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Control group liable to PBGC even absent actual control.

The Sixth Circuit has held, in PBGC v. East Dayton Tool and Die Co., 6th Cir., 1994, rev'g DC, that an employer's controlling interest" in a second employer rendered it liable for the unfunded benefit liabilities of the second employer's defined benefit planeven though it did not have actual control of the second employer at the time the plan was terminated.

Default shifts control

In 1973, Paul Granzow, Charles Sherman and Robert Tormey bought East Dayton Tool and Die from the founder's daughter, Dorothy Darrow, for $1.35 million. The buyers paid $150,000 in cash and gave Darrow a promissory note for the balance. The note provided that if the buyers defaulted, Darrow could compel the sale of the stock or elect at least two directors--and in any event, the voting rights of all the stock was held as security for the note. The buyers transferred their East Dayton stock to a holding company (Roscommon Financial); thus, the buyers owned Roscommon Financial, and Roscommon Financial owned East Dayton--or so it would seem.

After operating the company for 2 1/2 years, the buyers defaulted on the note--and Darrow appointed two directors, as was her option under the note. Twelve days later, the newly elected board decided to liquidate the company so that Darrow could collect her loan balance. (Granzow offered to transfer the East Dayton stock to Darrow, but she refused.)

Three months later, East Dayton filed with the PBGC a Notice of Intent to Terminate, relating to its defined benefit plan. Shortly thereafter, the PBGC notified East Dayton that the plan was under-funded by over $300,000. The PBGC sent a bill to the controlled group that included Roscommon Financial and East Dayton. Administrative wrangling ensued in which Roscommon Financial argued that it was not part of the control group for liability purposes because Roscommon Financial did not control East Dayton on the termination date--Darrow did. The PBGC did not accept that argument and brought suit in district court to enforce its determination that Roscommon Financial was liable for the $300,000. Relying on a related Sixth Circuit opinion (In Re Challenge Stamping & Porcelain Co., 719 F2d 146 (6th Cir. 1983)), the district court held that once Roscommon Financial had defaulted, the loan documents effectively transferred control to Darrow; thus, because Roscommon Financial did not control East Dayton on the termination date, it was not liable for East Dayton's unfunded benefit liabilities.

It's stock ownership that counts

On Jan. 24, 1994--approximately 18 years after the plan termination--the Sixth Circuit reversed the district court and found for the PBGC. The rationale for the decision was straightforward: The determination of control group status starts and ends with the question of who owns the stock. Here, three individuals owned a company (Roscommon Financial) that owned the East Dayton stock; they also owned other companies. Therefore, Roscommon Financial was part of the control group that included East Dayton.

In arriving at this conclusion, the court distinguished Challenge Stamping. In that case, the stock purchaser never had actual control of the company for which liability was being assessed. In East Dayton, the buyers had the run of the place for 2 1/2 years, and they took tax deductions based on East Dayton's results.
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Title Annotation:Pension Benefit Guaranty Corporation
Author:Yurkovic, Denis L.
Publication:The Tax Adviser
Date:Jun 1, 1994
Words:541
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