[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Notices]
[Pages 3483-3488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1775]
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DEPARTMENT OF LABOR
[Application No. D-09627, et al.]
Proposed Exemptions; Hassan Zekavat, M.D., P.A. Money Purchase
Pension Plan (the Plan)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request for a
hearing should state: (1) The name,
[[Page 3484]]
address, and telephone number of the person making the comment or
request, and (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing. A request for a hearing must also state the
issues to be addressed and include a general description of the
evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW., Washington, DC. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Hassan Zekavat, M.D., P.A. Money Purchase Pension Plan (the Plan)
Located in Moorestown, New Jersey
[Application No. D-09627]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 406(b)(1) and (2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (1) The purchase by the individual accounts
(the Accounts) in the Plan of Hassan Zekavat and Pouran Zekavat (the
Zekavats) from a certain limited partnership (the Partnership), a party
in interest with respect to the Plan, of interests (the Interests) in
the Partnership; and (2) the sale back to the Partnership of the
Interests, provided that the following conditions are met:
1. The fair market value of the real property (the Property) which
is the sole asset of the Partnership upon which is based the value of
the Interests is established by an appraiser independent of the Plan,
the Zekavats and Hassan Zekavat M.D., P.A. (the Employer);
2. The Accounts pay no more than current fair market value for the
Interests in the Partnership as of the time of purchase;
3. The Interests account for no more than 25 percent of the assets
of each Account as of the time of purchase;
4. The purchase of the Interests is a one-time transaction for
cash;
5. An independent fiduciary approves on behalf of the Accounts the
proposed purchase of the Interests from the Partnership;
6. No additional capital contributions or other contributions will
be made by the Accounts to the Partnership;
7. The Partnership will only sell the Property, in any future sale
of the Property, to an unrelated third party and the independent
fiduciary must approve such sale;
8. Each Account receives no less than fair market value for its
Interest in the Property as a result of any sale of the Property to a
third party.
9. If an independent fiduciary so determines, the Partnership must
repurchase the Interests for cash at a price set forth by an
independent appraiser chosen by the independent fiduciary acting on
behalf of the Accounts;
10. The Partnership cannot sell the Property, admit additional
partners or allow the general partners to sell their Partnership
interests to a third party without the consent of the independent
fiduciary;
11. The independent fiduciary receives disclosure of the annual
financial report of the Partnership containing a balance sheet and a
statement of changes in financial position within 90 days after the end
of Partnership's taxable year; and
12. All above transactions are determined by an independent
fiduciary to be in the best interests of the Accounts and the Plan.
13. The Independent Fiduciary shall approve and monitor the lease
between the Partnership and the Employer; and the lease between Zekavat
& Associates (``Related Party Leases'').
Summary of Facts and Representations
1. The Employer is engaged in the business of a medical practice in
Moorestown, New Jersey. Hassan Zekavat is the sole shareholder and the
president of the Employer. He and his wife, Pouran Zekavat, are the
trustees of the Plan and participants in the Plan. The Plan is a money
purchase plan which had six participants. Only the Accounts in the Plan
of Hassan Zekavat and Pouran Zekavat will invest in the Partnership. As
of October 31, 1994, the Account balance of Hassan Zekavat was
$1,304,000 and the Account balance of Pouran Zekavat was $297,000.
2. The Partnership is the York House East Ltd. limited partnership,
a New Jersey partnership of which Hassan Zekavat is a general partner
with a 63 percent capital and profits interest and Pouran Zekavat is a
general partner with a 37 percent capital and profits interest.1
In February, 1979 the Partnership purchased the Property, located in
Moorestown, for $400,000 from an unrelated party. A mortgage on the
Property is held by Commerce Bank of Cherry Hill, New Jersey, a party
unrelated to the Plan or the Employer. The balance remaining on the
mortgage was $289,203 as of May 1, 1994.
\1\ Section 3(14)(G) of the Act defines the term ``party in
interest'' with respect to a plan to include a partnership which is
50 percent or more owned by a 50 percent or more owner of an
employer of employees covered by the plan.
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The Property consists of a two-story office building constructed in
1970, with 24 separate office suites. In 1994 the Property had a 91.6%
occupancy rate with a yearly rental income of $190,682. The Employer
and a business
[[Page 3485]]
operated by the Zekevat's son, Zekevat & Associate, lease office suites
in the building under a lease agreement with yearly rent of $22,000 and
$6,000 per year respectively, with options extending until 1998.
3. Colin L. Necky (Necky), a real estate appraiser located in
Cherry Hill, prepared an appraisal (the Appraisal) on the Property
dated April 18, 1994. The applicant represents that Necky is
independent of the Employer and the Plan. Utilizing the cost, income
and comparable sales approaches to value, Necky estimated that the
Property had a fair market value of $980,000 as of the date of the
appraisal.
4. The Accounts now propose to purchase Interests in the
Partnership from the Partnership and to become limited partners with a
combined 37 percent capital and profits interest.2 The Accounts
will pay no more than current fair market value for their Interests in
the Partnership as of the date of acquisition. The purchase of the
Interests will be entirely for cash. The Accounts will pay no fees or
commissions in regard to the proposed transaction. As limited partner,
the Accounts will receive a cumulative priority return of eight percent
on its initial capital contribution. That is, net cash from operations
will be distributed first to the Accounts as a limited partner in
payment of the priority return.
2 The applicant represents that, subsequent to the Plan's
investment in the Partnership, the ongoing lease between the
Partnership and the Employer will not be a prohibited transaction
because the Partnership is a ``real estate operating company'' under
29 CFR 2510.3-101(e) and, therefore, the real estate held by the
Partnership does not constitute plan assets. The Department
expresses no opinion herein in that regard. The applicant states
that the Partnership is a real estate operating company pursuant to
the regulation, because at least 50 percent of its assets are
invested in real estate, the Partnership has the right to
substantially participate directly in the management or development
activities, and in the ordinary course of business the Partnership
engages in real estate management or development.
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The applicant represents that the investment in the Partnership
will represent less than 25 percent of the assets of each of the
Accounts. The proceeds of the investment will be used to pay the
existing mortgage and to fund planned capital improvements on the
Property. The initial Account purchase of Interests in the Partnership,
the possible sale of the Property to a third party and the sale back of
Interests to the Partnership will be approved in advance by an
independent fiduciary on behalf of the Accounts and the Plan.
5. The Employer has selected Michael J. Winter (Winter), an
employee of the Chase Manhattan Bank, to serve as independent fiduciary
for the Accounts in regard to the acquisition, and ownership or
disposition by the Accounts of the Interests in the Partnership.
According to the applicant, Winter has no other relationship to the
Plan or the Employer. Winter is currently employed in the real estate
resources department of the Chase Manhattan Bank and represents that he
has had many years of experience involving the acquisition, management
and disposition of industrial, commercial and residential real estate.
Winter acknowledges that he understands the duties of a fiduciary under
the Act. Winter reviewed the Appraisal which discloses existing leases,
vacancies and the Property's net income. In view of the potential
appreciation in the value of the Property and the priority return of
eight percent on the Plan's initial contribution, Winter believes that
the proposed investment is in the best interests of the Plan and its
participants. Winter will make certain that the Plan does not pay more
than fair market value for the 37 percent Interest in the Partnership.
Winter states that he will exercise the rights of the Plan in the
Partnership in the best interests of the Plan. Also, Winter will: (a)
Approve the Related Party Leases and monitor them on an on going basis
for the Plan; (b) approve changes to the Related Party Leases; and (c)
take any and all required actions to protect the Plan in the event of
default under the Related Party Leases.
6. Further, the Partnership Agreement has been amended to provide
that the independent fiduciary's approval is necessary before the
Partnership makes any sale of the Property to a third party. The
applicant represents that this third party will be unrelated to the
Plan, Zekavats or the Employer and that such sale will be at fair
market value. Also, the Partnership Agreement has been amended to
require the Partnership to repurchase the Accounts Interests, if, in
the opinion of the independent fiduciary disposing of the Interests to
the Partnership is in the best interests of the Accounts. Such ``put
option'' will be for cash at a price set forth by an independent
appraiser chosen by the independent fiduciary acting of behalf of the
Plan.
The Plan will not make a decision to acquire or sell an Interest in
the Partnership without the approval of the independent fiduciary.
Furthermore, the Plan will not be permitted to invest additional money
in the Partnership or make any additional capital contributions to the
Partnership. In the event of the need of cash with respect to the
Property, such cash will come from the general partner. However, under
the Partnership Agreement the Plan's percentage interest in the
Partnership cannot be changed and will not be changed by virtue of the
contribution by the general partner.
6. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria of section 408(a) of
the Act because: (1) An independent fiduciary has determined that the
proposed purchase of the Interests is in the best interests of the
Plan; (2) the fair market value of the Property will be established by
a real estate appraiser independent of the Plan and the Employer; (3)
the Plan will pay no more than current fair market value for the
Interests; (4) the Accounts may require the Partnership to repurchase
the Interests at a price set forth by an independent appraiser chosen
by the independent fiduciary; (5) the sale of the Property by the
Partnership or interest in the Partnership to an unrelated third party
will require the consent of the independent fiduciary; and (6) the
Independent Fiduciary shall approve and monitor the Related Party
Leases and take all required action to protect the Plan in the event of
default.
FOR FURTHER INFORMATION CONTACT: Janet L. Schmidt of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Rose's Stores, Inc. Retirement Savings 401(k) Plan (the Retirement
Savings Plan) Located in Henderson, NC
[Application No. D-10062]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2),
and 407(a) of the Act and the sanctions resulting from the application
of section 4975 of the Code by reason of section 4975(c)(1) (A) through
(E) of the Code, shall not apply to (1) the past acquisition and
holding by the Rose's Stores, Inc. Variable Investment Plan (the
Variable Investment Plan) of subscription rights (the Subscription
Rights) offered by Rose's Stores, Inc. (the Employer) to purchase
shares of new common stock (the New Stock) upon the emergence of the
Employer from bankruptcy; (2) the past acquisition and continued
holding by the Variable Investment Plan and subsequently, the
Retirement Savings Plan, of warrants (the Warrants) to purchase shares
of the Employer's New
[[Page 3486]]
Stock; and (3) the proposed acquisition of shares of the New Stock by
the Retirement Savings Plan upon the exercise of the Warrants.
This proposed exemption is subject to the following conditions:
(a) The acquisition and holding of the Subscription Rights and the
Warrants by the Variable Investment Plan occurred in connection with
the Employer's bankruptcy proceeding pursuant to which all holders of
the old common stock (the Old Stock) of the Employer were treated in
the same manner.
(b) The Variable Investment Plan had little, if any, ability to
affect the negotiation of the Employer's plan of reorganization with
respect to the bankruptcy proceeding.
(c) The Subscription Rights and the Warrants were acquired
automatically and without any action on the part of the Variable
Investment Plan.
(d) The Variable Investment Plan did not pay any fees or
commissions in connection with the receipt and holding of the
Subscription Rights and the Warrants, nor will the Retirement Savings
Plan pay any fees or commissions in connection with the holding and
exercise of the Warrants.
(e) Any decision to exercise the Warrants now held by the
Retirement Plan will be made by participants in accordance with the
terms of such Plan.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
February 7, 1995 with respect to the acquisition and holding by the
Variable Investment Plan of the Subscription Rights and April 28, 1995
with respect to the acquisition and holding by the Variable Investment
Plan (and subsequently the Retirement Savings Plan) of the Warrants.
Summary of Facts and Representations
1. The Retirement Savings Plan is a defined contribution plan that
provides for participant-directed investments. As of September 30,
1995, the Retirement Savings Plan had total assets of approximately
$59,025,284 and 9,155 participants. First Union National Bank of North
Carolina serves as the trustee (the Trustee) of the Retirement Savings
Plan but it exercises no investment discretion over the assets involved
in the transactions that are described herein.
The Retirement Savings Plan was formed, effective July 1, 1995, as
the result of the merger of the Variable Investment Plan and the Rose's
Stores, Inc. Profit Sharing Plan (the Profit Sharing Plan). The terms
of the merged plan are consistent with those of the Variable Investment
Plan, which was amended to reflect the merger. The name of the merged
plan was changed to ``Rose's Stores, Inc. Retirement Savings 401(k)
Plan.''
Both the Variable Investment Plan and the Profit Sharing Plan had
common participants and shared the same bank trustee. The Subscription
Rights and the Warrants that are described herein were assets of the
Variable Investment Plan but they were never assets of the Profit
Sharing Plan.
2. The Employer is a Delaware corporation maintaining its principal
place of business in Henderson, North Carolina. The Employer operates a
chain of retail stores called ``Roses'' in 11 southeastern states of
the United States.
3. The Employer recently emerged from a reorganization proceeding
under Chapter 11 of Title 11 of the United States Code. Under the
bankruptcy proceeding, the First Amended Joint Plan of Reorganization
of Rose's Stores, Inc. (the POR) was approved and confirmed by the U.S.
Bankruptcy Court for the Eastern District of North Carolina, Raleigh
Division (the Court) on December 14, 1994. A modified and Restated
First Amended Joint Plan of Reorganization (the Modified POR) was
confirmed by the Court on April 24, 1995 and became effective on April
28, 1995 (the Effective Date). It is represented that the Variable
Investment Plan had little, if any, bargaining power in the structuring
of the POR or the Modified POR.
4. Under the terms of the POR, the holders of record of the Old
Stock, as of February 7, 1995, were entitled to purchase shares of New
Stock at a subscription price of $6.50 per share. Each holder received
one Subscription Right for each 1.8758 shares of Old Stock owned as of
February 7, 1995, provided that the aggregate amount of subscription
proceeds received in connection with the Subscription Rights on or
before March 31, 1995 totaled at least $25 million.3
\3\ Because the Variable Investment Plan provided for
participant-directed investments, one investment option offered to
participants was the Company Stock Fund which was invested in shares
of Old Stock. As of September 1, 1993, the Variable Investment Plan
held 255,290 shares of Old Stock. At the time of the bankruptcy
filing described herein, the Variable Investment Plan's Advisory
Committee determined that the investment by such plan in the Old
Stock would be discontinued as of September 1, 1993. However, the
Advisory Committee also determined that it would permit each
participant to direct, in writing, that the portion of his or her
Variable Investment Plan account balance that was invested in the
Company Stock Fund on September 1, 1993 remain so invested until
such time as the participant directed otherwise. Participants were
advised that there were risks associated with the continued
investment in the Old Stock due to the Employer's reorganization
proceeding. Because some participants elected to have their accounts
remain invested in the Old Stock, the Variable Investment Plan
continued to hold shares of the Old Stock until April 28, 1995 which
is the Effective Date of the Modified POR (see Representation 6).
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5. To effect Subscription Rights, each holder, including
participants in the Variable Investment Plan, was notified of the
Subscription Rights. Approximately 300 participants elected to exercise
Subscription Rights. A check in the amount of the total subscription
price that was attributable to the Subscription Rights was issued by
the Variable Investment Plan's former trustee and held in escrow by
State Street Bank and Trust Company (State Street), as distribution
agent, pending a determination of whether a $25 million threshold
amount had been achieved. In the event that the threshold was achieved
and the exercise of the Subscription Rights became effective, an amount
equal to the total price attributable to the Subscription Rights would
have been deducted pro rata from other assets in a participant's
account. Because the $25 million threshold amount was not achieved,
State Street returned the check to the trustee. No adjustments were
ever made to participants' accounts due to Subscription Rights nor did
any affected participants pay any fees or commissions in connection
with the receipt and holding of the Subscription Rights.
6. By its terms, the Modified POR entitled holders of record of the
Employer's Voting Common Stock and Non-Voting Class B Stock (i.e., the
Old Stock) to receive their pro rata share of 4,285,714 Warrants that
were issued by the Employer within 30 days after the Effective Date of
the Modified POR. The Employer's Old Stock was also cancelled and
extinguished.
7. Each Warrant 4 entitles the holder to purchase one share of
New Stock during the period commencing on the date the Warrants were
issued and ending on the seventh anniversary of the Effective Date.
Under the Modified POR, the initial exercise price of the Warrants per
share of New Stock is $14.45. This price has been determined by
dividing the amount of the Employer's unsecured creditors' allowed
claims (and reserve disputed claims) (collectively, the Recovery
Amount) as of the Effective Date by 10 million (the total number of
shares of New Stock to be issued under the
[[Page 3487]]
Modified POR).5 As reported in the Wall Street Journal on December
11, 1995, the trading prices for the Warrants on the NASDAQ were as
follows: (High) \3/16\, (Low) \1/8\, (Close) \3/16\, (Net Change) 0.
4 The Warrants are treated as separate securities under
the Federal securities laws. Although the Warrants were originally
quoted on the NASDAQ system, they were subsequently delisted due to
the absence of two market makers making a market for such
securities. According to the applicant, the Warrants were relisted
by the NASDAQ on October 13, 1995.
5 The applicant represents that the Old Stock and the New
Stock constitute ``qualifying employer securities'' within the
meaning of section 407(d)(5) of the Act and therefore, the ownership
of such stock by either the Variable Investment Plan or the
Retirement Savings Plan would satisfy the requirements of section
407(a) of the Act. However, in this proposed exemption, the
Department expresses no opinion on whether the requirements of
section 407 have been met.
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8. The exercise price will be adjusted on each of the first three
anniversaries of the Effective Date to reflect changes in the Recovery
Amount on each of these three dates. The exercise price will be
adjusted on the fourth, fifth and sixth anniversaries of the Effective
Date to equal 105 percent, 110 percent and 115 percent, respectively,
of the Recovery Amount divided by 10 million shares. The exercise price
is also subject to further adjustment.
9. No participant in the Variable Investment Plan has paid any fees
or commissions in connection with the holding of the Warrants and no
participant in the Retirement Savings Plan will pay any fees or
commissions in connection with the continued holding or exercise of the
Warrants. With respect to the exercise of the Warrants, the Trustee
will follow the participant's directions. Under such circumstances, a
participant will exercise Warrants pursuant to procedures and forms
that will be established by the Retirement Savings Plan's Advisory
Committee. Such procedures may provide that the exercise price under
the Warrants will be paid from that portion of the participant's
account that is invested in assets other than in the Employer's
securities. In the event that the fair market value of the New Stock is
less than the exercise price under the Warrants, it is represented that
a participant will not exercise Warrants to acquire shares of New
Stock.
10. The Employer represents that it has analyzed the impact of the
POR and the Modified POR on the Variable Investment Plan and the
Retirement Savings Plan. In particular, the Employer has analyzed the
prohibited transaction implications of the automatic exchange of the
Old Stock previously held by the Variable Investment Plan for the
Warrants under the Modified POR and the acquisition and holding of the
Subscription Rights by the Plan under the POR. For these reasons, the
Employer has concluded that these transactions have resulted in
prohibited transactions in violation of the Act. Therefore, the
Employer has requested retroactive exemptive relief from the
Department.6
\6\ As noted above, the POR was confirmed by the Court on
December 14, 1994. However, the applicant explains that there could
be no assurance that the POR would become effective. The applicant
also explains that it was required to meet several financial hurdles
in order for the Modified POR to become effective. One of these
hurdles, according to the applicant, culminated in the negotiation
of a revolving credit agreement, the closing of which occurred on
April 27 and 28, 1995 with unrelated lenders.
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11. In summary, it is represented that the transactions satisfy the
statutory criteria for an exemption under section 408(a) of the Act
because: (a) The acquisition and holding of the Subscription Rights and
the Warrants by the Variable Investment Plan occurred in connection
with the Employer's bankruptcy proceeding pursuant to which all holders
of the Old Stock of the Employer were treated in the same manner; (b)
the Variable Investment Plan had little, if any, ability to affect the
negotiation of the Employer's plans of reorganization with respect to
the bankruptcy proceeding; (c) the Subscription Rights and the Warrants
were acquired automatically and without any action on the part of the
Variable Investment Plan; (d) the Variable Investment Plan did not pay
any fees or commissions in connection with the receipt and holding of
the Subscription Rights and the Warrants nor will the Retirement
Savings Plan pay any fees or commissions in connection with the
continued holding and exercise of the Warrants; and (e) any decision to
exercise the Warrants now held by the Retirement Savings Plan will be
made by participants in accordance with the terms of such plan.
Notice to Interested Persons
Notice of the proposed exemption will be given to all interested
persons within 10 days of the publication of the notice of proposed
exemption in the Federal Register. The notice will be provided to
interested persons by posting and by first class mail. Such notice will
inform interested persons of their right to comment on and/or to
request a hearing with respect to the proposed exemption. Comments are
due within 40 days of the publication of the proposed exemption in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Department of
Labor, telephone (202) 219-8881. (This is not a toll-free number.)
W.W. Taylor, Jr., M.D., P.C. Money Purchase Pension Plan (the Plan)
Located in Memphis, Tennessee
[Application No. D-10118]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the past contribution by W.W. Taylor,
M.D., P.C. (the Employer) to the Plan of certain publicly traded
securities (the Securities), provided: (a) The contribution was a one-
time transaction; (b) the Securities were valued at their fair market
value as of the date of the contribution as determined by an
independent broker; (c) no commissions were paid in connection with the
transaction; and (d) the Securities represented less than 25% of the
assets of the Plan at the time of the contribution.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective October 7, 1994.
Summary of Facts and Representations
1. The Plan is a defined contribution money purchase pension plan
that currently has 7 participants and had assets of $721,597 as of June
30, 1995. W.W. Taylor, M.D. (Dr. Taylor) is the trustee of the Plan.
2. On October 7, 1994, and November 2, 10, 17 and 22, 1994, the
Securities were transferred from a corporate account of the Employer to
an account of the Plan in order to satisfy the minimum funding
requirements of the Plan for the year ending June 30, 1994. The
Securities consisted of 100 shares of Sofamor/Danek Group, Inc. (S/D),
valued at $18 per share, for a total value of $1,800; 100 shares of GTE
Corporation (GTE), valued at $30.25 per share, for a total value of
$3,025; and 470.108 shares of Putnam Corporate Asset Trust, valued at
$40.01 per share, for a total value of $18,809.02. Thus, the total
contribution of the Securities was valued at $23,634.02. The values of
the Securities were obtained from the New York Stock Exchange firm of
Morgan Keegan & Company (MK).
3. The applicant represents that the contribution in kind of the
Securities
[[Page 3488]]
instead of cash was made in error. Ms. Nancy Cochran of Burleigh-
Dunger-Cochran (BDC) in Memphis, Tennessee, an independent firm which
provides pension consulting and administrative services to the Plan,
has represented that the Plan and the Employer each maintain a separate
brokerage account with MK. Ms. Cochran represents that prior to the
contribution of the Securities, Dr. Taylor called BDC to inquire
whether the contribution could be made by the transfer of funds from
the Employer's brokerage account at MK to the Plan's brokerage account.
BDC informed Dr. Taylor that this could be done, but since BDC did not
specify that it meant that only a cash disbursement was permissible,
Dr. Taylor understood the response to mean that the contribution could
be paid by the transfer of either cash or marketable securities. As a
result of this misunderstanding, Dr. Taylor instructed the broker at MK
to transfer the Securities directly from the Employer's account to the
Plan's account to satisfy a portion of the required contribution to the
Plan.
4. Michael D. Uiberall, C.P.A., an independent certified public
accountant with Uiberall, Lieb, Blockman, Perry, P.C. (ULBP) in
Memphis, Tennessee, represents that ULBP is the certified public
accounting firm for the Employer. He further represents that in the
process of preparing the Employer's 1994 U. S. Corporate Income Tax
Return in late January or early February, 1995, it came to ULBP's
attention that the Employer had contributed the Securities to the Plan.
ULBP contacted Dr. Taylor, who did not realize that this was a
prohibited transaction. On the contrary, Dr. Taylor was of the opinion
that this had been a permissible transaction. ULBP then contacted BDC,
which followed up with Dr. Taylor in resolving this issue by filing a
request for the exemption proposed herein. The applicant represents
that neither the Plan nor the Employer is the subject of an
investigation or enforcement action by the Department or the Internal
Revenue Service.
5. The applicant represents that the transaction was in the best
interest of the Plan. The Plan had already purchased shares in two of
the three investments involved in the subject transaction before the
erroneous transfers occurred. The Plan held 100 shares of GTE and 150
shares of S/D prior to the subject transaction. The applicant
represents that had cash been contributed to the Plan, the same
Securities would have been purchased by the Plan on the open market.
The Securities represented approximately 3.5% of the Plan's assets as
of the time of the contribution. Further, since the time of the
contribution, the Securities have appreciated in value by 11.45%. The
applicant also states that since no brokerage commissions were paid
with respect to the transfers as they would have been had the
Securities been purchased on the open market, the Plan has saved
additional money by virtue of the contribution in kind.
6. In summary, the applicant represents that the subject
transaction satisfies the criteria contained in section 408(a) of the
Act because: (a) The contribution was a one-time transaction; (b) no
commissions were paid by the Plan in connection with the transfer of
the Securities; (c) the Securities were valued by MK, an independent
brokerage firm, as of the dates of each transfer; (d) the transaction
occurred as a result of a misunderstanding between Dr. Taylor and the
pension consulting firm of BDC; and (e) when the prohibited transaction
was discovered by the Employer's independent C.P.A. firm, the Employer
requested the exemption proposed herein.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 25th day of January, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration.
Department of Labor.
[FR Doc. 96-1775 Filed 1-30-96; 8:45 am]
BILLING CODE 4510-29-P
