Withdrawal Liability – Real Property Presumed A Trade Or Business

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An employer’s permanent cessation of contributions to a multiemployer pension plan can trigger withdrawal liability. This liability may reach affiliated trades or businesses with sufficient common ownership to be under “common control” with the employer. The affiliates would be jointly and severally liable for withdrawal liability incurred and unpaid by the withdrawing affiliate.

Courts often struggle with the complex and fact-intensive distinction between a trade or business (liable for control group members’ withdrawal liability) and a passive investment (not liable). However, for the Seventh Circuit, the result is clear where commonly owned real estate is leased to or used by the withdrawing employer. In Local 705 Int’l Bhd. of Teamsters Pension Fund v. Pitello, (7th Cir. 2021), it reaffirmed the rebuttable presumption that leasing real property to a withdrawing employer is a trade or business.

The Pitello brothers owned a unionized business, another operating company, and a parcel of real property on which both companies operated. Neither company had a written lease agreement nor paid any rent. Shortly after the unionized company ceased all covered operations in 2018, the brothers (through their non-union company) leased the property to a third party. The Local 705 Pension Fund assessed withdrawal liability against the brothers and their companies, but the Pitellos ignored the demand. The Fund sued the defunct union company, the non-union company, and the Pitello brothers individually as trades or businesses under common control with the union company.

The Pitellos unsuccessfully argued 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 there was no statutory definition of “trade or business.” It then used the test developed for tax purposes by the Internal Revenue Service, Commissioner v. Groetzinger, (1987), which focuses on “two questions: (1) whether the activity is for the primary purpose of income or profit; and (2) whether the activity is undertaken with continuity and regularity.”

The Groetzinger test is simplified, the Court said, when it comes to leasing property, since “leasing property to a withdrawing employer is categorically a ‘trade or business.’” Circuit precedent provides that a fact-specific inquiry is not needed in the leasing context because, “where the real estate is rented to or used by the withdrawing employer and there is common ownership, it is improbable that the rental activity could be deemed a truly passive investment.” Central States, Southeast and Southwest Areas Pension Fund v. Messina Prod., LLC, (7th Cir. 2013). The Pitello Court explained there is a rebuttable presumption that leasing real property to a withdrawing employer is a trade or business. It had no trouble disposing of the brothers’ attempts to rebut the presumption and affirming the district court’s judgment in favor of the Local 705 Pension Fund.

Where the property at issue is both commonly owned and used by the withdrawn employer, under Pitello, arguing that leasing property to an affiliated employer is not a trade or business is difficult at best. The other potential avenue would have been to structure the property ownership so that the real estate entity would not be a control group member. Depending on the facts, this structure might result in an “evade or avoid” claim under ERISA Section 4212(c).

Real property is often the withdrawing employers’ most valuable asset. Understanding your potential withdrawal liability and making informed decisions before an assessment of withdrawal liability is paramount to limiting exposure for liability.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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