[Federal Register Volume 64, Number 102 (Thursday, May 27, 1999)]
[Notices]
[Pages 28835-28838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13497]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10621, et al.]
Proposed Exemptions; MICO, Inc. (MICO)
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 restrictions 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 requests for
a hearing should state: (1) The name, 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.
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.
MICO, Inc. (MICO)
Located in North Mankato, Minnesota
[Exemption Application Number D-10621]
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 32826, 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 proposed sale (the Sale) of a certain
parcel of unimproved real property (the Property) from the MICO, Inc.
Profit Sharing Plan (the Plan) to MICO, a party in interest and
disqualified person with respect to the Plan, provided that the
following conditions are met:
(a) The terms and conditions of the Sale are at least as favorable
to the Plan as those obtainable in an arm's length transaction with an
unrelated party;
(b) MICO purchases the Property for $362,000, which represents the
Property's current fair market value as determined by a qualified,
independent appraiser;
(c) MICO additionally pays to the Plan a premium of $36,200, as
determined by a qualified, independent appraiser, due to MICO's
ownership of improved real property which is located adjacent to the
Property;
(d) The Sale is a one-time transaction for cash; and
(e) The Plan pays no fees or commissions in connection with the
Sale.
Summary of Facts and Representations
1. MICO is a Minnesota corporation engaged primarily in the design
and manufacture of hydraulic brake systems. MICO is also the sponsor of
the Plan. The Plan is a defined contribution plan which allows the
Plan's participants to direct their individual accounts and the Plan's
trustees (the Trustees) to make all other investment decisions with
respect to the Plan. The Plan, which was established on December 8,
1959, has 280 participants and approximately $20,030,206 in total
assets as of June 8, 1998.
2. In 1966, the Plan purchased a lot of unimproved land (the
Original Parcel), located on Marie Lane in North Mankato, Minnesota for
$46,000 from Fred and Ruth Forsberg, parties unrelated to the Plan. The
Property is an irregularly shaped lot comprising approximately 12.74
acres of undeveloped land zoned for I-1 ``Planned Industrial'' use and
is located
[[Page 28836]]
adjacent to MICO's production facilities and offices. The applicant
represents that the Original Parcel was acquired for investment
purposes. The applicant represents that the Plan subsequently leased
(the Lease) to MICO a portion of the Original Parcel and, in 1979, sold
the Original Parcel portion to MICO (the Portion Sale).1 The
portion of the Original Parcel which was not transferred to MICO (i.e.,
the Property) continues to be held as an asset of the Plan.
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\1\ The Applicants represent that the Lease and the Portion Sale
were made pursuant to ERISA section 414 (c)(2) and (c)(3). In this
regard, the Department expresses no opinion herein as to whether the
Lease and Portion Sale were made in accordance with the requirements
of the Act.
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3. The Plan has incurred certain holding costs as a result of its
ownership of the Property. In this regard, the Plan has paid
approximately $90,000 in real estate taxes with respect to the
Property. Additionally, the Plan has incurred a special assessment (the
Assessment) which was imposed on the Property in 1998 for a principal
amount of $29,127.97. The Trustees of the Plan elected to pay the
Assessment over a 10 year period at the rate of $2,913.00 per year at
an interest rate of 7.5%.2
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\2\ The applicant represents that in the event that the proposed
transaction is granted by the Department, the Plan will be
responsible for paying the outstanding balance of the Assessment on
the closing date of the Sale.
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4. The Plan has received income from the Property through an at-
will oral agreement (the Agreement) with a sharecropper who has been
farming the Property since 1984. As a result, the Plan has received
approximately $1,350 each year from the Agreement. The Trustees
represent, however, that the sharecropper has recently given notice to
the Trustees that he is considering the discontinuation of the
Agreement.
5. The applicant represents that during the Plan's ownership of the
Property, the Trustees received several offers to purchase a portion of
the Property (the Offers). The applicant represents that the Trustees,
after receiving each Offer, determined the extent to which a sale
involving only a portion of the Property would reduce the value of the
remaining Property. The applicant represents that the Trustees, after
analyzing both the sale amount of each Offer and the resulting decline
in value of the remaining Property, determined that each Offer would
provide an unacceptable overall rate of return to the Plan for the
Property. As a result, the Trustees determined that each Offer was not
in the best interests of the Plan.
The Trustees represent they are currently not advertising the
Property for sale since the Property's limited marketability makes it
unlikely that any advertisement of the Property would result in the
Property's sale.
6. The Property was appraised on November 26, 1997 (the Appraisal)
by Gwen K. Gathercoal (Ms. Gathercoal), a Minnesota-licensed appraiser
for the Robinson Appraisal Company, Inc. ( the Robinson Co.). The
Appraisal was reviewed by another Robinson Co. appraiser, James K.
Simonson (Mr. Simonson). Ms. Gathercoal and Mr. Simonson each represent
that they are independent of the Plan and MICO and their employment and
compensation were not contingent on the appraised value of the
Property.
Ms. Gathercoal used the sales comparison approach and examined
eight different transactions before determining that, as of November
26, 1997, the Property had a fair market value of $362,000. In the
Appraisal, Ms. Gathercoal concluded that the ``highest and best use''
for the Property would be a combination of residential, commercial, and
industrial use.
The value of the Property was reevaluated (the Reevaluation) by Mr.
Simonson on November 23, 1998. The purpose of the Reevaluation was to
establish whether the Property had appreciated in value since the
Appraisal and to determine the extent to which a premium on the
Property was necessary in the event that the Property was sold to
MICO.3 In the Reevaluation, Mr. Simonson represented that
the Property's fair market value of $362,000 had not increased since
the Appraisal. As a result, Mr. Simonson estimated that the Property
had a fair market value of $362,000, as of November 23, 1998. Mr.
Simonson represented further that, in the event the Property was sold
to MICO, an adjacent landowner, a premium valued at $36,200, or 10%
above the Property's fair market value, should be paid by MICO to the
Plan. As a result, Mr. Simonson estimated that any sale of the Property
by the Plan to MICO should occur at a price equal to the sum of the
Property's fair market value of $362,000 and the Property's assemblage
value of $36,200.
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\3\ In the Reevaluation, Mr. Simonson stated that he customarily
adjusts upward the appraised value of real property in instances
where, as here, the purchaser of the real property owns real
property located adjacent to the real property the purchaser seeks
to buy. Mr. Simonson represents that this upward adjustment,
commonly referred to as an ``assemblage'', reflects the willingness
of such purchasers to pay a premium above market value so as to
avoid moving or to avoid business disruptions.
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7. MICO proposes to purchase the Property for $398,200 (the
Purchase Price). The Purchase Price represents the sum of the
Property's current fair market value of $362,000, as determined by a
qualified, independent appraiser, and the Property's assemblage value
of $36,200 with respect to the Sale, as determined by a qualified,
independent appraiser. The Sale will be a one-time transaction for cash
in which the Plan pays no fees or commissions. The Trustees represent
that the Sale is in the best interests of the Plan's participants and
beneficiaries since the Property's rate of appreciation has decreased
in recent years despite an increase in the Property's real estate
taxes. The Trustees represent further that the Assessment, when added
to the increased real estate taxes incurred by the Plan, creates an
inappropriate Plan expense with respect to the Property.
8. In summary, the Applicants represent that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because:
(a) The terms and conditions of the Sale are at least as favorable
to the Plan as those obtainable in an arm's length transaction with an
unrelated party;
(b) MICO purchases the Property for $362,000, which represents the
Property's current fair market value as determined by a qualified,
independent appraiser;
(c) MICO additionally pays to the Plan a premium of $36,200, as
determined by a qualified, independent appraiser, due to MICO's
ownership of improved real property located adjacent to the Property;
(d) The Sale is a one-time transaction for cash; and
(e) The Plan pays no fees or commissions connected to the Sale.
FOR FURTHER INFORMATION CONTACT: Christopher J. Motta at the United
States Department of Labor, telephone (202) 219-8883 (this is not a
toll free number).
Western Petroleum Company Profit Sharing Plan (the Plan)
Located in Eden Prairie, Minnesota
[Application No. D-10743]
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 proposed sale by the individual account
(the Account) of
[[Page 28837]]
James W. Emison in the Plan of certain closely-held stock (the Stock)
to Mr. Emison, a party in interest with respect to the Plan, provided
that the following conditions are satisfied: (a) The sale is a one-time
transaction for cash; (b) the Account pays no commissions nor other
expenses relating to the sale; and (c) the Account receives an amount
that is no less than the fair market value of the Stock as of the date
of the sale, as determined by a qualified, independent appraiser.
Summary of Facts and Representations
1. The Plan is a defined contribution, profit sharing plan
established by Western Petroleum Company (the Employer). The Employer
is a Minnesota corporation and a petroleum wholesaler, located in Eden
Prairie, Minnesota. As of February 8, 1999, the Plan had approximately
40 participants and beneficiaries. As of December 31, 1997, the Plan
had total assets of approximately $4,012,415, and the Account had total
assets of approximately $1,483,000. The trustees of the Plan are Mr.
Emison and Mr. Lee Granlund. Mr. Emison (hereafter also referred to as
``the Applicant'') is also the President and a 100% shareholder of the
Employer.
2. Among the assets of the Account is the Stock, which consists of
12,838 shares of Community Bank Group, Inc. (CBG), a closely-held bank
holding company with four subsidiary banks: Community Bank Jordan,
Community Bank Winsted, Community Bank New Ulm, and Community Bank St.
Peter. The Applicant represents that the Account acquired 51 shares of
the Stock in 1995 from Mr. Roy Terwilliger, an individual unrelated to
the Plan and the Employer, for $82,875.00. In 1997, the Stock underwent
a 100 for 1 stock split so that the Account held an additional 5,049
shares of the Stock. In 1997, the Account acquired 7,738 shares of the
Stock from CBG for $154,763.00. Thus, the Account's basis in the Stock
is $237,638.00. Mr. Emison has been a director of CBG since 1984. In
addition, Mr. Emison owns 70,480 shares of the Stock as trustee of the
James Wade Emison Trust, which shares represent approximately 24.82% of
the outstanding shares of the Stock as of December 31,
1998.4
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\4\ The Department expresses no opinion herein as to whether the
Account's acquisition and holding of the Stock violated any of the
general fiduciary responsibility provisions of Part 4 of Title I of
the Act. However, the Department notes that section 404(a) of the
Act requires, among other things, that a plan fiduciary act
prudently and solely in the interest of the plan's participants and
beneficiaries when making investment decisions on behalf of the
plan.
In addition, the Department does not propose exemptive relief
herein for any prohibited transaction that may have occurred with
respect to the Account's acquisition and holding of the Stock. The
Department notes that such acquisition and holding of the Stock by
the Account raises issues under sections 406(a)(1)(D) and 406 (b)(1)
and (b)(2) of the Act because Mr. Emison, as a director and
shareholder of CBG, has an interest in the issuer of the Stock that
may have affected his best judgment as a fiduciary for the Account.
See Advisory Opinion 90-20A (June 15, 1990) for a similar analysis
under section 4975(c)(1)(D) and (E) of the Code with respect to a
self-directed individual retirement acount (IRA).
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3. The Applicant requests an exemption to purchase all 12,838
shares of the Stock from the Account. Due to business and income tax
considerations, CBG seeks to elect Subchapter S status under the
Code.5 However, section 1361 of the Code permits only
``eligible shareholders'' to hold stock in a Subchapter S corporation.
Because the Account is not an eligible shareholder for purposes of the
Code, the Applicant wishes to purchase the Stock from the Account in
order to remove the impediment to CBG's Subchapter S election.
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\5\ Section 1362 of the Code contains provisions which allow a
small business corporation to elect and terminate Subchapter S
corporate status.
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4. The Stock was independently appraised by Paul W. Olander, AM,
and William D. Thumstedter, of Olander Advisory Services, A Division of
United Bankers' Bank, located in Bloomington, Minnesota. Messrs.
Olander and Thumstedter both specialize in the banking industry.
The appraisal states that, as of December 31, 1998, there were
283,990 shares of CBG issued and outstanding held by 14 shareholders,
and the Stock had an estimated fair market value of $34.55 per share.
In addition, it was determined that the adjusted fair market value of a
non-marketable, minority interest in the Stock, including the effect of
the outstanding management stock options, was approximately $34.45 per
share, based upon 4,800 options outstanding with an exercise price of
$29.00 per share.
The appraisal states further that the valuation of the Stock is
predicated upon the financial statements of CBG and its subsidiary
banks for the five years ending December 31, 1998. Messrs. Olander and
Thumstedter also interviewed key management personnel of CBG and
Winsted Bank, analyzed industry data, and considered the future
earnings potential of CBG. Finally, they gave consideration to the
eight factors in the valuation of the stock of closely-held businesses
that are set forth in the Internal Revenue Service's Revenue Ruling 59-
60,6 to the extent relevant. The appraisal states that the
net asset value method was the most appropriate to use in valuing the
Stock, since CBG receives virtually all its income from its subsidiary
banks.
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\6\ See Rev. Rul. 59-60, 1959-1 C.B. 237, as modified by Rev.
Rul. 65-193, 1965-2 C.B. 370, and as modified and extended by Rev.
Rul. 68-609, 1968-2 C.B. 327, and Rev. Rul 77-287, 1977-2 C.B. 319.
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5. The Applicant proposes to purchase the 12,838 shares of the
Stock from the Account for the fair market value of the Stock as of the
date of the sale, based upon an updated independent appraisal. Based
upon an appraised value for the Stock, as of December 31, 1998, of
$34.55 per share, the Stock has a total value of $443,552.90, which
represents approximately 30% of the assets of the Account. Thus, the
Account would realize a gain of approximately $205,914.90 as a result
of the sale.
The Applicant states that the sale will be a one-time transaction
for cash, and the Account will pay no commissions nor other expenses
relating to the sale. The Applicant represents that the proposed
transaction is in the best interests of the Account because the sale of
the Stock will enhance the liquidity and diversification of the assets
of the Account.
6. In summary, the Applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) the sale will
be a one-time transaction for cash; (b) the Account will pay no
commissions nor other expenses relating to the sale; (c) the Account
will receive an amount that is no less than the fair market value of
the Stock as of the date of the sale, as determined by a qualified,
independent appraiser; (d) the sale will enhance the liquidity and
diversification of the assets of the Account; and (e) Mr. Emison will
be the only participant of the Plan to be affected by the proposed
transaction.
Notice to Interested Persons
Because the only Plan assets involved in the proposed transaction
are those in the Account, and Mr. Emison is the only participant
affected by the proposed transaction, it has been determined that there
is no need to distribute the notice of proposed exemption to interested
persons. Comments and requests for a hearing on the proposed exemption
are due 30 days after the date of publication of this notice in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
[[Page 28838]]
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 24th day of May, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-13497 Filed 5-26-99; 8:45 am]
BILLING CODE 4510-29-P
