Key Case Law
These court decisions define the compliance boundaries for ROBS transactions. Understanding them helps you avoid the mistakes others have made.Ellis v. Commissioner (2015)
Citation: 787 F.3d 1213 (8th Cir. 2015) Topic: Founder compensation from a ROBS-funded companyWhat Happened
Mr. Ellis formed a company using his IRA through a ROBS structure. As General Manager, he had full authority to direct the company’s operations — including setting his own compensation. He paid himself a salary from the company, which was funded almost exclusively by his IRA.What the Court Ruled
The salary payments were a prohibited transaction under IRC 4975(c)(1)(D) and (E) because Ellis could unilaterally direct payments to himself with no independent oversight. The court found this constituted indirect self-dealing with plan assets.What This Means for You
Ellis does not mean you can’t pay yourself a salary. You must pay yourself — you’re a W-2 employee. The ruling is specifically about unchecked self-dealing: the ability to direct your own compensation without any governance controls.
- Set compensation at market rates for your role and industry
- Document compensation decisions through board resolutions
- Maintain standard corporate governance — this doesn’t require independent board members at formation, but it does require documentation
Peek v. Commissioner (2013)
Citation: 140 T.C. No. 12 (2013) Topic: Personal guarantees on business debtWhat Happened
Mr. Peek and Mr. Fleck used their IRAs to form a company and purchase an existing business. The purchase included a $200,000 promissory note from the company to the sellers. Peek and Fleck personally guaranteed the note, secured by deeds of trust on their personal residences.What the Court Ruled
The personal guarantees were an indirect extension of credit between the founders (disqualified persons) and the plan under IRC 4975(c)(1)(B). The court rejected the argument that the guarantee was to the corporation, not the plan — because the plan owns the corporation, an extension of credit to the corporation is an indirect extension of credit to the plan.The Consequence
The IRAs were disqualified as of January 1 of the year the guarantees were signed. The entire account balances were treated as taxable distributions. When the business was later sold for approximately $1.6 million, the capital gains were fully taxable — they lost the tax-free IRA treatment entirely.What This Means for You
If your business needs debt financing, the corporation must qualify on its own merits without your personal guarantee.Key Takeaways
| Rule | Source | Summary |
|---|---|---|
| Pay yourself a reasonable, documented salary | Ellis | Salary is required, but it must be at market rates with board documentation |
| Never personally guarantee business debt | Peek | Any personal guarantee is a prohibited transaction that disqualifies the plan |
| Independent board members are a best practice, not a requirement | Ellis analysis | Most ROBS startups begin with founder as sole director |
| ”Indirect” transactions count | Both cases | You can’t route around prohibited transaction rules through intermediaries |
| The plan asset regulation doesn’t override 4975 | Ellis | Even if the company is an “operating company,” indirect self-dealing is still prohibited |
Prohibited Transactions
Full list of what you can and cannot do under ROBS.