[Federal Register Volume 60, Number 172 (Wednesday, September 6, 1995)]
[Notices]
[Pages 46311-46314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22043]
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[[Page 46312]]
DEPARTMENT OF LABOR
[Application No. D-09956, et al.]
Proposed Exemptions; TSC International Ltd., Custom Marketing and
Import Profit Sharing Plan (the Plan)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemption.
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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, 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, N.W., Washington, D.C.
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, N.W., Washington, D.C. 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.
TSC International Ltd., Custom Marketing and Import Profit Sharing Plan
(the Plan) Located in Kansas City, MO
[Application No. D-09956]
Proposed Exemption
The Department of Labor is considering granting an exemption under
the authority of 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,
August 10, 1990). If the exemption is granted, the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) shall not apply to the proposed (1)
redemption by TSC International Merchandising Ltd., Custom Marketing
and Import Company (TSC) of 19,000 shares of common stock issued by TSC
and held by the Plan; and (2) the extension of credit by the Plan to
TSC in connection with the redemption of the stock.1
1 Because Mr. Jack Hardgree is the sole participant in the
Plan, there is no jurisdiction under Title I of the Employee
Retirement Income Security Act of 1974 (the Act). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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The proposed exemption is conditioned on the following
requirements:
(1) The redemption price for the stock is determined by a
qualified, independent appraiser.
(2) The note which evidences the redemption price for the stock
represents not more than 25 percent of the Plan's assets.
(3) The terms of the note are based upon terms that are comparable
to those that would be extended by a third party lender.
(4) The stock, which secures TSC's obligations under the note, at
all times represents 200 percent of the outstanding balance of the
note; however, if the value of the stock ever falls below the 200
percent level, TSC will pledge additional collateral.
(5) The Plan is not required to pay any fees or commissions in
connection with the redemption of the stock or the administration of
the note.
(6) Boatmen's First National Bank of Kansas City (Boatmen's) holds
certificates representing the stock in an escrow account until TSC pays
the redemption price in full.
(7) The Plan increases its liquidity and investment yield by
disposing of an asset and receives cash to promote asset
diversification.
Summary of Facts and Representations
1. The Plan is a profit sharing plan with Mr. Jack Hardgree as its
only participant. As of December 12, 1994, the Plan had net assets of
$565,500. The trustee of the Plan and the decisionmaker with respect to
the Plan's investments is Mr. Hardgree.
2. TSC is a ``C'' corporation that maintains its principal place of
business in Prairie Village, Kansas. It is engaged in the import
business and primarily deals in metal products for U.S. manufacturers.
Mr. Hardgree is the sole director, officer and employee of TSC.
3. The Plan currently holds 19,000 shares of common stock of TSC.
The stock has a stated par value of $10 per share and it is not
publicly-traded. The shares of stock that are held by the Plan
represent 97 percent of the issued and outstanding stock of TSC. The 3
percent remaining shares of stock are owned by Mr. Hardgree.
4. Prior to the incorporation of TSC in January 1984, Mr. Hardgree
was a manufacturer's representative with an unrelated company,
Merchandise International, Inc. (MII). That company had a money
purchase pension plan (the MII Plan) with individually-directed
accounts. In late 1983, Mr. Hardgree resigned from his employment with
MII, having been bought out by the two remaining principals of MII.
Although Mr. Hardgree had no further connections with MII as an
employee or
[[Page 46313]]
owner after his resignation, he continued to participate in the MII
Plan.
5. In January 1984, Mr. Hardgree formed TSC. At the time of
incorporation of TSC, Mr. Hardgree, in his personal capacity, acquired
500 shares of TSC common stock directly from TSC for $10 per share.
This amount represented the par value of such stock. In May 1985, Mr.
Hardgree directed the trustee of the MII Plan to acquire, from TSC,
9,500 shares of TSC common stock for his individually-directed account
in such Plan. The acquisition price for the stock was $10 per share.
Although the stock had been authorized in TSC's corporate charter, it
had not been been issued.
In 1986, Mr. Hardgree again directed the trustee of the MII Plan to
acquire, from TSC, an additional 9,500 shares of TSC's authorized but
unissued common stock, for his individually-directed account in the MII
Plan. The acquisition price for the stock was also established at $10
per share. It is represented that at the time of both stock
acquisitions, Mr. Hardgree had no interest in MII other than as a
participant in the MII Plan. It is also represented that following the
stock acquisitions, TSC common stock constituted the majority of the
assets of Mr. Hardgree' account in the MII Plan.2
2 The Department expresses no opinion herein on whether the
acquisition of TSC common stock by Mr. Hardgree's individually-
directed account in the MII Plan violated any of the provisions of
Part 4 of Title I of the Act.
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6. In January 1991, TSC established the Plan by adopting the Mid
American Bank & Trust Company Defined Contribution Master Plan. Soon
after the establishment of the Plan, the trustee of the MII Plan
transferred all 19,000 shares of TSC common stock to Mid American Bank
& Trust Company, the former trustee of the Plan, in a ``trustee-to-
trustee transfer.'' It is represented that Mr. Hardgree was advised
that the stock transfer which was made on behalf of the Plan did not
constitute a prohibited transaction.3
3 The Department expresses no opinion herein on whether the
transfer of the TSC common stock from the MII Plan to the Plan
violated the exclusive benefit rule of section 401(a) of the Code.
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7. Mid American Bank & Trust Company later became part of Johnson
County Bank which was thereafter acquired by Mercantile Bank. In
December 1994, Mercantile Bank became the custodian for the Plan and
Mr. Hardgree, the trustee.
8. TSC paid an unrelated third-party investment banking firm, Stern
Brothers & Co. of Kansas City, Missouri for a valuation report of the
19,000 shares of TSC common stock that are held by the Plan. According
to the appraisal report dated December 14, 1994, which was prepared by
Messrs. John C. Korschot, CFA, ASA, CBA and David K. Jones, CBA of the
firm, as of December 2, 1994, the 19,000 shares of TSC common stock
held by the Plan had a fair market value of $535,500 or $27.46 per
share. The appraisers stated that they used the adjusted book value
approach and the market comparison approach in rendering their opinion
as to the fair market value of the Plan's controlling interest in the
stock. In addition, the appraisers explained that they applied a
discount factor of 15 percent to the initial value of $640,000 they had
determined for the stock due to its lack of marketability. The
appraisers further noted that a control premium was implied in the
$640,000 initial value.
9. Although the value of TSC common stock and Plan assets have
increased significantly, it is represented that by holding only TSC
stock, the Plan is in an illiquid position should assets be needed for
distributions. Moreover, it is represented that TSC cannot promise that
its stock will hold or increase in value. Therefore, TSC requests an
administrative exemption from the Department in order to redeem the
shares of TSC common stock that are held by the Plan in return for cash
and a promissory note.
10. TSC proposes to redeem the stock held by the Plan by giving the
Plan a cash downpayment of $394,125 and a promissory note in the
principal amount of $141,375. The note will bear a fixed rate of
interest of 11 percent per annum. The note will also provide for
monthly installments of principal and interest over a period of two
years after the date of the redemption. The note may be prepayable
without penalty at any time by TSC. In addition, the Plan will not be
required to pay any fees or commissions in connection with the
redemption of the TSC common stock or with respect to the
administration of the proposed loan.
11. The note will be secured by the shares of the TSC common stock
that are redeemed from the Plan. The security interest in such shares
will be a first security interest and it will be governed by an escrow
agreement (the Escrow Agreement) between TSC and Boatmen's, with whom
TSC currently has a revolving loan arrangement, as escrow agent. At all
times, the fair market value of the stock will represent 200 percent of
the outstanding principal balance of the note. If, however, the fair
market value of the stock should ever fall below this level, TSC will
pledge additional collateral to cover the loan payments made under the
note. As further security, Mr. Hardgree will assign a portion of his
life insurance policy in the amount of the note.
12. By letter dated June 23, 1995, TSC received a loan commitment
in the amount of $141,375 from an unrelated lender, Missouri Bank &
Trust Company of Kansas City (Missouri Bank & Trust). The terms offered
by Missouri Bank & Trust are comparable to the terms of the note.
13. Under the Escrow Agreement, TSC will pledge all 19,000 shares
of the stock that are redeemed from the Plan by the delivery of
certificates evidencing such pledged shares to Boatman's. Boatmen's
will hold the certificates until the loan is repaid. If at any time TSC
defaults in the payment of principal or interest on the note, and the
default remains uncured for two months after written notice, the entire
unpaid principal amount of the note and accrued interest thereon will
become immediately due and payable. Then, the Plan will have all of the
certificates on deposit delivered to it. At the end of 20 days after
receipt of a written demand from the Plan, together with evidence that
the notice of the demand has been given to TSC, Boatmen's will deliver
to the Plan the certificates held by Boatmen's. If, however,
satisfactory proof is presented to Boatmen's that all installments of
the note have been paid, Boatmen's will deliver to TSC, the shares
remaining in its possession. Afterwards, all obligations between the
Plan, TSC and Boatmen's will cease.
The Plan will not be required to pay any fees or expenses in
connection with the administration of the Escrow Agreement. Further, no
parties to the Escrow Agreement will grant a security interest in any
of the securities deposited with Boatmen's or create a lien,
encumbrance, or other claim against monies or borrow from such stock.
14. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
4975(c)(2) of the Code because:
(a) The redemption price for the stock has been determined by a
qualified, independent appraiser.
(b) The note which evidences the redemption price for the stock
will represent 25 percent of the Plan's assets.
(c) The terms of the note are based upon terms that are comparable
to those that would be extended by a third party lender.
(d) The stock, which secures TSC's obligations under the note, at
all times will represent 200 percent of the outstanding balance of the
note.
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(e) The Plan will not be required to pay any fees or commissions in
connection with the redemption of the stock or the administration of
the note.
(f) Boatmen's will hold certificates representing the stock in an
escrow account until TSC pays the redemption price for the stock in
full.
(g) The Plan will increase its liquidity and investment yield by
disposing of an asset and receive cash to promote greater asset
diversification.
Notice to Interested Persons
Because Mr. Hardgree is the only participant in the Plan who will
be affected by the proposed transactions, it has been determined that
there is no need to distribute the notice of pendency to interested
persons. Therefore, comments and requests for a public hearing are due
30 days from the date of publication of this notice of proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady 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 31st day of August, 1995.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-22043 Filed 9-5-95; 8:45 am]
BILLING CODE 4510-29-P
