By: Ronald Kramer and Chris Busey,
“Mom and Pop” learned the hard way that the Seventh Circuit will not hesitate to find business owners who own rental real estate and other commonly controlled businesses jointly and severally liable for withdrawal liability.
In Central States Southeast and Southwest Areas Pension Fund v. Messina Products, LLC, Nos. 11-3513 & 12-1333 (7th Cir. Feb. 8, 2013), the Central States Pension Fund sought to hold Stephen and Florence Messina personally, and Messina Products, another company they had that rented property, jointly and severally liable for withdrawal liability assessed against their trucking company, Messina Trucking. The Multiemployer Pension Plan Amendments Act of ERISA holds “trades or businesses” under “common control” with the exiting entity jointly and severally liable to the Pension Fund for withdrawal liability. There was no dispute that the Messinas, who personally owned commercial and residential rental property, Messina Products and Messina Trucking were under “common control.” The court was asked only whether the rental property owned by the Messinas and Messina Products were “trades or businesses” under the Act
The Messinas personally owned commercial property they had leased to their trucking company. They also owned adjacent property that had been acquired for trucking company use, but which had homes they leased as well. No written lease agreement existed between the Messinas and their trucking company, the company had stopped paying rent when it ran into financial trouble, and repairs and maintenance on both the commercial and residential properties were completed by company employees free of charge.
To determine whether the Messinas operated a trade or business as commercial and residential landlords, the court applied the “Groetzinger test,” which requires that the activity be performed with (1) “continuity and regularity” (2) “for the primary purpose of income or profit.” Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1980). The test distinguishes trades or businesses that are jointly and severally liable under the Act from passive investments, which cannot form a basis for imputing withdrawal liability.
In holding that the real estate owned by the Messinas personally did qualify as a trade or business, the court emphasized that the couple owned real estate that it rented to their trucking company that triggered the withdrawal liability. The ownership of real estate leased to the withdrawing employer “categorically” constitutes a trade or business and not mere “passive investment.” This arrangement could only be for profit or income, even if the activity is used to reduce taxes or does not result in a net gain. To support a finding that the activities were continuous and regular, the court imputed to the Messinas the more frequent activities of Messina Trucking employees in maintaining the real estate. The court reasoned that, without a formal agreement between the Messinas and their trucking company under which the trucking company was obligated to perform such services, the employees must have acted for the Messinas’ benefit. The court distinguished the couple from owners in other cases that were not found to be trades or business simply because they leased residential apartments above their home’s garage, or leased commercial property to an unrelated entity via a “triple net” lease in which the owner only collected rent and paid the mortgage.
Turning to Messina Products, the court first noted that it was “highly unlikely” that a formal for-profit business would not qualify as a trade or business. Although the company had no employees or real estate and its sole asset was a partnership interest in a property rental company, the court had no trouble finding that it satisfied the Groetzinger test. In particular, the court highlighted Messina Products’ operating agreement, which it found “highly relevant” in that it expressed that the company had been created for business purposes (as opposed to being a passive investment vehicle). Messina Products also filed tax returns for “trade or business income” that listed the entity’s principal business activity as real estate rental.
Although the real estate owned by the Messinas was leased to the trucking company that incurred the withdrawal liability, ownership of any type of rental real estate may be found to constitute a “trade or business” if the owner engages in a sufficient level of activity. Furthermore, if rental property that is owned directly, rather than through a limited liability company or similar entity, is found to constitute a “trade or business”, the owner’s home and other personal assets may also be subject to the withdrawal liability
Many business owners wrongly assume that commercial or rental real estate they hold personally or in a separate corporate entity is insulated from withdrawal liability. They similarly believe that other separately but commonly owned businesses may evade liability. As the Messinas unfortunately learned, it is not that simple. Personal liability may lurk just around the corner from a multiemployer pension fund withdrawal. Business owners who participate in multiemployer pension funds need to think strategically if they plan to expand into other enterprises, whether personally or via a corporate vehicle, and understand fully their risks and potential liabilities if the additional enterprises are considered commonly controlled trades or businesses.