[Federal Register Volume 59, Number 124 (Wednesday, June 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15798]


[[Page Unknown]]

[Federal Register: June 29, 1994]


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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9705]

 

Proposed Exemptions; B&B Securities, Inc. Money Purchase Pension 
Plan, et al.

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, 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.

B&B Securities, Inc. Money Purchase Pension Plan (the Plan) Located in 
Seaford, New York

[Application No. D-9705]

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 C.F.R. 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 purchase by the individual 
accounts in the Plan of Barry Reich and Robert McGrath of a condominium 
(the Property) from Mr. Reich, a party in interest with respect to the 
Plan, provided that the following conditions are satisfied:
    (a) The proposed purchase will be a one-time cash transaction;
    (b) The price paid by the Accounts will be the lesser of 
$121,6001 or the fair market value of the Property at the time of 
the purchase as determined by an independent, qualified appraiser less 
a sales commission, which may have otherwise been paid by Mr. Reich in 
a sale of the Property to an unrelated party;
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    \1\This figure represents the fair market value of the Property 
determined by an independent qualified appraiser as of November 10, 
1993 less a 5% sales commission, which it is represented is the 
standard sales commission in the state of Pennsylvania.
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    (c) The Accounts will pay no expenses associated with the 
transaction;
    (d) The transaction will enable the Accounts to acquire the 
Property which is expected to yield rental income;
    (e) the fair market value of the Property will at no time exceed 
25% of either Account's total assets or the Plan's total assets; and
    (f) Mr. Reich and Mr. McGrath are the only participants of the Plan 
that would be affected by the proposed transaction.

Summary of Facts and Representations

    1. The Plan is a money purchase pension plan with 3 participants, 
including Mr. Reich and Mr. McGrath. Mr. Reich and Mr. McGrath are the 
trustees of the Plan and co-owners of B&B Securities, Inc. (the 
Employer). The Plan provides for individually directed accounts. As of 
July 31, 1993, the Plan had a total balance of $590,903. As of the same 
date, Mr. Reich's account in the Plan had a balance of $300,002, and 
Mr. McGrath's account in the Plan had a balance of $267,031. The 
Employer is a corporation which is a New York Stock Exchange specialist 
trader.
    2. The Property, located in Lake Harmony, Pennsylvania, is improved 
residential real estate and consists of 4 rooms, 2 bedrooms, and 2 
baths. The Property was appraised on November 10, 1993, by Byron E. 
Long (Mr. Long), an independent qualified appraiser certified in the 
state of Pennsylvania. Mr. Long primarily relied on the sales 
comparison appraisal method and concluded that the fair market value of 
the Property as of November 10, 1993, was $128,000. In a supplemental 
letter of April 22, 1994 to the Appraisal, Mr. Long stated that the 
Property has an excellent location, and that current economic 
indicators point to an improving real estate market due to an increase 
in recent sales.
    3. Mr. Reich proposes to sell the Property via a one-time cash 
transaction to his own Account and to Mr. McGrath's Account, such that 
each Account will own an undivided \1/2\ interest. Subsequent to the 
acquisition by the Accounts, the Property will be managed and rented to 
unrelated third parties by the Condominium Association's Management 
Company, an unrelated management company.2 All association fees 
will be paid by the management company, and management fees will be 
withheld such that the Accounts will receive net rental income.
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    \2\The Department notes that any use or lease of the Property by 
individuals who are parties in interest with respect to the Plan 
under section 3(14) of the Act would constitute a violation of 
section 406 of the Act. Accordingly, no relief for such transaction 
is provided herein.
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    4. The transaction, which will involve 20% of Mr. Reich's Account 
and 23% of Mr. McGrath's Account, will be a one-time cash purchase, and 
neither the Accounts nor the Plan will sustain any expenses as a result 
of the purchase transaction. Also, the applicants represent that the 
transaction is protective of the Accounts because the fair market value 
of the Property has been determined by an independent qualified 
appraiser. The price paid by the Accounts in this transaction will be 
the lesser of $121,600, or the fair market value of the Property at the 
time of the purchase as determined by an independent, qualified 
appraiser less a sales commission, which may have otherwise been paid 
by Mr. Reich in a sale of the Property to an unrelated party. It is 
also represented that in the State of Pennsylvania and in particular in 
the region where the Property is located, typical sales commission rate 
is 5% of the sales price. The purchase is in the best interest of the 
Accounts because the Accounts will derive rental income from the 
Property, and also because the transaction will affect only the 
Accounts and not any other Plan participant.
    5. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (a) The proposed purchase will be a one-time cash transaction;
    (b) The price paid by the Accounts will be the lesser of $121,600, 
or the fair market value of the Property at the time of the purchase as 
determined by an independent, qualified appraiser less a sales 
commission, which may have otherwise been paid by Mr. Reich in a sale 
of the Property to an unrelated party;
    (c) The Accounts will pay no expenses associated with the 
transaction;
    (d) The transaction will enable the Accounts to acquire the 
Property which is expected to yield rental income;
    (e) the fair market value of the Property will at no time exceed 
25% of the either Account's total assets or Plan's total assets; and
    (f) Mr. Reich and Mr. McGrath are the only participants of the Plan 
that would be affected by the proposed transaction.

Notice to Interested Persons

    Because the only Plan assets involved in the proposed transaction 
are those in Mr. Reich's And Mr. McGrath's Accounts, and they are the 
only participants 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 by July 29, 1994.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department, 
telephone (202) 219-8883. (This is not a toll-free number.)

Long Mfg. N.C. Inc. Employee's Retirement Plan (the Plan) Located in 
Tarboro, North Carolina

[Application No. D-9616]

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 C.F.R. 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 prospective sale of certain real property 
(the Tarboro Property) by the Plan to Long Mfg. N.C. Inc. (the 
Employer), the Plan sponsor and a party in interest with respect to the 
Plan; provided that the following conditions are satisfied:
    (1) The proposed sale will be a one-time cash transaction;
    (2) The Plan will incur no expenses as a result of the transaction;
    (3) the Plan will receive the greater of: (a) $188,548, 
representing the Plan's total investment in the Tarboro Property; or 
(b) the fair market value of the Tarboro Property as determined at the 
time of the sale by an independent, qualified appraiser; and
    (4) the Employer will file form 5330 (return of Initial Excise 
Taxes for Pension Plans and Profit Sharing Plans) with the Internal 
Revenue Service (the IRS) and pay the appropriate excise taxes due with 
respect to the past prohibited leasing of the Tarboro Property by the 
Plan to the Employer within 90 days of the date of the publication of 
the proposed exemption, if granted, in the Federal Register.

Summary of Facts and Representations

    1. The Plan is a defined contribution profit sharing plan, which as 
of October 31, 1992, had 185 participants and beneficiaries and 
$2,913,465 in net assets. The current trustees are James H. Long, Faye 
M. Britt and Alton H. Cobb., Jr. Mr. Long is the vice president and 
chief operating officer of the Employer, and Mr. Cobb is the vice 
president, chief financial officer and secretary of the Employer. The 
Employer is a North Carolina corporation in the business of 
manufacturing and selling farm equipment and machinery.
    2. On June 14, 1974, the Employer purchased 85.582 acres of 
undeveloped real estate (the Land) from Austin Estate, an unrelated 
party, for $203,000, of which $50,000 was paid in cash and the 
remaining $153,000 with a promissory note, which was paid off within 
that year. It is represented that 6.61 acres (the Parcel) were 
segregated from the Land for purposes of constructing a building for 
the use by the Employer. In November 1974, the Parcel was contributed 
to the Plan while construction was still in progress. The construction 
was completed between March and June of 1975. The Parcel and the 
completed building comprise the Tarboro Property. The applicant 
indicates that when the Tarboro Property was contributed to the Plan 
its value was $188,548, which was approximately 8.4% of the Plan's 
total assets at the time. This value was determined by adding the 
construction cost of $140,483 of the building incurred through the date 
of transfer, plus the value of the Parcel of $36,350, plus the 
additional construction costs of $11,715 which were paid by the Plan to 
an unrelated construction company. Therefore, the Plan's total 
investment in the Tarboro Property was $188,548.
    3. The Tarboro Property was subsequently leased (the Tarboro Lease) 
by the Plan to the Employer or its subsidiaries from June 1975 to the 
present.3 The original term of the Tarboro Lease was in effect 
from 1975 through 1983. Annual rental of $21,898, or a monthly rental 
of $1,825, was agreed upon to provide a 10% return on the purchase 
price of the Parcel and a 12% return for the construction cost of the 
building. In 1979, the Tarboro Lease was renegotiated and the monthly 
rent was increased to $2,037.50, and this rental amount was effective 
through 1983. The current Tarboro Lease was entered into on November 1, 
1983, with an initial term of one year but with an option to renew in 
one year increments. Under the current Tarboro Lease, for the period 
1983 through 1994, the rent being paid by the Employer to the Plan was 
$2,350 per month. Also, pursuant to the terms of the Tarboro Lease, the 
Plan has paid the annual ad valorem property taxes and fire and 
casualty insurance, and the Employer has paid all other expenses, 
including utilities, maintenance and other insurance.
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    \3\The applicant maintains that at the time that the Tarboro 
Property was contributed to the Plan, the Plan held and leased to 
the Employer nine other pieces of property which met the definition 
of ``qualifying employer real property'' contained in section 
407(d)(4) of the Act. The applicant represents that these properties 
were geographically dispersed, suitable for more than one use and 
leased to the Employer at a fair market rental value. The applicant 
further represents that these nine properties were sold out of the 
Plan between July, 1977 and April 1984.
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    4. In 1978 the Plan acquired another property (the Palestine 
Property) from unrelated third parties, and leased that Property to the 
Employer or its subsidiaries (the Palestine Lease). However, in May 
1985, the subsidiary of the Employer which was leasing the Palestine 
Property from the Plan was dissolved, and its assets and liabilities 
were transferred to an unrelated third party, and subsequently the 
Palestine Lease involving the Palestine Property was also transferred 
to the third party. As a result, by virtue of the Plan's disposal of 
the Palestine Property, the Tarboro Property and the Tarboro Lease no 
longer met the definition of qualifying employer real property 
contained in section 407(d)(4) of the Act. Also, as a result the 
statutory exemption contained in section 408(e) of the Act, regarding 
acquisition, sale or lease by a plan of qualifying employer real 
property was no longer available due to the fact that the Tarboro 
Property was the sole, remaining parcel of real property leased by the 
Plan to the Employer. As such, effective May 1985, the continuing 
leasing of the Tarboro Property by the Plan to the Employer became 
prohibited under sections 406(a)(1)(A) and 406(a)(2) of the Act.4 
In this regard, the Employer has agreed to file form 5330 (return of 
Initial Excise Taxes for Pension Plans and Profit Sharing Plans) with 
the Internal Revenue Service (the IRS) and pay the appropriate excise 
taxes due with respect to the past prohibited leasing of the Tarboro 
Property within 90 days of the date of the publication of the proposed 
exemption, if granted, in the Federal Register.5
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    \4\Section 406 of the Act prohibits, among other things, the 
sale or exchange, or leasing, of any property between the plan and a 
party in interest.
    Section 407(d)(2) of the Act defines the term ``employer real 
property'' as real property which is leased to the employer of 
employees covered by the Plan, or to an affiliate of such employer.
    Section 407(d)(4) of the Act defines the term ``qualifying 
employer real property'' as parcels of employer real property--
    (A) if a substantial number of the parcels are dispersed 
geographically;
    (B) if each parcel of real property and the improvements thereon 
are suitable (or adaptable without excessive cost) for more than one 
use; and
    (C) even if all of such real property is leased to one lessee 
(which may be an employer, or an affiliate of an employer).
    Section 408(e) of the Act provides, in relevant part, for the 
acquisition, sale, or lease by a plan of qualifying employer real 
property--
    (1) if such acquisition, sale, or lease is for adequate 
consideration * * *
    (2) if no commission is charged with respect thereto, and
    (3) if-- * * * (B) in the case of an acquisition or lease of 
qualifying employer real property by a plan which is not an eligible 
individual account plan * * * the lease or acquisition is not 
prohibited by section 407(a).
    \5\In this regard, the applicant represents that the excise 
taxes were paid to the IRS for the following Plan years, November 1, 
1990-October 31, 1991, and November 1, 1991-October 31, 1992.
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    5. The applicant is now requesting prospective relief in order to 
purchase the Tarboro Property from the Employer. The Employer currently 
utilizes the Tarboro Property for agricultural and equipment sales and 
servicing. Also, the Employer at its own expense made minor 
improvements, such as addition of gas heaters, to the Tarboro Property 
in the amount of $4,099.37.
    6. The Tarboro Property was appraised (the Appraisal) on August 27, 
1993, by John L. Jenkins, II, an independent, state-certified 
residential real estate appraiser (Mr. Jenkins). The Tarboro Property 
is located at 1201 West Northern Boulevard, Tarboro, North Carolina. 
The Tarboro Property consists of 6.61 acres which are improved with a 
one story metal prefabed building with a metal roof. The interior of 
the building includes approximately 4,800 square feet of heated and 
cooled sales area and offices and 16,000 square feet of storage/shop 
area. In the Appraisal, Mr. Jenkins relied on the cost approach and the 
market data approach, and determined that as of August 27, 1993, the 
fair market value of the Tarboro Property is $207,500.6 On 
February 3, 1994, in an update to the Appraisal, Mr. Jenkins indicated 
that while the Tarboro Property is adjacent to property owned by the 
Employer (the Employer Property), the adjacency factor does not merit a 
premium above fair market value, because the Employer Property has been 
on the market for over eight years, and there has been no active buyer.
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    \6\Mr. Jenkins states that the income approach was not used in 
the Appraisal because the leasing arrangement involved a short term 
lease (12 month, annually renewable), and therefore the income 
approach could not have been used to determine the return on 
investment.
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    7. The applicant maintains that the Tarboro Property has yielded 
revenue for the Plan, with the Plan receiving positive cash flow as a 
result of its investment. The applicant submitted a ``return on 
investment'' analysis (the Analysis) on the Plan's investment in the 
Tarboro Property, covering the period from 1975 through 1992. Return on 
investment value ratios were derived by the applicant by dividing the 
estimated net rental income by the fair market value of the Tarboro 
Property for each year of ownership.7 An average of the ``return 
on investment'' figures was determined to be 9.42%. Therefore, 
according to the Analysis, the Plan received an average yield of 9.42% 
for its investment in the Tarboro Property.
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    \7\With respect to the Analysis, the applicant represents that 
the fair market values of the Tarboro Property were determined using 
independent appraisals for the years when such appraisals were made. 
For the years when no appraisals were made, the fair market values 
were obtained from the Plan's audited financial statements.
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    8. The applicant represents that the transaction is 
administratively feasible, in the interest and protective of the Plan's 
participants and beneficiaries. The Employer has the financial 
resources to purchase the Tarboro Property at its fair market value in 
a one-time cash transaction. The transaction is protective and in the 
best interest of the Plan because the aggregate fair market value of 
the Tarboro Property was determined by an independent qualified 
appraiser, and because as a result of this transaction, the Plan will 
receive the greater of: (1) $188,548, representing the Plan's total 
investment in the Tarboro Property; or (2) the fair market value of the 
Tarboro Property as determined at the time of the sale by an 
independent, qualified appraiser. The transaction would also be in the 
interest of the Plan because it will enable the Plan to sell an 
illiquid asset which had little appreciation in value over time. The 
applicant also represents that the Plan will incur no expenses as a 
result of the transaction described herein.
    9. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (1) the proposed sale will be a one-time cash transaction;
    (2) the Plan will receive the greater of: (a) $188,548, 
representing the Plan's total investment in the Tarboro Property; or 
(b) the fair market value of the Tarboro Property as determined at the 
time of the sale by an independent, qualified appraiser.
    (3) the Plan will pay no expenses associated with the sale; and
    (4) the Employer will file form 5330 with the IRS and pay the 
appropriate excise taxes due with respect to the past prohibited 
leasing of the Tarboro Property by the Plan to the Employer within 90 
days of the date of the publication of the proposed exemption, if 
granted, in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department, 
telephone (202) 219-8883. (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 24th day of June 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 94-15798 Filed 6-28-94; 8:45 am]
BILLING CODE 4510-29-P