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Secretary of Labor Thomas E. Perez
Proposed Exemptions; MICO, Inc. (MICO) [Notices] [05/27/1999]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; MICO, Inc. (MICO) [05/27/1999]

[PDF Version]

Volume 64, Number 102, Page 28835-28838

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10621, et al.]

 
Proposed Exemptions; MICO, Inc. (MICO)

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

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing 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 Pension 
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5507, 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 (43 FR 47713, October 17, 1978) 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.

MICO, Inc. (MICO)

Located in North Mankato, Minnesota
[Exemption Application Number D-10621]

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 32826, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 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 proposed sale (the Sale) of a certain 
parcel of unimproved real property (the Property) from the MICO, Inc. 
Profit Sharing Plan (the Plan) to MICO, a party in interest and 
disqualified person with respect to the Plan, provided that the 
following conditions are met:
    (a) 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;
    (b) MICO purchases the Property for $362,000, which represents the 
Property's current fair market value as determined by a qualified, 
independent appraiser;
    (c) MICO additionally pays to the Plan a premium of $36,200, as 
determined by a qualified, independent appraiser, due to MICO's 
ownership of improved real property which is located adjacent to the 
Property;
    (d) The Sale is a one-time transaction for cash; and
    (e) The Plan pays no fees or commissions in connection with the 
Sale.

Summary of Facts and Representations

    1. MICO is a Minnesota corporation engaged primarily in the design 
and manufacture of hydraulic brake systems. MICO is also the sponsor of 
the Plan. The Plan is a defined contribution plan which allows the 
Plan's participants to direct their individual accounts and the Plan's 
trustees (the Trustees) to make all other investment decisions with 
respect to the Plan. The Plan, which was established on December 8, 
1959, has 280 participants and approximately $20,030,206 in total 
assets as of June 8, 1998.
    2. In 1966, the Plan purchased a lot of unimproved land (the 
Original Parcel), located on Marie Lane in North Mankato, Minnesota for 
$46,000 from Fred and Ruth Forsberg, parties unrelated to the Plan. The 
Property is an irregularly shaped lot comprising approximately 12.74 
acres of undeveloped land zoned for I-1 ``Planned Industrial'' use and 
is located

[[Page 28836]]

adjacent to MICO's production facilities and offices. The applicant 
represents that the Original Parcel was acquired for investment 
purposes. The applicant represents that the Plan subsequently leased 
(the Lease) to MICO a portion of the Original Parcel and, in 1979, sold 
the Original Parcel portion to MICO (the Portion Sale).<SUP>1</SUP> The 
portion of the Original Parcel which was not transferred to MICO (i.e., 
the Property) continues to be held as an asset of the Plan.
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    \1\ The Applicants represent that the Lease and the Portion Sale 
were made pursuant to ERISA section 414 (c)(2) and (c)(3). In this 
regard, the Department expresses no opinion herein as to whether the 
Lease and Portion Sale were made in accordance with the requirements 
of the Act.
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    3. The Plan has incurred certain holding costs as a result of its 
ownership of the Property. In this regard, the Plan has paid 
approximately $90,000 in real estate taxes with respect to the 
Property. Additionally, the Plan has incurred a special assessment (the 
Assessment) which was imposed on the Property in 1998 for a principal 
amount of $29,127.97. The Trustees of the Plan elected to pay the 
Assessment over a 10 year period at the rate of $2,913.00 per year at 
an interest rate of 7.5%.<SUP>2</SUP>
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    \2\ The applicant represents that in the event that the proposed 
transaction is granted by the Department, the Plan will be 
responsible for paying the outstanding balance of the Assessment on 
the closing date of the Sale.
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    4. The Plan has received income from the Property through an at-
will oral agreement (the Agreement) with a sharecropper who has been 
farming the Property since 1984. As a result, the Plan has received 
approximately $1,350 each year from the Agreement. The Trustees 
represent, however, that the sharecropper has recently given notice to 
the Trustees that he is considering the discontinuation of the 
Agreement.
    5. The applicant represents that during the Plan's ownership of the 
Property, the Trustees received several offers to purchase a portion of 
the Property (the Offers). The applicant represents that the Trustees, 
after receiving each Offer, determined the extent to which a sale 
involving only a portion of the Property would reduce the value of the 
remaining Property. The applicant represents that the Trustees, after 
analyzing both the sale amount of each Offer and the resulting decline 
in value of the remaining Property, determined that each Offer would 
provide an unacceptable overall rate of return to the Plan for the 
Property. As a result, the Trustees determined that each Offer was not 
in the best interests of the Plan.
    The Trustees represent they are currently not advertising the 
Property for sale since the Property's limited marketability makes it 
unlikely that any advertisement of the Property would result in the 
Property's sale.
    6. The Property was appraised on November 26, 1997 (the Appraisal) 
by Gwen K. Gathercoal (Ms. Gathercoal), a Minnesota-licensed appraiser 
for the Robinson Appraisal Company, Inc. ( the Robinson Co.). The 
Appraisal was reviewed by another Robinson Co. appraiser, James K. 
Simonson (Mr. Simonson). Ms. Gathercoal and Mr. Simonson each represent 
that they are independent of the Plan and MICO and their employment and 
compensation were not contingent on the appraised value of the 
Property.
    Ms. Gathercoal used the sales comparison approach and examined 
eight different transactions before determining that, as of November 
26, 1997, the Property had a fair market value of $362,000. In the 
Appraisal, Ms. Gathercoal concluded that the ``highest and best use'' 
for the Property would be a combination of residential, commercial, and 
industrial use.
    The value of the Property was reevaluated (the Reevaluation) by Mr. 
Simonson on November 23, 1998. The purpose of the Reevaluation was to 
establish whether the Property had appreciated in value since the 
Appraisal and to determine the extent to which a premium on the 
Property was necessary in the event that the Property was sold to 
MICO.<SUP>3</SUP> In the Reevaluation, Mr. Simonson represented that 
the Property's fair market value of $362,000 had not increased since 
the Appraisal. As a result, Mr. Simonson estimated that the Property 
had a fair market value of $362,000, as of November 23, 1998. Mr. 
Simonson represented further that, in the event the Property was sold 
to MICO, an adjacent landowner, a premium valued at $36,200, or 10% 
above the Property's fair market value, should be paid by MICO to the 
Plan. As a result, Mr. Simonson estimated that any sale of the Property 
by the Plan to MICO should occur at a price equal to the sum of the 
Property's fair market value of $362,000 and the Property's assemblage 
value of $36,200.
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    \3\ In the Reevaluation, Mr. Simonson stated that he customarily 
adjusts upward the appraised value of real property in instances 
where, as here, the purchaser of the real property owns real 
property located adjacent to the real property the purchaser seeks 
to buy. Mr. Simonson represents that this upward adjustment, 
commonly referred to as an ``assemblage'', reflects the willingness 
of such purchasers to pay a premium above market value so as to 
avoid moving or to avoid business disruptions.
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    7. MICO proposes to purchase the Property for $398,200 (the 
Purchase Price). The Purchase Price represents the sum of the 
Property's current fair market value of $362,000, as determined by a 
qualified, independent appraiser, and the Property's assemblage value 
of $36,200 with respect to the Sale, as determined by a qualified, 
independent appraiser. The Sale will be a one-time transaction for cash 
in which the Plan pays no fees or commissions. The Trustees represent 
that the Sale is in the best interests of the Plan's participants and 
beneficiaries since the Property's rate of appreciation has decreased 
in recent years despite an increase in the Property's real estate 
taxes. The Trustees represent further that the Assessment, when added 
to the increased real estate taxes incurred by the Plan, creates an 
inappropriate Plan expense with respect to the Property.
    8. In summary, the Applicants represent that the proposed 
transaction satisfies the criteria of section 408(a) of the Act 
because:
    (a) 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;
    (b) MICO purchases the Property for $362,000, which represents the 
Property's current fair market value as determined by a qualified, 
independent appraiser;
    (c) MICO additionally pays to the Plan a premium of $36,200, as 
determined by a qualified, independent appraiser, due to MICO's 
ownership of improved real property located adjacent to the Property;
    (d) The Sale is a one-time transaction for cash; and
    (e) The Plan pays no fees or commissions connected to the Sale.

FOR FURTHER INFORMATION CONTACT: Christopher J. Motta at the United 
States Department of Labor, telephone (202) 219-8883 (this is not a 
toll free number).

Western Petroleum Company Profit Sharing Plan (the Plan)

Located in Eden Prairie, Minnesota
[Application No. D-10743]

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). If the exemption 
is granted, the restrictions of sections 406(a), 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 proposed sale by the individual account 
(the Account) of

[[Page 28837]]

James W. Emison in the Plan of certain closely-held stock (the Stock) 
to Mr. Emison, a party in interest with respect to the Plan, provided 
that the following conditions are satisfied: (a) The sale is a one-time 
transaction for cash; (b) the Account pays no commissions nor other 
expenses relating to the sale; and (c) the Account receives an amount 
that is no less than the fair market value of the Stock as of the date 
of the sale, as determined by a qualified, independent appraiser.

Summary of Facts and Representations

    1. The Plan is a defined contribution, profit sharing plan 
established by Western Petroleum Company (the Employer). The Employer 
is a Minnesota corporation and a petroleum wholesaler, located in Eden 
Prairie, Minnesota. As of February 8, 1999, the Plan had approximately 
40 participants and beneficiaries. As of December 31, 1997, the Plan 
had total assets of approximately $4,012,415, and the Account had total 
assets of approximately $1,483,000. The trustees of the Plan are Mr. 
Emison and Mr. Lee Granlund. Mr. Emison (hereafter also referred to as 
``the Applicant'') is also the President and a 100% shareholder of the 
Employer.
    2. Among the assets of the Account is the Stock, which consists of 
12,838 shares of Community Bank Group, Inc. (CBG), a closely-held bank 
holding company with four subsidiary banks: Community Bank Jordan, 
Community Bank Winsted, Community Bank New Ulm, and Community Bank St. 
Peter. The Applicant represents that the Account acquired 51 shares of 
the Stock in 1995 from Mr. Roy Terwilliger, an individual unrelated to 
the Plan and the Employer, for $82,875.00. In 1997, the Stock underwent 
a 100 for 1 stock split so that the Account held an additional 5,049 
shares of the Stock. In 1997, the Account acquired 7,738 shares of the 
Stock from CBG for $154,763.00. Thus, the Account's basis in the Stock 
is $237,638.00. Mr. Emison has been a director of CBG since 1984. In 
addition, Mr. Emison owns 70,480 shares of the Stock as trustee of the 
James Wade Emison Trust, which shares represent approximately 24.82% of 
the outstanding shares of the Stock as of December 31, 
1998.<SUP>4</SUP>
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    \4\ The Department expresses no opinion herein as to whether the 
Account's acquisition and holding of the Stock violated any of the 
general fiduciary responsibility provisions of Part 4 of Title I of 
the Act. However, the Department notes that section 404(a) of the 
Act requires, among other things, that a plan fiduciary act 
prudently and solely in the interest of the plan's participants and 
beneficiaries when making investment decisions on behalf of the 
plan.
    In addition, the Department does not propose exemptive relief 
herein for any prohibited transaction that may have occurred with 
respect to the Account's acquisition and holding of the Stock. The 
Department notes that such acquisition and holding of the Stock by 
the Account raises issues under sections 406(a)(1)(D) and 406 (b)(1) 
and (b)(2) of the Act because Mr. Emison, as a director and 
shareholder of CBG, has an interest in the issuer of the Stock that 
may have affected his best judgment as a fiduciary for the Account. 
See Advisory Opinion 90-20A (June 15, 1990) for a similar analysis 
under section 4975(c)(1)(D) and (E) of the Code with respect to a 
self-directed individual retirement acount (IRA).
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    3. The Applicant requests an exemption to purchase all 12,838 
shares of the Stock from the Account. Due to business and income tax 
considerations, CBG seeks to elect Subchapter S status under the 
Code.<SUP>5</SUP> However, section 1361 of the Code permits only 
``eligible shareholders'' to hold stock in a Subchapter S corporation. 
Because the Account is not an eligible shareholder for purposes of the 
Code, the Applicant wishes to purchase the Stock from the Account in 
order to remove the impediment to CBG's Subchapter S election.
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    \5\ Section 1362 of the Code contains provisions which allow a 
small business corporation to elect and terminate Subchapter S 
corporate status.
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    4. The Stock was independently appraised by Paul W. Olander, AM, 
and William D. Thumstedter, of Olander Advisory Services, A Division of 
United Bankers' Bank, located in Bloomington, Minnesota. Messrs. 
Olander and Thumstedter both specialize in the banking industry.
    The appraisal states that, as of December 31, 1998, there were 
283,990 shares of CBG issued and outstanding held by 14 shareholders, 
and the Stock had an estimated fair market value of $34.55 per share. 
In addition, it was determined that the adjusted fair market value of a 
non-marketable, minority interest in the Stock, including the effect of 
the outstanding management stock options, was approximately $34.45 per 
share, based upon 4,800 options outstanding with an exercise price of 
$29.00 per share.
    The appraisal states further that the valuation of the Stock is 
predicated upon the financial statements of CBG and its subsidiary 
banks for the five years ending December 31, 1998. Messrs. Olander and 
Thumstedter also interviewed key management personnel of CBG and 
Winsted Bank, analyzed industry data, and considered the future 
earnings potential of CBG. Finally, they gave consideration to the 
eight factors in the valuation of the stock of closely-held businesses 
that are set forth in the Internal Revenue Service's Revenue Ruling 59-
60,<SUP>6</SUP> to the extent relevant. The appraisal states that the 
net asset value method was the most appropriate to use in valuing the 
Stock, since CBG receives virtually all its income from its subsidiary 
banks.
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    \6\ See Rev. Rul. 59-60, 1959-1 C.B. 237, as modified by Rev. 
Rul. 65-193, 1965-2 C.B. 370, and as modified and extended by Rev. 
Rul. 68-609, 1968-2 C.B. 327, and Rev. Rul 77-287, 1977-2 C.B. 319.
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    5. The Applicant proposes to purchase the 12,838 shares of the 
Stock from the Account for the fair market value of the Stock as of the 
date of the sale, based upon an updated independent appraisal. Based 
upon an appraised value for the Stock, as of December 31, 1998, of 
$34.55 per share, the Stock has a total value of $443,552.90, which 
represents approximately 30% of the assets of the Account. Thus, the 
Account would realize a gain of approximately $205,914.90 as a result 
of the sale.
    The Applicant states that the sale will be a one-time transaction 
for cash, and the Account will pay no commissions nor other expenses 
relating to the sale. The Applicant represents that the proposed 
transaction is in the best interests of the Account because the sale of 
the Stock will enhance the liquidity and diversification of the assets 
of the Account.
    6. In summary, the Applicant represents that the proposed 
transaction satisfies the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (a) the sale will 
be a one-time transaction for cash; (b) the Account will pay no 
commissions nor other expenses relating to the sale; (c) the Account 
will receive an amount that is no less than the fair market value of 
the Stock as of the date of the sale, as determined by a qualified, 
independent appraiser; (d) the sale will enhance the liquidity and 
diversification of the assets of the Account; and (e) Mr. Emison will 
be the only participant of the Plan to be affected by the proposed 
transaction.

Notice to Interested Persons

    Because the only Plan assets involved in the proposed transaction 
are those in the Account, and Mr. Emison is the only participant 
affected by the proposed transaction, it has been determined that there 
is no need to distribute the notice of proposed exemption to interested 
persons. Comments and requests for a hearing on the proposed exemption 
are due 30 days after the date of publication of this notice in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

[[Page 28838]]

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 of 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 accurately describe all 
material terms of the transaction which is the subject of the 
exemption. In the case of continuing exemption transactions, if any of 
the material facts or representations described in the application 
change after the exemption is granted, the exemption will cease to 
apply as of the date of such change. In the event of any such change, 
application for a new exemption may be made to the Department.

    Signed at Washington, DC, this 24th day of May, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 99-13497 Filed 5-26-99; 8:45 am]
BILLING CODE 4510-29-P