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EBSA Notices

Application Nos. and Proposed Exemptions; D-11569, Sherburne Tele Systems, Inc.; and D-11597, John D. Simmons Individual Retirement Account; et al.   [8/6/2010]
[PDF]
FR Doc 2010-19368
[Federal Register: August 6, 2010 (Volume 75, Number 151)]
[Notices]               
[Page 47639-47644]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06au10-129]                         

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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: 
``moffitt.betty@dol.gov'', 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-

[[Page 47643]]

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