Withdrawal liability – Real estate presumed to be a trade or business | Jackson Lewis PC
The permanent cessation of an employer’s contributions to a multi-employer pension plan may trigger the withdrawal obligation. This responsibility may extend to affiliated trades or businesses with enough common ownership to be under “common control” with the employer. Affiliates would be jointly and severally liable for the withdrawal liability incurred and unpaid by the withdrawing affiliate.
Courts are often grappling with the complex and factual distinction between a business or enterprise (responsible for the responsibility for removing control group members) and passive investing (not responsible). However, for the Seventh Circuit, the result is clear when common real estate is leased or used by the retiring employer. In Local 705 Int’l Bhd. of Teamsters Pension Fund v. Pitello, (7e Cir. 2021), he reaffirmed the rebuttable presumption that the rental of a building to a retiring employer is a trade or business.
The Pitello brothers owned a unionized business, another operating company, and a piece of land on which both companies operated. Neither company had a written lease agreement or paid rent. Shortly after the unionized business ceased all covered activities in 2018, the brothers (through their non-union business) leased the property to a third party. Local pension fund 705 assessed the withdrawal liability against the brothers and their companies, but the Pitellos ignored the request. The Fund sued the defunct union business, the non-union business and the Pitello brothers individually as businesses or businesses under common control with the union business.
The Pitellos argued unsuccessfully that the property was a passive investment, not a “trade or business”, and therefore they were not liable for the debts of the defunct union entity.
The appeals court first noted that there was no legal definition of “commerce or business”. He then used the test developed for tax purposes by the Internal Revenue Service, Commissioner c. Groetzinger, (1987), which focuses on “two questions: (1) whether the main objective of the activity is income or profit; and (2) whether the activity is undertaken with continuity and regularity.
The Groetzinger The test is simplified, the Court said, when it comes to renting a property, because “renting a property to an employer who is retiring is categorically a ‘business or a business.’ , “Where the building is rented or used by the retiring employer and there is common ownership, it is unlikely that the rental activity can be considered a truly passive investment”. Central, Southeastern and Southwestern States Pension Fund c. Messina Prod., LLC, (7th Cir. 2013). The Pitello The Court explained that there is a rebuttable presumption that leasing real estate to a retiring employer is a trade or business. She had no difficulty in ruling on the brothers’ attempts to rebut the presumption and uphold the district court’s judgment in favor of the Local Pension Fund 705.
When the good in question is both the common property and the common use of the dismissed employer, by virtue of Pitello, arguing that leasing property to an employer affiliate is not a business or business is difficult at best. The other potential avenue would have been to structure land ownership so that the real estate entity is not a member of the controlling group. Depending on the facts, this structure may result in an “escape or avoid” claim under section 4212 (c) of ERISA.
Real estate is often the most valuable asset of retiring employers. Understand your potential Withdrawal liability and making informed decisions prior to a withdrawal liability assessment is paramount to limiting liability exposure.