[Federal Register Volume 75, Number 151 (Friday, August 6, 2010)]
[Notices]
[Pages 47639-47644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19368]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Application Nos. and Proposed Exemptions; D-11569, Sherburne Tele
Systems, Inc.; and D-11597, John D. Simmons Individual Retirement
Account; et al.
AGENCY: Employee Benefits Security 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 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, 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 requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ------, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``[email protected]'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Warning: If you submit written comments or hearing requests, do not
include any personally-identifiable or confidential business
information that you do not want to be publicly-disclosed. All comments
and hearing requests are posted on the Internet exactly as they are
received, and they can be retrieved by most Internet search engines.
The Department will make no deletions, modifications or redactions to
the comments or hearing requests received, as they are public records.
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, 5 U.S.C. App. 1 (1996), 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.
Sherburne Tele Systems, Inc., 2008 Amended and Restated Employee
Stock Ownership Plan and Trust (the ``ESOP''), Located in Big Lake,
Minnesota [Application No. D-11569]
[[Page 47640]]
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).\1\ If the
exemption is granted, the restrictions of sections 406(a)(1)(A) and
(D) and 406(b)(1) and 406(b)(2) of the Act and the sanctions imposed
under section 4975 of the Code, by reason of sections 4975(c)(1)(A),
(D), and (E) of the Code, shall not apply to the sale by the ESOP of
all its shares of common stock (the ``ESOP Shares'') in Sherburne
Tele Systems, Inc. (the ``Company'') to the Company, a party in
interest with respect to the ESOP, provided that the following
conditions are satisfied:
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\1\ For purposes of this proposed exemption, references to
provisions of Title I in the Act, unless otherwise specified, should
be read to refer also to the corresponding provisions of the Code.
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(a) The sale is a one-time transaction for cash;
(b) The terms and conditions of the sale are at least as
favorable to the ESOP as those that the ESOP could obtain in an
arm's length transaction with an unrelated third party;
(c) The sales price is the greater of (i) $5.01 per share, or
(ii) the fair market value of the ESOP Shares as of the date of the
sale, as determined by a qualified, independent appraiser (the
appraiser);
(d) The sales proceeds received by the ESOP pursuant to the
transaction are valued at a share price that is greater than the
share price received by the non-ESOP shareholders;
(e) The benefits received by the members of the board of
directors and officers of the Company pursuant to the board of
directors awards program, the Company's phantom stock plan and
retention plans, which were paid, coincident with the closing of the
asset sale of the Company to Iowa Telecommunications Services, Inc.
were reasonable;
(f) A qualified, independent fiduciary (the ``Independent
Fiduciary'') for the ESOP was and is responsible for (i) reviewing
the terms of the sale of the Company's assets; (ii) engaging the
appraiser to value the ESOP Shares; (iii) reviewing and, if
appropriate, approving the methodology used by the appraiser, to
ensure that such methodology is properly applied in determining the
fair market value of the ESOP Shares, to be updated as of the date
of the sale; (iv) negotiating the terms of the sale of the ESOP
Shares to the Company to ensure that the ESOP participants receive
at least the fair market value of the ESOP Shares; (v) determining,
and documenting in writing, whether the terms of the sale are fair
and reasonable to the ESOP and whether it is prudent to proceed with
the proposed transaction; (vi) approving the proposed transaction;
and (vii) determining whether the proposed transaction satisfies the
criteria set forth in section 404 and section 408(a) of the Act;
(g) The ESOP pays no fees, commissions, or other expenses in
connection with the sale (including the fees paid to the appraiser
and the Independent Fiduciary), other than a one-time $500.00 escrow
fee (as described in Summary of Facts and Representations
10); and
(h) The proceeds from the sale are promptly forwarded to the
ESOP's trust simultaneously with the transfer of the ESOP Shares to
the Company.
Summary of Facts and Representations
1. The ESOP was established by Sherburne Tele Systems, Inc. (the
``Company'' or the applicant) on January 1, 1999. As of December 31,
2009, the ESOP had 102 participants. The Company is the named
fiduciary of the ESOP. The Company formerly operated as a sub-
chapter ``S'' corporation in Big Lake, Minnesota, providing local
and long distance telephone services to residential and business
customers. The Company's assets were acquired in 2009, as described
in Item 7, below.
According to the applicant, the ESOP had total assets of
approximately $8,204,432.51, as of December 31, 2009; this amount
includes $2,966,920.46 invested in money market funds and
certificates of deposit, as well as 1,427,115 shares of the
Company's stock (the ``ESOP Shares'') with a current value of
$5,237,512.05, based upon the annual valuation of the ESOP assets
performed by a qualified, independent appraiser.
2. The Company has only one class of stock. As of June 29, 2009,
there were 14,436,920 shares of the stock issued and outstanding.
Robert Eddy is the President of the Company and a member of the
board of directors. Mr. Eddy owned, directly and indirectly,
approximately 87% of the outstanding shares of the stock; he owned
6,262,772 shares directly. Mr. Eddy's sister, Jane Eddy Shiota, was
the only other shareholder who directly owned more than 10% of the
stock; she owned approximately 35.46% (5,120,123 shares) of the
outstanding shares of the stock.\2\ The 1,427,115 shares of stock
owned by the ESOP represent a minority interest in the Company of
9.89%.
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\2\ The non-ESOP shareholders besides Mr. Eddy and Ms. Shiota,
some of whom are relatives to Mr. Eddy, are as follows: Rolland K.
Eddy and Donna L. Eddy Trust (1,137,116 shares); Eric R. Morales
(485,750 shares); and Fred I. Shiota, Sr. (4,044 shares).
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3. The background to the ESOP's acquisition of the Company stock
is as follows. The applicant represents that, on September 15, 1999,
the ESOP acquired 285,423 shares of the stock at $9.81 per share,
the fair market value of the stock as of that date, as determined by
the ESOP's trustees, based upon a report by a qualified, independent
appraiser, Chartwell Business Valuation, LLC (doing business as
Chartwell Capital Solutions) (``Chartwell'').\3\ The total price for
the stock purchased on September 15, 1999 was $2,799,999.63, which
was financed in the form of an exempt loan (the ``Exempt Loan'').
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\3\ The Department expresses no opinion herein as to whether the
ESOP paid ``adequate consideration'' for its initial purchase of the
Company stock.
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The Company approved a five-to-one split of its stock, effective
November 3, 2005, which increased the shares of stock held by the
ESOP from 285,423 shares to 1,427,115 shares. In 2007, the ESOP
repaid the Exempt Loan in full, in advance of the amortized payment
schedule under the loan agreement, and allocated the remaining ESOP
Shares held in the ESOP's suspense account to the ESOP participant
accounts.
The ESOP received income distributions from the Company with
respect to the ESOP Shares in the following amounts: $19,647.92
(1999); $176,447.15 (2000); $66,638.00 (2001); $14,139.00 (2002);
$11,479.00 (2003); $33,917.00 (2004); $54,852.00 (2005); $373,238.00
(2006); $5,651,375.40 (2007); and $841,997.85 (2008). There were no
expenses charged to participant accounts in connection with holding
the ESOP Shares.
4. The applicant represents that, after reviewing the strategic
alternatives, the Company's board of directors decided that a sale
of the Company was in the best interests of its shareholders. In
October 2007, the Company retained the services of Green Holcomb &
Fischer, LLC, an investment banking firm, to find a buyer.
Due to a potential sale of the Company, Barnes & Thornburg LLP,
counsel to the Company (specifically, with regard to its ESOP
matters), advised the Company to engage First Bankers Trust
Services, Inc. (FBTS), a discretionary trustee, to serve as an
independent fiduciary (the ``Independent Fiduciary'') for the ESOP
in order to avoid any conflict of interest or appearance of
impropriety.\4\ As set forth in the July 22, 2008 retainer
agreement, FBTS, as the sole discretionary trustee of the ESOP,
agreed to ``exercise all duties, responsibilities, and powers of a
fiduciary under ERISA in its capacity as a discretionary trustee. *
* *'' As such, FBTS' responsibilities, in addition to other
traditional trustee responsibilities, were (i) to exercise its
exclusive discretion as trustee and make its independent decision
concerning any transaction that may arise or occur under the ESOP,
and (ii) to control the management and disposition of the assets
held by the ESOP trust. FBTS represents that, pursuant to its
retainer agreement, FBTS' responsibilities included: (i) Negotiating
a fair transaction in which the ESOP participants would receive no
less than fair market value for their Company stock as of the
closing date of the transaction; (ii) reviewing an appraisal of the
Company stock, which was prepared by an independent, qualified
appraiser, and updated as of the closing date of the transaction;
(iii) evaluating the sufficiency of the methodology of such
appraisal; and (iv) determining the reasonableness of the
conclusions reached in such appraisal.
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\4\ FBTS represents that it is not acting as an ``investment
manager'' within the meaning of section 3(38) of the Act because
such section specifically excludes trustees.
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5. It is represented that FBTS is a state chartered trust
company that has been specializing in employee benefits as an
independent trustee for over twenty years and that, at all times,
FBTS has been and continues to be represented by its own counsel,
Krieg Devault. Prior to its engagement as the discretionary trustee
for
[[Page 47641]]
the ESOP, FBTS had no relationship with the Company. Moreover, FBTS
and its wholly-owned subsidiaries derived less than 1% of its
consolidated gross income from the Company and its affiliates for
the years ending December 31, 2008 and through May 4, 2010. In
addition, FBTS represents that it has no relationship with Green
Holcomb & Fischer, LLC.
6. In regard to its qualifications, FBTS states that the firm
has four offices nationwide and 30 full-time employees devoted to
providing trust services for over 600 account relationships. FBTS
maintains that its professional staff has in-depth knowledge of
Internal Revenue Service and Labor Department regulations and
compliance requirements for all types of retirement plans.
Kimberly Serbin, a senior trust officer with FBTS since 2001, is
one of FBTS' employees responsible for providing trust services to
the ESOP; she has an insurance license, and her past work experience
includes manufacturing, investment/financial services, insurance
services, and banking. In a letter dated June 18, 2009, Ms. Serbin
asserts that FBTS is well qualified to review appraisals in
connection with the sale of the ESOP Shares. She states: ``In the
last three years, FBTS has served as an independent transactional
trustee for approximately 15-20 transactions in which the sale of
stock by an employee benefit plan has occurred. The circumstances
have usually been in connection with the sale of the plan sponsor
(either a stock sale or an asset sale) or in connection with the
termination of an employee benefit plan by the plan sponsor.''
7. On or about November 21, 2008, the Company and its
subsidiaries and all non-ESOP shareholders executed an Asset
Purchase Agreement (the ``Purchase Agreement''), which provided for
the sale of substantially all of the assets of the Company and its
subsidiaries to Iowa Telecommunications Services, Inc. (``ITSI'').
The asset sale closed on June 30, 2009, and the final purchase price
paid was approximately $82 million due to certain terms and
conditions that allowed for adjustment to the purchase price based
on changes in the Company's operations. The Purchase Agreement
required that the Company ``terminate'' the ESOP immediately prior
to the closing of the asset sale, which occurred on June 30,
2009.\5\ Although the ESOP was ``frozen'' as of the same date, it
continues to hold the ESOP Shares in trust.\6\ It is represented
that ITSI is not affiliated with any party in interest to the
proposed exemption transaction, (i.e., the sale of the ESOP Shares
to the Company (the ``ESOP Transaction'')).
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\5\ Counsel for FBTS explained that as a technical matter the
ESOP has not yet ``terminated.'' Rather, according to the counsel, a
``partial termination'' of the ESOP occurred, for purposes of the
Internal Revenue Code, because the employees of the Company were
terminated from employment and, generally were re-hired by ITSI.
Because of the ``partial termination,'' counsel for FBTS represented
that participants are 100% vested in their account balances.
\6\ The Department notes that, as the ESOP Transaction has not
yet been consummated, the ESOP Shares are ``plan assets'' subject to
the requirements of, among other things, Part 4 of Title I in the
Act.
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8. Because the ESOP was a minority shareholder of the Company,
it did not have the authority to delay the asset sale that occurred
on June 30, 2009. Prior to the sale, however, the Independent
Fiduciary negotiated a Stock Redemption Agreement (the ``Redemption
Agreement'') on May 26, 2009 with the Company and Robert Eddy, in
his individual capacity and in his capacity as majority shareholder
representative, providing for a sale of all of the ESOP Shares to
the Company. Under the terms of the Redemption Agreement, the
consummation of the ESOP Transaction is contingent upon first
obtaining a prohibited transaction exemption from the Department.\7\
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\7\ In general, the applicant notes that section 408(e) of the
Act provides a statutory exemption for the sale of qualifying
employer securities (QES) by an individual account plan to a party
in interest. Section 408(d) of the Act, however, excludes from this
exemption transactions involving an individual account plan and (i)
any person who is an owner-employee with respect to the plan, (ii) a
family member of such owner-employee, or (iii) any corporation of
which such owner-employee owns 50 percent or more of the combined
voting stock of the corporation. Thus, section 408(d) excludes any
transaction between the ESOP and the Company because Mr. Eddy, an
owner-employee of the Company, owns 50% or more of the combined
voting stock of the Company. The Taxpayer Relief Act of 1997 granted
some relief to subchapter ``S'' corporations that maintain ESOPs.
Specifically, section 408(d)(2)(B) of the Act provides an exemption
for sales of QES to an ESOP by an owner-employee, a family member of
such owner-employee, or related Subchapter ``S'' corporation. It
does not, however, exempt a sale by an ESOP to such parties.
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9. Prior to the anticipated sale of the Company's assets, the
Company applied for authorization by the Department, pursuant to
class Prohibited Transaction Exemption (PTE) 96-62, for the one-time
cash sale by the ESOP of 100% of the ESOP Shares to the Company, a
party in interest to the ESOP. Because the Company was notified by
the Department in June 2009 that it would not qualify for
authorization pursuant to PTE 96-62, it has requested an individual
prohibited transaction exemption.
10. As a result, the cash value of the ESOP Shares, attributable
to the sale of the Company's assets, is currently held in an escrow
account, subject to the final closing of the Redemption Agreement,
which is pending until the grant of the requested exemptive
relief.\8\ Wells Fargo Bank, National Association is the escrow
agent. It is represented that the funds in the escrow account are
invested in a money market account. There was a one-time escrow fee
of $500.00 paid from the earnings on the escrowed funds and no other
fees.
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\8\ The Department is not expressing an opinion whether the cash
equivalent of the value of the ESOP Shares held in the escrow
account are ``plan assets'' subject to the requirements of Part 4 of
Title I in the Act.
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11. The applicant represents that the terms and conditions of
the proposed ESOP Transaction are at least as favorable to the ESOP
as those that the ESOP could obtain in an arm's length transaction
with an unrelated third party. A fairness opinion, the ESOP Closing
Valuation and Opinion, was prepared and issued on July 2, 2009 by
Chartwell for the Independent Fiduciary, concerning the proposed
sale of the ESOP Shares to the Company for adequate consideration.
FBTS engaged Chartwell to perform this appraisal of the ESOP Shares
pursuant to their January 26, 2009 retainer agreement. The Company
has confirmed that the financial projections shared with Chartwell
are identical with those shared with FBTS, other lenders and ITSI.
As previously noted in Item 3, above, Chartwell is represented to be
a qualified, independent appraiser and has performed the ESOP's
annual stock valuations to date. It is represented that Chartwell
derived less than 1% of its annual gross income from the Company and
its affiliates for the years ending December 31, 2007 and December
31, 2008. It is further represented that Chartwell derived less than
3% of its annual gross income from the Company and its affiliates
for the year ending December 31, 2009 and will derive no income from
the Company and its affiliates for the year ending December 31,
2010.
12. The applicant represents that Chartwell is a nationally
recognized financial services firm located in Minneapolis,
Minnesota, serving privately held companies and their shareholders.
The firm focuses on business valuation and transaction consulting
and has provided opinions and advisory services to hundreds of
organizations in a variety of industries, including over 150 ESOPs
throughout the United States. The individuals involved in the July
2, 2009 appraisal of the ESOP Shares were Paul J. Halverson,
Managing Director, and Matthew R. Schubring. Mr. Halverson is an
Accredited Senior Appraiser, a Certified Business Appraiser, and a
member of the American Society of Appraisers and the Institute of
Business Appraisers, who has provided financial advisory services to
privately-held companies since 1987; a substantial portion of his
work relates to ESOPs and providing independent financial advisory
services to ESOP trustees and other corporate fiduciaries. Mr.
Schubring is an Accredited Senior Appraiser who has provided
valuation services since 1999 and also has extensive valuation
experience with ESOPs, buy/sell agreements, and other corporate
matters.
13. It is represented that the methodologies used by Chartwell
to evaluate the fairness of the proposed sales price are uniformly
accepted and approved for valuing companies of the size and within
the industry of the Company and took into consideration all known
and relevant facts and circumstances attendant to the proposed ESOP
Transaction. Chartwell represents that it valued the ESOP Shares
using the merger and acquisition method of the market approach.
Chartwell states, ``In the merger and acquisition method, the sales
of entire companies or large blocks of companies are analyzed to
determine appropriate valuation multiples for the subject company.
In this case, the sale of the subject company presented the best
indication of fair market value under this method. Based upon our
knowledge of the diligence of the transaction process undertaken by
the Company and the
[[Page 47642]]
results of these efforts we believe that the value received by the
non-ESOP shareholders represents the best indication of fair market
value of the Company. Because this represented the actual fair
market value and not theoretical values indicated by the income,
guideline public company or asset approaches we chose to rely on the
merger and acquisition method.'' As a condition of the proposed
exemption, Chartwell will update the appraisal of the ESOP Shares as
of the date of the ESOP Transaction.
14. The Independent Fiduciary not only evaluated the Chartwell
appraisal of the ESOP Shares, it also negotiated the Redemption
Agreement with the Company for the sale of ESOP Shares. It is
represented that, over the course of several months, FBTS negotiated
vigorously on behalf of the ESOP to receive the sales price of $5.01
per share rather than participating in the liquidating distribution
from the available net asset proceeds, alongside the non-ESOP
shareholders. In other words, according to FBTS' counsel, the
Redemption Agreement allows the ESOP to avoid being subject to,
among other things, potential indemnification liabilities and
certain other expenses that FBTS determined should not be borne by
the ESOP. Thus, the negotiation resulted in the ESOP receiving a
sales price of $5.01 per share rather than the estimated $4.64 per
share that would be received by the non-ESOP shareholders of the
Company under the terms of the Purchase Agreement with ITSI.\9\ The
$5.01 per share price will be paid in cash upon closing of the ESOP
redemption.
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\9\ Of the $4.64 per share value received by non-ESOP
shareholders, $3.65 per share was paid upon closing, $0.75 per share
was placed in a separate escrow account to be released 18 months
following the closing, and the remaining proceeds (i.e.,
approximately $0.23 per share) are expected to be distributed after
finalizing all transaction costs. The administrative file refers to
the $4.64 per share amount even though the sum of the three amounts
equals $4.63. The Department assumes that the discrepancy is
attributable to it being an estimated amount.
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By way of further explanation, the total per share proceeds from
the asset sale of the Company to ITSI came to $5.68 per share, but
this amount was reduced to the putative $4.64 per share after taking
into account various payments that the Company intended to make. The
Independent Fiduciary believed that the ESOP participants' benefits
should not be reduced by certain post-sale payments that the Company
was making, which the ESOP had no control over, including: Certain
awards to members of the Company's board of directors and officers
(some of whom are also shareholders) for completing the sale of the
Company's assets; S-corporation insurance; and amounts due under the
Company's phantom stock plan and retention agreements.\10\
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\10\ For example, FBTS determined that it was not appropriate,
in an asset acquisition, for the ESOP to bear the allocable cost of
S-corporation insurance, which apparently ITSI required the Company
to pay in the event the Internal Revenue Service made a
determination that the Company's S-corporation's tax status election
was improper and resulted in the assessment of additional taxes.
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Based on the sales price of $5.01 per share, the ESOP will
realize in the aggregate approximately $7,149,846.15 on the sale of
the 1,427,115 ESOP Shares, which constitute approximately 71% of the
total assets of the ESOP. It is represented that the Independent
Fiduciary reviewed the Purchase Agreement, the Redemption Agreement,
and the ESOP Closing Valuation and Opinion and determined that the
ESOP Transaction would be in the best interests of the ESOP
participants. The Independent Fiduciary, on behalf of the ESOP,
reviewed and approved the valuation methodology used by Chartwell,
ensured that such methodology was properly applied in determining
the fair market value of the ESOP Shares, and determined that the
terms of the sale are fair and reasonable to the ESOP. The
Independent Fiduciary also will determine whether it is prudent to
go forward with the ESOP Transaction.
15. The applicant represents that the sale of the ESOP Shares
for cash pursuant to the terms of the Redemption Agreement is in the
best interests of the ESOP and its participants because, in addition
to the reasons given by the Independent Fiduciary, above, it will
allow participants to diversify their investments. Except for the
one-time $500.00 escrow fee, as described in Item 10, above, which
was paid from earnings on the ESOP's share of cash proceeds derived
from the asset sale of the Company to ITSI and held pursuant to an
Escrow Agreement between Wells Fargo Bank and FBTS, the ESOP will
not be responsible for any fees, commissions, or other expenses that
may be associated with the sale of the ESOP Shares--including the
cost of filing the exemption application, notifying interested
persons, and engaging Chartwell and FBTS. The sale proceeds will be
credited to the ESOP's trust simultaneously with the transfer of
title of the ESOP Shares to the Company, and each participant's
individual account will receive its pro rata share of the sale
proceeds.
16. In summary, the applicant represents that the ESOP
Transaction meets the statutory criteria of section 408(a) of the
Act because, among other things: (a) The ESOP Transaction will be a
one-time transaction for cash; (b) the sales price for the ESOP
Shares will be the greater of (i) $5.01 per share, or (ii) the fair
market value of the ESOP Shares as of the date of the sale, as
determined by Chartwell; (c) FBTS was and is responsible for (i)
reviewing the terms of the sale of the Company's assets; (ii)
engaging Chartwell to value the ESOP Shares; (iii) reviewing and
approving the methodology used by Chartwell to ensure that such
methodology is properly applied in determining the fair market value
of the ESOP Shares, to be updated as of the date of the sale; (iv)
negotiating the terms of the ESOP Transaction to ensure that the
ESOP participants receive at least the fair market value of the ESOP
Shares; and (v) determining whether the terms of the sale are fair
and reasonable to the ESOP and whether it is prudent to go forward
with the ESOP Transaction; and (e) the ESOP will pay no fees,
commissions, or other expenses in connection with the sale
(including the fees paid to the independent appraiser and the
Independent Fiduciary), other than a one-time $500.00 escrow fee.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8557. (This is not a toll-free number.)
John D. Simmons Individual Retirement Account (the IRA), Located in
West Chester, PA, [Application No. D-11597]
Proposed Exemption
The Department 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, 32847, August 10, 1990). If the exemption is granted, the
sanctions resulting from the application of section 4975(c)(1)(A)-
(E) of the Code, shall not apply to the proposed sale (the Sale) by
the IRA to John D. Simmons, (the Applicant) a disqualified person
with respect to the IRA,\11\ of a 50 percent interest (the Interest)
in a condominium (the Condo); provided that the following conditions
are satisfied:
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\11\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not within the
jurisdiction of 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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(a) The terms and conditions of the Sale are at least as
favorable to the IRA as those obtainable in an arm's length
transaction with an unrelated party;
(b) The Sale is a one-time transaction for cash;
(c) As consideration, the IRA receives the lesser of $192,500 or
the fair market value of the Interest as determined by a qualified,
independent appraiser in an updated appraisal on the date of Sale;
and
(d) The IRA pays no commissions, costs, fees, or other expenses
with respect to the Sale.
Summary of Facts and Representations
1. The Applicant is an attorney residing in West Chester,
Pennsylvania. In August 2008, the Applicant established the IRA
because it permitted self-directed purchases of real property and
other non-stock investments. The Applicant then transferred
approximately $195,000 from various mutual funds held by his
rollover individual retirement account with Vanguard to the IRA. As
of January 4, 2010, the IRA had total assets of $195,189.74. Entrust
MidAtlantic, LLC, the directed trustee of the IRA, is based in
Frederick, Maryland.
2. Rose Marie Simmons (Mrs. Simmons) is the mother of the
Applicant and a disqualified person with respect to the IRA. Mrs.
Simmons resides in Millsboro, Delaware. Mrs. Simmons formerly owned
investment real property in Drexel Hill, Pennsylvania (the Drexel
Property) which was about 125 miles from her home in Southern
Delaware. Mrs. Simmons had difficulty with her Drexel Property
tenants and required the Applicant's assistance in subsequent
eviction proceedings against such tenants. In August 2008, Mrs.
Simmons sold the Drexel Property to one of her neighbors.
3. During 2008, the Applicant sought to diversify his IRA's
holdings into non-equity investments in light of the waning economy.
So, he decided to invest one-half of his tax-
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favored retirement holdings in alternative investments, such as real
property. As discussed above, Entrust MidAtlantic, LLC allows IRA
owners to invest in real property. The Applicant also represents
that he and Mrs. Simmons desired to purchase a long term investment
property together for well below its value, and wait for it to
increase in value as market conditions improved. Moreover, Mrs.
Simmons wished to reside closer to her investment property so that
she could inspect it more frequently than she could the Drexel
Property.
Thus, on October 6, 2008, the IRA and Mrs. Simmons incorporated
Beach Rent, LLC in Delaware, described in detail below, to act as an
investment property manager. In the same month, the Applicant found
the Condo, located at 1609 Coastal Highway, Dewey Beach, Delaware.
The Condo, which is Unit S204, was listed for $399,900 in the Opal
Condominiums Complex (the Opal). The Applicant represents that in
comparison, similar two-bedroom units in the Opal, had sold for
approximately $500,000 to $550,000 in 2006. Additionally, the Condo
is located approximately 30 miles from Mrs. Simmons' residence.
4. On October 17, 2008, the IRA and Mrs. Simmons purchased the
Condo for $384,500. The IRA's Interest and Mrs. Simmons' 50 percent
interest in the Condo each equaled $192,250.00. Both the IRA and
Mrs. Simmons paid cash for their respective interests in the Condo
from the Opal Dewey Beach, LLC, an unrelated party. Mrs. Simmons
used the proceeds from the sale of the Drexel Property to purchase
her 50 percent interest in the Condo pursuant to a tax-favored
exchange under section 1031 of the Code. Currently, the IRA's
Interest in the Condo accounts for 98 percent of the IRA's total
value.
5. The IRA and Mrs. Simmons are named as the managing members of
Beach Rent, LLC. The Applicant acts as its uncompensated manager.
Beach Rent, LLC, which was created to simplify the bookkeeping of
the rents and bills, is a flow-through tax entity intended to pass
profits (i.e., rental income) received by the Beach Rent, LLC to the
IRA and Mrs. Simmons based on their respective ownership interests
in the Condo. Both Mrs. Simmons and IRA each own 50 percent of the
shares of Beach Rent, LLC. For the years 2008 and 2009, the Condo's
total rental income was $13,400 and total expenses have been
$12,128. In these years, the IRA's share of total income was $6,700
and total expenses were $6,064. Thus, the IRA's net acquisition cost
for the Interest is $191,864 [$192,500 (purchase price) + $6,064
(expenses)--$6,700 (income)].
6. Beach Rent, LLC is responsible for renting and maintaining
the Condo. Beach Rent, LLC deducts expenses, such as insurance,
taxes, Opal condominium fees, cleaning service fees, cable and
utilities, against the income generated from the seasonal rentals.
During the off-season, Beach Rent, LLC pays for the maintenance of
the Condo.
Since 2008, neither the Applicant nor Mrs. Simmons nor any other
disqualified person has stayed at the Condo. Since its acquisition
by the IRA and Mrs. Simmons, the Applicant and Mrs. Simmons
periodically visit the Condo for inspections and repairs, including
installing furniture and window treatments. Neither the Applicant
nor Mrs. Simmons have been compensated by the IRA for the services
rendered to the Condo. As far as the Condo's furnishings and
electronics are concerned, Mrs. Simmons has either purchased or
contributed them to the Condo.
7. Beach Rent, LLC advertises for Condo renters on the Internet.
At one time, Mrs. Simmons and the Applicant used Ocean Sothesby
Realtors, which is not a related party, to locate renters. However,
the Applicant represents that using Beach Rent, LLC to find renters
has been more cost effective. On or about Memorial Day, Beach Rent,
LLC typically begins renting the Condo for the beach season. Stays
vary in price from a three-day stay at $600 up to a weekly rate for
$1,500 plus a refundable $350 security deposit. A deposit of half
the rent plus the security deposit is due a month prior to the
rental and the other half is due at signing. Beach Rent, LLC refunds
the security deposit 14 days after a rental if its cleaning service
confirms the Condo is in good condition. For the 2008 and 2009
rental seasons, the Condo has been rented a total of 11 times to
unrelated parties.
8. The Applicant represents that he and Mrs. Simmons thought the
Condo would be a good investment because they believed the housing
market would rebound more quickly than it has to date and there
would be a substantial increase in the IRA's equity holding in the
Interest. Since 2008, the Applicant explains that the Opal Dewey
Beach, LLC has been unable to sell the remaining 7 condominium units
out of the original 36 in the Opal. The unsold units are currently
being rented for less than fair market value. Additionally, the
Applicant states that a bank-owned two-bedroom unit in the Opal
failed to sell for its short sale price of $290,300 in May 2010 at a
sheriff's auction. This property had originally sold for $547,000 in
October 2006. Thus, the Applicant believes there is the possibility
that the IRA could face future equity losses in the Condo and that
any equity improvement may not occur for a long time. Further, the
Applicant states that, the IRA's current rate of return is low. In
this regard, the Applicant projects the Condo's total 2010 rentals
will be $15,000 and total expenses will be $9,500, with a profit of
$5,500. Accordingly, the IRA's rate of return for its $192,500
Interest will be approximately 1.4 percent per annum (($5,500 *.5)/
$192,500).
Because of these events, the Applicant proposes to purchase the
Interest from the IRA in order that his IRA's assets can be placed
in investments yielding higher rates of return. Due to the joint
ownership of the Condo, the Applicant explains that a Sale of the
Interest to an unrelated party would be unduly burdensome and
unreasonable, such Sale and would likely force the IRA to offer a
discount for the Interest. In the alternative, the Sale avoids
forcing Mrs. Simmons to sell her 50 percent interest in the Condo
during down market conditions because her interest would be sold
during a down market at a discounted price. Although the Applicant
believes that there will be an equity improvement in 10-15 years, he
states that the short-term returns are too low for a tax-deferred
investment and the IRA needs to divest itself of the Interest as
soon as possible. Accordingly, the Applicant requests an
administrative exemption from the Department.
9. The Sale will be a one-time cash transaction. The terms will
be at least as favorable to the IRA as those obtainable in an arm's
length transaction with an unrelated party. The IRA will receive no
less than the fair market value for the Interest, as determined by a
qualified, independent appraisal on the date of the Sale. Further,
the IRA will pay no commissions, costs, or other expenses in
connection with the Sale. Following the Sale, Beach Rent, LLC will
be dissolved and its assets will be distributed to the IRA and Mrs.
Simmons.
10. The Applicant retained R. Stephen White of First State
Appraisal, Inc. of Rehoboth Beach, Delaware to appraise the Condo.
Mr. White is licensed in the State of Delaware as a certified
residential real property appraiser. During 2009, he received less
than one percent of his income from services provided to the
Applicant and related parties, including Mrs. Simmons.
In an appraisal report dated September 17, 2009 (the Appraisal),
Mr. White compared the Condo in an ``as is'' condition with six
other two-bedroom condominium sales in Dewey Beach and Rehoboth
Beach, Delaware using the Sales Comparison Approach to valuation.
Also as of September 17, 2009, Mr. White valued the Condo at
$385,000. Mr. White will update the Appraisal on the date of Sale.
Accordingly, the Applicant represents that the Interest is valued at
$192,500.00 ($385,000 x 50 percent).
11. The Applicant represents that the proposed transaction will
satisfy the statutory criteria for an exemption under section
4975(c)(2) of the Code because:
(a) The terms and conditions of the Sale will be at least as
favorable to the IRA as those obtainable in an arm's length
transaction with an unrelated party;
(b) As consideration, the IRA will receive the lesser of
$192,500 or the fair market value of the Property as determined by a
qualified, independent appraiser in an updated appraisal on the date
of Sale; and
(d) The IRA will pay no commissions, costs, fees, or other
expenses with respect to the Sale.
Notice to Interested Persons
Because the Applicant is the sole participant of the IRA, it has
been determined that there is no need to distribute the notice of
proposed exemption (the Notice) to interested persons. Therefore,
comments and requests for a hearing are due thirty (30) days after
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Anh-Viet Ly of the Department at
(202) 693-8648. (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
[[Page 47644]]
408(a) of the Act and/or section 4975(c)(2) of the Code does not
relieve a fiduciary or other party in interest or 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 that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 29th day of July 2010.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2010-19368 Filed 8-5-10; 8:45 am]
BILLING CODE 4510-29-P