans to victims of Mr. Dawson’s scheme. A lawyer for the bank and Mr. Arena did not return a phone call seeking comment.

Neither Mr. Laucella nor Mr. Arena has been accused of wrongdoing.

Contending that all the loans made to these clients were obviously improper and full of red flags, Jacob Zamansky, a lawyer who represents the families fleeced by Mr. Dawson, has sued various lenders involved with Mr. Dawson.

“At every turn, the banks placed their own interests ahead of the interests of their customers,” Mr. Zamansky said. “The banks were driven by their insatiable thirst for revenues and were recklessly indifferent to the devastating consequences these loans would have on the borrowers.”

Bank of America’s Countrywide Home Loans, as well as PHH Mortgage, Homecomings Financial and the other lenders, have argued that they should be dismissed from the case because Mr. Dawson caused the victims’ losses, not them.

But in a ruling issued a few weeks ago, Justice F. Dana Winslow of New York State Supreme Court in Nassau County said the banks’ actions should be examined.

A spokeswoman for Bank of America and a spokesman for Homecomings Financial both said that the case involves a theft by a financial adviser with no connection to them. Both said their institutions would vigorously defend against the lawsuit.

Yet Justice Winslow seems to have rejected the argument that the banks were wholly blameless.

“Significantly, the courts have held that banks do owe duties of care to their own customers,” he wrote, in deciding to keep the banks as defendants in the case. “Moreover, there is a public interest in ensuring the alleged duties relied upon are ‘performed with reasonable care’ — as evidenced by the recent flurry of consumer-oriented laws and amendments enacted in the wake of the ‘subprime mortgage meltdown.’ ”

UNTIL all the facts of the case are heard at trial, it is unclear whether the banks will be held liable for injury to Mr. Dawson’s victims.

But Lewis D. Lowenfels, an expert in securities law at the law firm of Tolins Lowenfels who is not involved in the case, said Justice Winslow’s ruling was significant. It appeared to counter the more restrictive approach taken by the United States Supreme Court in recent years on the issue of holding third parties liable, he said.

“This decision by a lower New York State court may open the door to actions against mortgage brokers, banks and related parties involved in the recent mortgage debacle,” Mr. Lowenfels said. “It will be interesting to see how the facts and the law unfold in this case, particularly in the face of recent U.S. Supreme Court cases embracing a more limited approach to liabilities in analogous areas.”

New York judges have been ahead of the curve before on financial wrongdoing. They were among the first to recognize the flaws in banks’ foreclosure practices, shifting away from a stance held over decades of automatically ruling in favor of lenders and against troubled borrowers. Perhaps the ruling by Justice Winslow is evidence of another such turn in the tide.

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DealBook: Zipcar Soars on Market Debut

A Zipcar outside NASDAQ on the car-sharing service's stock /” /span class=Mike Segar/Reuters A Zipcar outside the NASDAQ on the car-sharing service’s stock debut.

In an encouraging sign for the larger I.P.O. market, shares of the car-sharing service Zipcar soared nearly 67 percent on their first day of trading.

The company, best known for its nationwide fleet of affordable rental cars, priced its initial public offering on Wednesday at $18 a share, according to a regulatory filing — well above the previously expected a range of $14 to $16 a share. Zipcar, which raised $174.3 million in its offering, also sold more shares than expected, offloading 9.7 million shares, according to the company.

The stock opened at $30 on the Nasdaq market, trading under the ticker “ZIP.”

Zipcar’s warm reception is another sign that the I.P.O. market, which was moribund during the financial crisis, has begun to thaw.

So far this year, the United States market has welcomed 40 I.P.O.’s, with proceeds exceeding $16 billion — more than double the corresponding period for 2010, according to Renaissance Capital.

Still, analysts caution, investors are not sinking money into I.P.O.’s indiscriminately. Of the three other companies that priced on Wednesday night, two priced below their expected range, while the other, Arcos Dorados, the world’s largest McDonald’s franchise chain, priced above its range and raised $1.25 billion.

“Investors are not looking at these I.P.O.’s with starry eyes,” said Kathleen Smith, a principal at Renaissance. “Investors are being very selective; Zipcar is trading well because it is establishing a new market and they are profitable in a number of their early markets.”

Zipcar is a capital intensive business, with more than 8,000 vehicles across the United States. The service, which is most active in top metropolitan areas like Manhattan, Boston and Chicago, requires users to sign-up for an annual membership. Once enrolled, drivers can reserve cars, often located in public parking lots, and pay by the hour, with insurance and gas included.

The company, founded in 2000 and based in Cambridge, Mass., has proved popular, with 560,000 members.

But Zipcar is not yet profitable. According to a recent filing, Zipcar posted a net loss of $14.7 million in 2010 and a loss of $4.7 million for 2009. The company, which has accumulated losses of $65.4 million, said it did not expect to be profitable this year.

Still, revenue is growing. Sales rose 41.9 percent to $186.1 million last year. In its filing, the company said it planned to use the proceeds from the I.P.O. to pay down debt and for general business expenses.

Part of the reason Zipcar is saddled with losses is its aggressive campaign to build its network and thwart rivals, like Hertz, which started its own car-sharing program, Connect, in 2008. Zipcar is now in Canada and Britain, where it recently purchased Streetcar, a London-based competitor.

“Competition is the biggest worry, but if they can stay ahead of the game, this could stock could do very well,” Ms. Smith of Renaissance said. Hertz’s Connect is available in eight cities, while Zipcar is in more than 200 markets.

Venture capital investors in Zipcar include Revolution Living, led by the founder of AOL, Stephen M. Case; Benchmark Capital Partners; Greylock Partners; and Smedvig Capital. Revolution, which did not sell shares in the offering, owns a 21.5 percent stake.

This post has been revised to reflect the following correction:

Correction: April 14, 2011

An earlier version of this post included incorrect earnings for Zipcar. The company reported a loss of $14.7 million in 2010 and a loss of $4.7 million for 2009.

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