[Federal Register: October 31, 2000 (Volume 65, Number 211)]
[Notices]
[Page 65011-65016]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc00-96]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10771, et al.]
Proposed Exemptions; Care Services Employees' 401(k) Profit
Sharing Plan and Trust
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request 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 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
the Pension and Welfare Benefits Administration, U.S. Department of
Labor, Room N-5638, 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, 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
[[Page 65012]]
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.
Care Services Employees' 401(k) Profit Sharing Plan and Trust (the
Plan) Located in Beachwood, OH; Proposed Exemption
[Application No. D-10771]
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 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 (1) cash sale by the Plan,
occurring on December 30, 1997, of certain assets (the Assets), to Mr.
Warren L. Wolfson, a party in interest with respect to the Plan; and
(2) the prospective cash resale of the Assets by the Plan to Mr.
Wolfson.
The proposed exemption is subject to the following conditions:
(a) Each sale of the Assets was or will be a one-time transaction
for cash.
(b) The Plan received or will receive no less than the fair market
value of the Assets at the time of each sale.
(c) The sales price for each Asset was determined or will be
determined by a qualified, independent appraiser at the time of each
sale transaction.
(d) The terms of the past and prospective sales transactions were
or will be no less favorable to the Plan than those obtainable in
similar transactions negotiated at arm's length with unrelated parties.
(e) The Plan did not incur any fees or commissions in connection
with the past sale of the Assets nor will it incur any fees or
commissions expenses with respect to the prospective sale of such
Assets.
(f) Within 60 days of the publication, in the Federal Register, of
the notice granting this proposed exemption, Mr. Wolfson will file a
Form 5330 with the Internal Revenue Service (the Service) and pay all
appropriate excise taxes that may be due and owing with respect to
prohibited transactions arising in connection with certain of the
Assets.
Effective Date: If granted, this proposed exemption will be
effective as of December 30, 1997 with respect to the initial sale of
the Assets by the Plan to Mr. Wolfson. In addition, this proposed
exemption will be effective as of the date of the grant with respect to
the resale of the Assets by the Plan to Mr. Wolfson.
Summary of Facts and Representations
1. The Plan, which was established on December 16, 1983, is a
defined contribution plan covering all eligible employees of W.W.
Extended Care, Inc.; Richfield Nursing Center, Inc.; Villa Nursing
Corporation; Cleveland Golden Age Hospital, Inc.; Pebble Creek
Convalescent Center of Ohio, Inc.; Belcare, Inc.; LTC Remedies, Inc.;
Richmond Nursing, Inc.; Wyatt Woods, L.L.C., and WLW, Inc., companies
which have common ownership. As of December 31, 1999, the Plan had 710
participants and aggregate assets of approximately $3,306,853.
The Plan provides for participant-directed investments for its
401(k) portion. Investment discretion over the profit sharing portion
of the Plan is exercised by Warren L. Wolfson, who serves as the Plan
trustee. Mr. Wolfson is also a principal of W.L.W., Inc. (the
Employer), which operates a chain of six long-term care facilities and
an associated management company in northeast Ohio. The Employer does
business under trade name ``Care Services Associates.''
2. To provide a more cohesive investment policy and reduce overall
administrative costs to the Plan, the Employer and Mr. Wolfson wished
to consolidate the Plan's investments with one investment adviser. The
new investment adviser, The Heitner Corporation (Heitner), advised the
Employer and Mr. Wolfson to dispose of certain of the Plan's
investments inasmuch as Heitner did not desire to hold and manage these
Assets.\1\ The specific Assets targeted by Heitner included the Plan's
investments in six bonds issued by the Government of Israel (the Israel
Bonds), 50 shares of common stock in River Glen REIT, Inc. (the REIT
Interests) and a \1/4\ limited partnership interest (the \1/4\ LP Unit)
in the Apartment Opportunity Fund II, L.P., (the AOF II Partnership
).\2\
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\1\ In a letter dated May 17, 2000, Mr. Larry Flynn, Vice
President and Financial Consultant of Huntleigh Financial Services,
Inc. of St. Louis, Missouri, and a former employee of Heitner,
stated that he advised Mr. Wolfson regarding the reallocation of the
Plan's assets during 1997. Mr. Flynn explained that both he and Mr.
Wolfson considered many third party administrators for the Plan.
However, none of the prospective candidates expressed an interest in
holding the Assets on behalf of the Plan because the investments
could not be priced on a daily basis. Therefore, Mr. Flynn said he
advised Mr. Wolfson to sell the subject Assets and reallocate the
Plan's assets into mutual funds.
\2\ It is represented that Mr. Wolfson did not invest in any of
the aforementioned Assets in his personal capacity.
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3. The six Israel Bonds, which are set forth below in the table,
were purchased by the Plan for cash from an unrelated party between
November 1986 and July 1997.
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Bond Issuance date Face value Interest rate Maturity date
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One............................. 11/1/86............ $25,000 Variable.......... 11/1/98
Two............................. 11/1/88............ 25,000 Variable.......... 11/1/00
Three........................... 11/1/90............ 25,000 Variable.......... 3/31/02
Four............................ 11/1/93............ 25,000 6.0%, Fixed....... 9/30/03
Five............................ 10/1/95............ 25,000 Variable.......... 1/31/03
Six............................. 7/1/97............. 25,000 7.5%, Fixed....... 5/31/07
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The Israel Bonds were acquired by the Plan for their $25,000 face
value and have (or had) terms ranging from 8 to 12 years. With the
exception of Bond One, which matured on November 1, 1998, the other
Israel Bonds are still in existence. Bonds One, Two, Three and Five
carry (or carried) variable interest rates, based on the average of the
prime rates quoted by Bank of America National Trust & Savings
Association, Continental Bank, N.A. and Citibank, N.A. Bonds Four and
Six bear fixed interest rates of 6 percent and 7.5 percent per annum.
Interest has been paid on the Israel Bonds twice per year. During 1997,
the Plan received interest payments on the Israel Bonds of $11,109.41.
4. On July 25, 1997, the Plan acquired 25 shares of common stock
comprising
[[Page 65013]]
the REIT Interests from River Glen REIT, Inc. (River Glen REIT), an
unrelated party, for $25,000. On September 11, 1997, the Plan acquired
an additional 25 shares comprising the REIT Interests from River Glen
REIT for $25,000. The Plan paid the consideration in cash. The REIT
Interests are assignable only with the consent of River Glen REIT.
The seller, River Glen REIT, is a Virginia corporation that
qualifies as a real estate investment trust for federal income tax
purposes. River Glen REIT owns a 99 percent limited partnership
interest in River Glen of Orlando Partners, Ltd. (the River Glen
Partnership), which, in turn, owns a 396 residential unit located in
Orlando, Florida. In addition, River Glen REIT has 5,800 shares of
common stock authorized and outstanding with a par value of $1,000 per
share.
During 1997, the Plan received no distributions with respect to the
REIT Interests.
5. On February 24, 1997, the Plan purchased the \1/4\ LP Unit in
the AOF II Partnership, from General Capital Corporation, an unrelated
party, for a cash purchase price of $25,000. The AOF II Partnership is
a Tennessee limited partnership which was organized on January 10, 1996
for the purpose of owning and operating apartment complexes located in
Florida and Tennessee. The general partner (the General Partner) of the
AOF II Partnership is General Capital Associates II, L.P., an affiliate
of General Capital Corporation. The AOF II Partnership makes quarterly
distributions to investors at an annual rate of 8 percent and
anticipates selling or refinancing its underlying investments within 4
to 7 years after acquisition. Sales of AOF II Partnership interests,
such as the \1/4\ LP Unit, require the approval of the General Partner.
During 1997, the Plan received a distribution of $1,086 from the
AOF II Partnership with respect to the \1/4\ LP Unit.
6. Because the subject Assets are not publicly-traded, Mr. Wolfson,
as Plan trustee, attempted to locate prospective purchasers. In this
regard, Mr. Wolfson contacted the sellers from whom the Assets were
purchased to determine whether there was a secondary market. \3\ Upon
learning that there was no secondary market for these Assets, Mr.
Wolfson sought the advice of his accountant, who purportedly advised
him to purchase the Assets, in his individual capacity, at their fair
market value.
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\3\ Specifically, Mr. Wolfson attempted to sell. the Israel
Bonds to several business acquaintances. However, these persons did
not wish to purchase the Israel Bonds at that time due to their
cost. With respect to the REIT Interests and the \1/4\ LP Unit, Mr.
Wolfson was informed by officials at River Glen REIT and General
Capital Corporation, respectively, that there was no buyers
available to acquire these Assets.
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The fair market value of each of the Assets was determined by the
entities from which they had been acquired. With respect to the Israel
Bonds, the fair market value of such instruments was deemed to be equal
to their face value by Ms. Evelyn Epstein of the State of Israel Bond
Office in Cleveland, Ohio. In a verbal consultation with Mr. Wolfson,
Ms. Epstein placed the aggregate fair market value of the Israel Bonds
at $150,000 as of December 30, 1997.
In addition, by letter dated December 16, 1997, William J. Gordon,
President of River Glen REIT, advised Mr. Wolfson that the fair market
value of River Glen REIT common stock was $1,000 per share as of that
date. Therefore, Mr. Gordon placed the total value of the Plan's River
Glen REIT Interests at $50,000.
Further, on December 22, 1997, Maclin Davis, III, Controller/
Secretary of the General Partner, informed Mr. Wolfson, in writing,
that because there were no secondary market transactions in the AOF II
Partnership interests, the best measure of the fair market value of the
\1/4\ LP Unit was its original cost of $22,500.
Based upon the aforementioned valuations of the Assets, Mr. Wolfson
obtained the requisite consents from the issuers and individually
purchased all of the Israel Bonds, the REIT Interests and the \1/4\ LP
Unit from the Plan at their respective fair market values on December
30, 1997 for a total cash purchase price of $222,500. The Plan paid no
fees or commissions in connection with the sale. In January 1998, all
of the remaining assets were transferred to Heitner for investment
management.
7. In December 1998, the Plan's auditors discovered a $2,500
shortfall in the purchase price Mr. Wolfson had paid for the Assets.
The discrepancy was attributed solely to the \1/4\ LP Unit for which
Mr. Wolfson had erroneously paid $2,500 less than its fair market value
through no fault of his own. The problem stemmed from Mr. Davis's
December 22, 1997 letter to Mr. Wolfson in which Mr. Davis had
mistakenly noted that the \1/4\ LP Unit's original cost was $22,500.
This amount actually reflected the adjusted income tax basis for the
\1/4\ LP Unit rather than its true original cost of $25,000.
Therefore, in an effort to resolve the pricing error, the Plan's
auditors established a $2,500 account receivable, which was to be owed
to the Plan by Mr. Wolfson. The auditors also recommended that the
receivable carry an interest rate of 10 percent per annum from the time
of the December 30, 1997 sale transaction. No other loan terms were
negotiated by the Plan and Mr. Wolfson. No promissory note was ever
executed and the loan amount was unsecured.
8. Also in December 1998, the Plan's auditors were advised by their
legal counsel that the December 1997 sale had resulted in a prohibited
transaction in violation of the Act. In order to ``correct'' the
prohibited transaction, counsel advised the auditors to resell the
Assets to the Plan for their fair market value. Accordingly, on
December 31, 1998, Mr. Wolfson sold all of the previously purchased
Assets back to the Plan at what was believed to be no more than the
fair market value of such Assets.\4\ The receivable owed to the Plan
was also canceled. Further, Mr. Wolfson made a total restoration
payment to the Plan of $18,290.56. Of this amount, $2,000.00
represented a distribution from the AOF II Partnership, $4,269.00
represented a dividend on the REIT Interests, $819.00 represented a
non-taxable distribution attributed to the REIT Interests, $9,312.50
represented interest derived from the Israel Bonds, for a subtotal of
$16,400.50. Of the subtotal, Mr. Wolfson made a 10 percent interest
payment to the Plan in the amount of $1,640.06. In addition, Mr.
Wolfson made a cash payment to the Plan of $250, reflecting a 10
percent interest factor on the receivable for its one year duration.\5\
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\4\ The Department has no jurisdiction with respect to section
53.491(e)-(c)(1) of the Foundation Excise Tax Regulations (the
FETR). This provision applies to prohibited transactions under
section 4975 of the Code by reason of Temporary Pension Excise Tax
Regulation 141.4975-13. Under section 53.4941(e)-1(c)(1) of the
FETR, any correction pursuant to Code section 4941 is not an act of
self-dealing. Similarly, the Department has determined that the
correction of a prior prohibited transaction is not a prohibited
transaction under section 406 of the Act. Therefore, the Department
expresses no opinion herein on whether the return of the Assets by
Mr. Wolfson to the Plan was a proper correction.
\5\ Specifically, the Plan repurchased the Israel Bonds for
$150,000, the REIT Interests for $50,000 and the \1/4\ LP Unit for
$22,500, for a total reacquisition price of $222,500. Along with the
$18,290.56 total restoration payment made by Mr. Wolfson, the Plan
received a total payback of $240,790.56 with respect to the subject
Assets.
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Between January 1999 and August 2000, the Plan has received
additional income with respect to the subject Assets. In regard to the
Israel Bonds and the REIT Interests, the Plan has received total
interest payments and distributions of $23,953 and $7,176,
respectively. In
[[Page 65014]]
regard to the \1/4\ LP Unit, the Plan has received a total distribution
of $11,457.
9. Mr. Wolfson believes that the safeguards necessary for the
granting of a prospective exemption were present at the time the
original sale transaction was consummated. It is represented that Mr.
Wolfson acted in good faith and took reasonable and appropriate steps
to protect the Plan from abuse and unnecessary risks by restoring the
Assets to the Plan, returning all income and distributions he had
received and making interest payments upon discovery that the
transaction was prohibited. In addition, Mr. Wolfson represents that at
no time was he aware that he was engaging in a prohibited transaction.
In this regard, the Department notes that there was no
contemporaneous, written valuation for the Plan's sale of the Israel
Bonds to Mr. Wolfson. Instead, Mr. Wolfson relied upon the oral
valuation of Ms. Epstein to establish the fair market value of the
Israel Bonds. In addition, with respect to the Plan's acquisition and
holding of the $2,500 account receivable, the terms of this arrangement
did not appear to reflect arm's length dealings between the parties
since the loan was never collateralized, and there was no independent
fiduciary to protect the interests of the Plan and its participants and
beneficiaries.
Due to the absence of adequate independent safeguards necessary for
the granting of an administrative exemption in both instances, the
Department has decided not to provide exemptive relief for these
transactions. Therefore, Mr. Wolfson represents that within sixty days
of the publication, in the Federal Register, of the notice granting
this proposed exemption, he will file a Form 5330 with the Service and
pay all appropriate excise taxes that are due and owing with respect to
the Plan's sale of the Israel Bonds and the extension of credit
transaction.
10. Aside from the retroactive exemption request involving the sale
by the Plan to Mr. Wolfson of the REIT Interests and the \1/4\ LP Unit,
Mr. Wolfson is also seeking a prospective exemption from the Department
which, if granted, will allow the Plan to resell the Assets to him, in
his personal capacity. It is represented that the prospective exemption
will simplify Plan administration, reduce recordkeeping costs, and
ensure that the Plan receives a return on the Assets in excess of its
original investment, and allow the Plan to dispose of illiquid assets.
The proposed resale of the Assets will be a one-time transaction for
cash and the Plan will receive fair market value for the Assets as
determined by a qualified, independent appraiser. The Plan will not be
required to pay any fees or commissions in connection with the resale
of the Assets.
11. Donald C. May, CPA/ABV, CVA, a qualified, independent appraiser
affiliated with the accounting firm of Howard Wershable & Co. of
Cleveland, Ohio has valued the Assets for purposes of their potential
resale. Following is a discussion of Mr. May's valuations of each of
the subject Assets.
(a) Israel Bonds. In an appraisal report dated June 5, 2000, Mr.
May valued the Israel Bonds as of April 15, 2000. With respect to Bonds
Two, Three and Five, Mr. May concluded that the $25,000 face value of
these Israel Bonds would be indicative of their fair market value as of
April 15, 2000. He also noted that Bond One, which matured on November
1, 1998, was redeemed for its $25,000 face value.
With respect to Bond Four, Mr. May noted that as of April 15, 2000,
rates on U.S. Treasury Notes having terms that were similar to the
remaining term on Bond Four increased to 6.21 percent. Therefore, he
placed the fair market value of Bond Four at $23,028 as of April 15,
2000.
With respect to Bond Six, Mr. May observed that as of April 15,
2000, the rate on U.S. Treasury Notes having terms similar to the
remaining term of Bond Six was 6.16 percent. Because overall market
interest rates had fallen since Bond Six's acquisition on July 1, 1997,
he projected the fair market value of Bond Six, which carries a 7.5
percent fixed rate, to be $26,178 as of April 15, 2000.
In summary, the fair market values of each of the Israel Bonds, as
determined by Mr. May, are reflected in the following table:
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Fair market
Bond Face value value as of
4/15/00
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One........................................... $25,000 Matured
Two........................................... 25,000 $25,000
Three......................................... 25,000 25,000
Four.......................................... 25,000 23,028
Five.......................................... 25,000 25,000
Six........................................... 25,000 26,178
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Total....................................... ........... 124,206
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(b) REIT Interests. In an appraisal report dated May 17, 2000, Mr.
May stated that the fair market value of a REIT unit should be
determined by the value of the properties underlying the REIT. Because
River Glen REIT owns a 99 percent interest in a parcel of property
known as the ``Heather Glen,'' Mr. May believed that the book value of
River Glen REIT, adjusted for the accumulated depreciation of Heather
Glen, would reflect the fair market value of River Glen REIT as of
April 15, 2000.
Based on the fact that management had been able to raise rents and
occupancy for the property and the local economy had remained strong,
Mr. May stated that the fair market value of the underlying property
would at least be equal to its original cost. Although financial
information was only available through December 31, 1999, Mr. May
observed that there were no events which would significantly affect the
value of the underlying property and require adjustments to other
assets or liabilities. Therefore, Mr. May placed the fair market value
of the REIT Interests at $57,500 (or $1,150 per share) as of April 15,
2000.
(c) The \1/4\ LP Unit. In an appraisal report dated May 15, 2000,
Mr. May also noted that the fair market value of a real estate
partnership unit should be determined by the value of the underlying
properties in the partnership. Because the AOF II Partnership
properties had been acquired in recent years, Mr. May asserted that the
book value of such properties, with an adjustment for accumulated
depreciation, would reasonably reflect the value of such properties as
of April 15, 2000.
Based on the fact that management had been able to raise rents and
occupancy for most of the properties and the local economies had
remained stable or increased, Mr. May stated that the fair market value
of the underlying properties was at least equal to their original
acquisition costs. Although at the time of his appraisal, Mr. May
stated that financial information was available through December 31,
1999, he noted that no events had taken place that would significantly
affect the value of the \1/4\ LP Unit and require adjustments to other
assets or liabilities. Therefore, as of April 15, 2000, Mr. May placed
the fair market value of the \1/4\ LP Unit at $25,000. He also noted
that there had been no recent sales of AOF II Partnership units.
12. Thus, based upon Mr. May's valuations of the Assets as of April
15, 2000, Mr. Wolfson proposes to purchase the five remaining Israel
Bonds from the Plan for $124,206, the REIT Interests for $57,500 and
the \1/4\ LP Unit for $25,000, which reflects the fair market value of
such Assets. The aggregate purchase price of $206,706 \6\ will be paid
by Mr.
[[Page 65015]]
Wolfson to the Plan in cash. Mr. May will update his valuations of the
Assets on the date of the sale.
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\6\ To recap, during 1997 and between January 1999 and August
2000, the Plan has received--
$44,374.91 in interest payments with respect to the
Israel Bonds for which it had paid an aggregate purchase price of
$150,000. Thus, the Plan's total net cost with respect to the Israel
Bonds (excluding Bond One which matured on November 1, 1998 and was
subsequently redeemed by the Plan for its $25,000 face value) is
$80,625.09.
$12,624 in distributions with respect to the REIT
Interests. Because the Plan paid $50,000 for the REIT Interests, its
net cost with respect to this investment is $37,376.
$13,457 in distributions from the AOF II Partnership.
Because the Plan had acquired the \1/4\ LP Unit for $22,500, its net
cost with respect to the \1/4\ LP Unit is $9,043.
Thus, the Plan's overall net cost with respect to the Assets is
$127,044.09.
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13. In summary, it is represented that the transactions have
satisfied or will satisfy the statutory exemptive relief that is
available under section 408(a) of the Act because:
(a) Each sale of the Assets was or will be a one-time transaction
for cash.
(b) The Plan received or will receive no less than the fair market
value of the Assets at the time of each sale.
(c) The sales price for each Asset was determined or will be
determined by a qualified, independent appraiser at the time of each
sale transaction.
(d) The terms of the past and prospective sales transactions were
or will be no less favorable to the Plan than those obtainable in
similar transactions negotiated at arm's length with unrelated parties.
(e) The Plan did not incur any fees or commissions in connection
with the past sale of the Assets nor will it incur any fees or
commissions expenses with respect to the prospective sale of such
Assets.
(f) Within 60 days of the publication, in the Federal Register, of
the notice granting this proposed exemption, Mr. Wolfson will file a
Form 5330 with the Service and pay all appropriate excise taxes that
may be due and owing with respect to the sale of the Israel Bonds and
the extension of credit transaction.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Department of
Labor, telephone (202) 219-8881. (This is not a toll-free number.)
Gillespie Real Estate Professional Corporation Defined Benefit Plan
(the Plan) Located in Phoenix, Arizona; Proposed Exemption
[Applicant No. D-10880]
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,
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) of the Code, shall not apply to the proposed
cash sale (the Sale) of a certain residential lot (the Property) by the
Plan\7\ to Bruce and Ann Gillespie (the Applicants), disqualified
persons with respect to the Plan, provided that the following
conditions are met:
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\7\ Because Bruce Gillespie is the sole shareholder of the
Employer and he and his wife, Ann Gillespie, are the only
participants in the Plan, there is no jurisdiction under Title I of
the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act under section 4975 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 Plan as those obtainable in an arm's length transaction with an
unrelated party;
(c) The Plan receives the greater of $450,000 or the fair market
value of the Property at the time of the Sale; and
(d) The Plan is not required to pay any commissions, costs or other
expenses in connection with the Sale.
Summary of Facts and Representations
1. The Plan is a defined benefit plan which was established by the
Applicants, the sole participants and beneficiaries. As of March 6,
2000, the Plan held assets valued at approximately $1.9 million. The
trustees of the Plan are Bruce and Ann Gillespie.
2. The Property is a 34,372 square foot residential lot located at
Forest Highlands, Lot 781, Coconino County, Arizona.
According to the Applicants, the Plan originally acquired the
Property as a real estate investment. The Plan purchased the Property
in June 24, 1998, from an unrelated third party, the Homeowners
Association of the Forest Highlands.\8\ First of American Mortgage
served as the lender for the Plan's mortgage. The purchase price of the
Property including settlement charges was $343,350.57. The Plan paid a
cash deposit of $168,133.07 and financed the balance of the purchase
price.
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\8\ The Department is expressing no opinion as to whether the
acquisition and holding of the Land by the Plan was a prohibited
transaction under section 4975(c)(1)(D) and (E) of the Code, and no
relief is provided herein.
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The Applicants represent that the only expenditures the Plan has
paid since owning the Property are $2,397.46 in property taxes,
$5,729.08 in association fees, and $13,977.81 in loan interest payments
from 1998 (i.e., the year of original acquisition) until August 18,
2000. Therefore, the total cost to the Plan for the Property is
$365,454.92 as of August 18, 2000 ($343,350.57 + $2,397.46 + $13,977.81
+ $5,729.08 = $365,454.92). From the time of the purchase through
August 18, 2000, the Property has remained vacant and no income has
been generated.
The Applicants represent that the Property has not been leased to,
or used by, any disqualified persons.
3. The Applicants request an exemption for the Sale. The Applicants
represent that the proposed transaction would be feasible because it
would be a one-time transaction for cash. Furthermore, the Applicants
state that the transaction would be in the best interest of the Plan
because the Sale would enable the Plan to invest the proceeds from the
Sale in assets with a higher rate or return. The Applicants desire to
sell the Property because they wish to build a personal residence on
the lot. Finally, the Applicants assert that the transaction will be
protective of the rights of the Plan's participants and beneficiaries
as indicated by the fact that the Plan will receive the fair market
value of the Property, as determined by a qualified, independent
appraiser on the date of the Sale, and will incur no commissions,
costs, or other expenses as a result of the Sale.
4. Stephen G. Leach (Mr. Leach), an accredited appraiser with
Cushman & Wakefield of Arizona, Inc., located in Phoenix, Arizona,
appraised the Property on September 5, 2000. Mr. Leach states that he
is a full time qualified, independent appraiser, as demonstrated by his
status as a Certified Residential Real Estate Appraiser licensed by the
State of Arizona. In addition, Mr. Leach represents that both he and
his firm are independent of the Applicants.
In his appraisal, Mr. Leach relied primarily on the sales
comparison approach. According to Mr. Leach, this method best
represents the actions of buyers and sellers in the market place. This
method of appraisal involves an analysis of similar recently sold
properties in the area in question so as to derive the most probable
sales price of the Property. Mr. Leach's appraisal indicates that he
compared the Property to nine recently sold lots in the Forest
Highland's complex before reaching a conclusion as to the value of the
Property. After inspecting the Property and analyzing all relevant
data, Mr. Leach determined that a fee simple interest in the Property
had a fair market value of approximately $450,000, as of September 5,
2000.
5. In summary, the Applicants represent that the proposed
transaction satisfies the statutory criteria of section 4975(c)(2) of
the Code because: (a) The terms and conditions of the Sale would
[[Page 65016]]
be at least as favorable to the Plan as those obtainable in an arm's
length transaction with an unrelated third party; (b) the Sale would be
a one-time cash transaction allowing the Plan to divest itself of the
Property and reinvest the proceeds of the Sale in assets that will
yield a higher rate of return; (c) the Plan would receive an amount
equal to the greater of $450,000, which represents the appraised fair
market value of the Property, as appraised by Mr. Leach in September
2000, or the fair market value of the Property at the time of the Sale,
based on an updated appraisal of the Property by Mr. Leach or another
independent, qualified appraisal; and (d) the Plan would not be
required to pay any commissions, costs or other expenses in connection
with the Plan.
Notice to Interested Parties: Because Mr. Gillespie is the sole
shareholder of the Employer and he and his wife, Ann Gillespie, are the
only participants in the Plan, it has been determined that there is no
need to distribute the notice of proposed exemption (the Notice) to
interested persons. Comments and requests for a hearing are due thirty
(30) days after publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Khalif Ford 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 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 25th day of October 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-27915 Filed 10-30-00; 8:45 am]
BILLING CODE 4510-29-P