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Corporation’s Withdrawal Liability Imputed to Individual Owners


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By Mary Leigh Pirtle

Business entities or individuals leasing rental property to an employer who has withdrawn from a multi-employer pension fund may be liable for withdrawal liability, according to a recent decision by the U.S. Court of Appeals for the Seventh Circuit.

A trucking company completely withdrew from a major pension fund in 2007.  As a result of the withdrawal, the pension fund assessed the trucking company with $3.1 million dollars in withdrawal liability – the amount the company owned for the pension fund’s unfunded vested benefits.  

Typically, withdrawal liability is paid by the withdrawing employer.  However, the Multiemployer Pension Plan Amendments Act (MPPAA) permits the pension fund to also recover the money  from any “trade or business” under “common control” of the departing employer.”  Under the MPPAA, a “business or trade” is defined as any continuous or regular activity performed for the primary purpose of income or profit.  This usually comes into play when the withdrawing employer has a parent/subsidiary or brother/sister relationship with another business.

In this case, the pension fund argued that the individual owners of the trucking company should be held jointly and severally liable for the trucking company’s withdrawal liability because, they, as individuals, also owned several rentals properties, which constituted a “business or trade.”   The individual owners admitted to being under “common control” with the trucking company, leaving the court to determine only whether the individual owners’ rental investment activities rose to the level of being a “business or trade”.

Rental Income may create Trade or Business
The individual owners’ rental investments included the ownership and rental of two pieces of property adjacent to the property owned by the trucking company.   The trucking company paid rent to use both adjacent properties, without a formal lease, until 2005.  After 2005, the trucking company stopped making rent payments because of financial difficulties, yet continued to utilize the adjacent properties.  Once the rental payments ceased, the owners recorded the rental income and expenses on their federal tax returns, thus still receiving a benefit from the rental arrangement.  Of note, the trucking company’s employees performed all of the property maintenance on the rental properties during the entire period the trucking company utilized the properties.

The Seventh Circuit had previously taken the position that “leasing property to a withdrawing employer is a ‘trade or business’ within the meaning of MPPAA.”  Generally, MPPAA does not impose liability for a withdrawing employer on purely passive investment entities, including those that invest in real estate.  But “where the real estate is rented to or used by the withdrawing employer and there is common ownership, it is improbable that the rental activity could be deemed a truly passive investment.” 

Therefore, because the owners did not provide any evidence to persuade the Seventh Circuit that this standard should not apply, the court held the rental arrangement between the owners and the trucking company was a “trade or business.” It held the owners jointly and severally liable for the withdrawal liability.  Simply put, because the owners, who were under common control, rented property to their own trucking company - the withdrawing employer - they were also held liable for the $3.1 million withdrawal liability assessment.

Rental income from unrelated parties may create liability
In addition to renting property to the trucking company, the owners also rented residential property to an unrelated occupant.  While the court did not spend much time analyzing those rental activities because they had already found the owners liable, it did clarify that “real estate activity unrelated to business of the withdrawing employer also can be for the primary purpose of income or profit” where that activity “increases equity, appreciates value, and generates tax deductions that reduce the overall tax burden” of a company. 

Takeaway
Individuals or business entities under common control with a withdrawing employer should be aware that any rental property investments may create liability, regardless of whether the property is rented directly to the withdrawing employer or to an unrelated individual, because such actions may be considered “trade or business” activities under MPPAA.  

 

Read the case here

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