Another Business Owner Caught by Withdrawal Liability
I have blogged before [May 16, 2012, November 21, 2012, April 23, 2012, May 15, 2012, September 5, 2012] about the liability that can be imposed on businesses whose union employees participate in a multiemployer pension plan if the business ceases to participate in that plan. That liability is called withdrawal liability and can be imposed if a union decertifies, a union and the employer negotiate to replace the multiemployer pension plan with, for example, a 401(k) plan, or in some instances where the number of employees covered by the union pension plan is reduced because of plant closures, declining business conditions or other reasons. Withdrawal liability is imposed if the multiemployer plan is underfunded, a condition in which many such plans find themselves these days.
One of the seriously underfunded plans is the Central States Southeast and Southwest Areas Pension Plan, a Teamsters plan headquartered in Chicago. It has been in critical status or the “red zone” since multiemployer plans were required to begin reporting their funded status by zone in 2008. According to the Fund’s most recent annual funding notice, the Fund is expected to have an accumulated funding deficiency at least through the 2021 plan year. Thus, employers participating in that plan face substantial withdrawal liability and Central States has been diligent in pursuing that liability since 1980 when withdrawal liability provisions were added to federal law.
One of the features of withdrawal liability is that the liability is owed by all members of the controlled group of employers. This means that parent companies and their subsidiaries are jointly and severally liable for withdrawal liability that may be imposed on one of them. The controlled group rules also apply to “brother-sister” businesses, which are businesses owned in sufficiently the same proportions by the same five or fewer individuals, estates and trusts. The brother-sister controlled group rules can be quite complicated but in their simplest form require the aggregation of all businesses owned by one person or by that person and his or her spouse.
Controlled businesses could arise where an operating business (corporation or LLC) is owned by a person who also owns the real estate on which the business operates. That property ownership is often maintained in a separate entity or outside the operating business for liability and tax purposes. The lease arrangements between the operating business and the real estate business may be triple net leases where the entity holding the real estate has little or no responsibility for the property. Much like the hedge fund operators I discussed in earlier blogs [November 21, 2012 and May 16, 2012], these owners also would like to claim that the real estate is simply a passive investment and not a trade or business to be aggregated with the operating business. If the operating business withdrew from a multiemployer plan, the owners would claim that the person or entity owning the real estate cannot be required to pay the withdrawal liability.
The United States Court of Appeals for the Seventh Circuit, which is the circuit that includes Chicago, recently considered such a case where a business was assessed $3.6 million in withdrawal liability by the Central States Southeast and Southwest Areas Pension Fund. When the business did not pay that assessment, the Pension Fund claimed that the owner of the business was personally liable both because his work as an independent contractor for a golf course qualified as a trade or business under common control and because his ownership of the real estate used by the business was also a trade or business under common control. The district court found that the golf course activities constituted a trade or business but that real estate ownership was simply a passive activity.
The Seventh Circuit affirmed the district court but in the process declared a bright-line rule that where the owner of a withdrawing business leases property to that business, the leasing activity qualifies as a trade or business. If that trade or business is owned personally by the owner of the withdrawing business, the leasing activities and the withdrawing business would be aggregated under the controlled group rules and both would be responsible for the withdrawal liability assessment. In this case, since the real estate was held by the business owner personally, that meant that the business owner personally was responsible for the $3.6 million withdrawal liability.
The Seventh Circuit also found that the owner’s independent contractor activities, where he essentially acted as a consultant and manager for a golf course, also constituted a trade or business to be aggregated with the withdrawing business. The owner had tried to suggest that he acted as an employee of the golf course for those activities, but the Seventh Circuit noted that the business owner received a 1099-MISC rather than a W-2 from the golf course and filed tax returns claiming independent contractor status. The court concluded that the owner was not an employee of the golf course. Therefore, his independent contractor business was also aggregated with the withdrawing business, so he was responsible for the withdrawal liability because of that business as well.
In light of this decision, owners of businesses whose employees participate in multiemployer plans may wish to review the structure of their other business activities. If they have an independent contractor business or own the real estate on which another of their businesses operates they may find themselves personally responsible for withdrawal liability if their operating business fails to pay a withdrawal liability assessment.
Contact Benefits Notes for more information.