September 26, 2007 

 

Date of Plan Termination: 

Date of Trusteeship: 

Dear 

I. INTRODUCTION 

By letter dated December 9, 2005, the Pension Benefit Guarant 

Corporation ("PBGC") determined that: 

[ 7 (the "Fund") ha a aren -su sl lar 

r , ,,,nsor of the 

(the 

termination date of ("D0PT1') ; (2) the Fund owns 

or has an 80% controllinq interest inIc-, "D. 

Company .E. I, I company and I I lithe "Other Companie!") a! of DOPT; L r of brother-sister controlled group 

wlth the Other Companies. Accordingly, PBGC determined that: (1) 

the Fund, as well as the Other Companies, were members of a 

controlled group pursuant to 29 U.S.C. § 1301 (a) (14) ; (2) those 

entities are jointly and severally liable to PBGC under 29 U. S. C. 

fj 1362(b)(l) for the unfunded benefit liabilities of the Plan; and 

(3) the amount of the liability was $3,234,699.00 as of DOPT, plus 

interest in the amount of $772,987.00 for the period between 

November 30, 2001 and December 9, 2005.' 

IPBGC's regulation at 29 Code of Federal Regulations ("C.F.R.") 

§ 4062.7, which incorporates by reference section 6601 of the Internal Revenue 

Code, establishes the applicable interest rate. 
On June 7, 2006, you filed a timely appeal of PBGC's 

determination letter on behalf of your ~lient,l~-~~ .E" 

, the Fund's management company: For the reasons I 

stated in thls decision, the Appeals Board has denied your appeal 

respect to the Plan; and (3) the liability is for the above-stated 

amount, plus additional interest that has accrued since December 9, 

2005. With respect to PBGC's determination that the Other Companies 

also are jointly and severally liable under Section 4062 of ERISA, 

the Board granted your appeal. 

with regard to the Fund's liability for the unfunded benefit 

liabilities of the Plan. Accordingly, the Appeals Board has 

sustained PBGC's determination that under ERISA: (1) the Fund was 

under common control withcbs of DOPT; (2) the Fund and 

11. BACKGROUND 

.cU 

A. Facts 

are jointly an severa y liable to the PBGC for the 

a Delaware cor oration was the Plan's sponsor. 

 

liability imposed by Section 4062 of ERISA, 29 U.S.C. § 1362, with 

Prior to stock was publicly 

traded. On (which is 

by I company IL. 1, of the sale. 

On , ICompany "' 

 he acquisition of I .L" "c. Form OK filing with the Securitieb and Exchange 

Commission ("SEC") provides the following information concerning 

this acqui~ition:~ 

Company '~"1 a corporation formed byl 'Em 

I I (tosether with its 

The Appeals Board had previously granted you, pursuant to 29 C.F.R 

5 4003.4, an extension of time until June 8, 2006 to file your appeal. 

' The Plan. initially was called the ployees of 

.C" changed its name effective 

' Selected pages of this Form 10-K filing with the SEC are enclosed 
Debentures, issuance of $100 million of 10 5/8% Senior 

Subordinated Notes of lmc. land borrowin s of 

n 

$33.6 million under a bank credit facility . . . of aaffiliates, m, was organized as a holding company to 

effect t e acailiw nf all .., of the outstanding common 

- 

The Fund 

stock of "Lm 

eneral partner, Company INrn 

and independent institutional investors. The Fund's 

establishment is documented by the October 7, 1994 "Agreement of 

Limited Partnership of1 .B. 

( 'Partnership Agreement" ) , whxch was executed by 1 .N. land 

the Fund's limited partners through their representatives. 

. . . . The purchase price, 

Section 6.1 (b) of the Partnership Agreement delegated "full 

control over the business and affairs of the partnership" tom 

has a 1% capital interest and 20% carried interest in all 

prof its realized by the Fund. In addition to rlthe Fund has 

32 limited partners. 

The Partnership Agreement describes the Fund's purpose as 

follows : 

The Partnership is organized for the principal purposes 

of (i) creating and realizing long-term capital gains 

primarily from investments in United States industrial 

businesses, including without limitation, the general 

buying, selling, holding, and otherwise investing in 

securities of every kind and nature . . . (ii) 

exercising all rights, powers, privileges, and other 

incidents of ownership or possession with respect to 

investments held or owned by the Partnership, (iii) 

entering into, making, and performing all contracts and 

other undertakings with respect to such investments, (iv) 

managing and supervising such investments and (v) 

engaging in such other activities incidental or ancillary 

thereto as the General Partner deems necessary, advisable 

or desirable. 

including transaction fees and expenses, of approximately 

$175.2 million was financed with a $25 million capital 

contribution from (including rollover ownership 

interests of certain members of mana ement) 

approximately $15 million in proceeds from 

issuance of $29.25 million of 13 3/4% 

Partnership Agreement, Sec. 1.3 
 -hired I .=. 

to manage the Fund's xnvestments. As your appeal stated, 

mis a "private equity investment firm" that is in the business 

of formins - and ~rovidinq - services to investment partnerships, or 

"funds, " to wkch groups of institutional -investors- make 

commitments.' As an advisor to those funds, sources 

investment opportunities, negotiates and consummates the 

investments, monitors and oversees the investments, and ultimately 

. . . negotiates the sales of the investments for profit (or losses, 

as in the case of the C~mpany)."~ 

Bankru~tcv Filinq and the Plan's Termination 

On filed for Cha ter 

bankruptcy in 

were sold in two separate transactions that closed on 

 ' also was the date whenlmcm 

ceased and terminated all of its employees.' 

Although the purchasers of 1 .cm lassets hired a substantial 

number of its former employees, they did not assume the liabilities 

associated with the Plan. 

On , PBGC issued a Notice of Determination that the 

Plan should be terminated pursuant to 29 U. S. C. § 1342 (a) (1) and 

(2) . Subsequently, (as Plan Administrator) 

entered into an agreement that terminate the Plan, appointed PBGC 

as trustee, and established as the DOPT under 29 

U.S.C. § 1348. As a result which took effect on 

 PBGC became trustee of the Plan. 

Appeal, p. 6. 

B. 

' Id. Additionally, your appeal stated at page 6 that the 'profits and 

losses of each fund are shared b the limited partner investors and a general 

artner entity affiliated withm Your appeal did not explain, however, how 

bnd mare affiliated. 

.?Irn 1 Appeal 

a On the Fund deducted 0 of capital losses 

on its artnership Income (Form 1065), Schedule D, for its 

investment in Your appeal further states that: (1) the net 

proceeds from t e asset sa e were not sufficient to pay the claims of the 

Comwanv's secured creditors in full; (2) with the sale of the Company's 

In your June 7, 2006 appeal, you asserted that the following 

grounds exist for changing PBGC's determination: 

& 

assets, the Fund lost all of its ; and (3j the holders 

of 1 .P. land m~m psecured subordinated debt also lost their 

entire investment. 
The Fund is not conducti iness" and 

therefore cannot be in T-7 ontrolled 

group ; 

PBGC incorrectly determ nd and the 

Other Companies are in Controlled 

Group ; 

PBGC erred in its determination that the Fund and 

any of the Other Companies are liable for the 

Termination Payment. 

You also argued the following: 

A controlled group determination in the instant case 

would be directly contrary to long-standing legal 

precedent. ... the Fund cannot be a member of a parentsubsidiary controlled group of trades or businesses under 

ERISA because the Fund is not conducting a "trade or 

business. " The Fund is a passive investment vehicle that 

has no employees, no involvement in the day-to-day 

operations of its portfolio investments and no income 

other than passive investment income such as dividends, 

interest and capital gains. The Fund cannot be a trade 

or business because, as the Supreme Court has clearly 

held, "investing is not a trade or business." 

. . . There is no legal basis on which the PBGC could 

sustain an argument that it is entitled to deference in 

broadly interpreting and applying its regulations. ERISA 

commits interpretive authority here to the Treasury 

Department, not to the PBGC, and the Treasury 

Department's actions represent a deliberate decision by 

that agency to leave in place the Supreme Court's longstanding definition of the phrase 'trade or business" - 

a definition that has been ratified by Congress. If the 

PBGC determines that it is desirable to expand the 

controlled group rules to include private equity funds 

(such as the Fund) and their portfolio investments (such 

as the Other Companies), it should do so prospectively 

and openly by seeking a legislative change or (if it 

believes it has the authority to do so) by issuing new 

regulations after the required notice and comment 

period. 

111. DISCUSSION 

A. Controlled Group Liabilitv 

ERISA § 4062(a) [29 U.S.C. § 1362(a)1 provides that liability 

for an underfunded single-employer pension plan upon its termination 

Appeal pp. 2 -3 
is incurred by any 'person" who is, on the termination date, a 

contributing sponsor of the pension plan or a member of the 

sponsor's controlled group. That section further states that the 

liability of all such persons is "joint and several." A "controlled 

group" means, with respect to any person, "a group consisting of 

such person and all other persons under common control with such 

person."" ERISA § 4001(b) (1) 129 U.S.C. § 1301(b) (l)] provides that 

"all employees of trades or businesses (whether or not incorporated) which 

are under cononon control shall be treated as employed by a single employer 

and all such trades and businesses as a single employer." 

To impose termination liability on an organization other than the 

one originally obligated, two conditions must be met: (1) the organization 

must be under "common control" with the obligated organization and (2) the 

organization must be a "trade or b~siness."~~ 

You contend that PBGC lacks the authority to interpret 29 U.S.C 

§ 1301(a) (14) (B) relating to controlled group determinations because 

"Congress . . . granted interpretive authority over . . . [29 U.S.C. 

§ 1301 (a) (14) (B) ] to the Treasury Department. We disagree. ERISA 

§ 4001(a) (14) (B) (29 U.S.C. § 1301 (a) (14) (B)l states that 'the 

determination of whether two or more persons are under 'common control' 

shall be made under regulations of [PBGC] which are consistent and 

coextensive with regulations prescribed by the Secretary of the Treasury 

under subsections (b) and (c) of . . . [IRC] 414". Thus, the only 

restriction ERISA imposes on PBGC's authority to interpret 29 U.S.C. 

§ 1301 (a) (14) (B) is that its regulations must be consistent and 

coextensive with the applicable regulations issued under Internal Revenue 

Code ("IRC") section 414.12 Accordingly, PBGC does have interpretive 

authority with respect to 29 U.S.C. § 1301 (a) (14) (B) . See 29 U.S.C. 

§ 1302 (b) , which establishes the powers of PBGC to administer Title IV of 

ERISA, and, in particular, 29 U.S.C. § 1302(b) (31, which authorizes PBGC 

to issue regulations to carry out the purposes of Title IV. 

You also assert that PBGC "lacks authority to adjudicate this case 

under ERISA in any fashion contrary to the judicial definition of" trade 

or business in the federal income tax context. You state that this 

definition excludes investment activities. 

Again, we disagree. As several courts have noted, interpretations 

under the IRC are not determinative of whether an entity is a trade or 

lo See 29 U.S.C. 5 1301(a) (14) (A); 29 C.F.R. § 4001.2 (definition of 

"controlled group") . 

29 U.S.C. Li 1301(a) (14) (B); Treas. Reg. Li 1.414(c)-2(a). 

See 29 C.F.R. 5 4001.3(a) (1). 
business under ERISA." Moreover, in this case, PBGC's determination does 

not involve an interpretation of "trade or business" that differs from the 

"judicial definition" in the tax context. As detailed below, PBGC' s 

determination is consistent with the "trade or business" test articulated 

in Conmissioner v. Groetzinyer,14 a tax court case, as well as with 

judicial decisions that have applied the Groetzinger test in determining 

liability under ERISA.I5 

B. Ccrmmon Control 

ERISA § 4001 (a) (14) (A), (B) 129 U.S.C. § 1301(a) (14) (A), (B)I provides 

that a "controlled group'' consists of two or more "persons" under comon 

control.16 ERISA § 4001 (b) (1) [29 U.S.C. § 1301 (b) (1) 1 states that 'all 

employees of trades or businesses (whether or not incorporated) which are 

under comon control shall be treated as employed by a single employer and 

all such trades and businesses as a single employer." The above-cited 

ERISA provisions also state that the determination of whether two or more 

"persons" are under common control shall be "consistent and coextensive" 

with regulations under sections 414 (b) and 414 (c) of the Internal Revenue 

Code. 

The applicable regulation for determining "comn control" is 

Treasury Reg. § 1.414 (c) -2. Treas. Reg. § 1.414 (c) -2 defines "comon 

control" as one or more chains of organizations: (1) "connected through 

ownership of a controlling interest1' with a common parent organization 

. . . where the common parent organization owns a controlling interest 

in each of the organizations" (i.e., a parent-subsidiary relationship) or 

(2) where 'the same five or fewer persons who are individuals, estates, 

or trusts own a controlling interest in each organization . . . [andl such 

l3 PBGC v. Center City Motors, 609 F. Supp. 409, 411 (S.D. Cal. 1984) 

(citing United Steelworkers of America, etc. Local 4805 v. Harris & Sons Steel 

Co., 706 F.2d 1289, 1299 (3rd Cir. 1983)). 

480 U.S. 23 (1987). 

See, e.g., Central States, Southeast & Southwest Pension Fund v. 

Personnel, Inc., 974 F.2d 789, 794 (7th Cir. 19921 ('Personnel") (stating that 

"[allthough the Groetzinger court considered a provision of the tax code, we 

find its definition helpful in . . . [determining whether an activity is a1 

trade or business"). 

l6 See also 29 C.F.R. 5 4001.3 (PBGC regulation defining "trade or 

business under common control" and "controlled group"). 

" IRC F, 414(b) defines "Employees of Controlled Group of Corporations" 

and IRC 5 414(c) "Employees of Partnerships, Proprietorships, etc., Which Are 

Under Common Control." See also 29 C.F.R. 5 4001.3 (PBGC regulation). 

18 In the case of a partnership, "controlling interest" is ownership 

of at least 80 percent of the voting shares of and 80 percent of the 

profits, interest, or capital interest of a partnership. Treas. Reg. 

5 1.414 (c) -2 (h) (2) . 
ownership is identical with respect to each such organization, such 

persons are in effective control19 of each organization" (i .e . , a brothersister relationship). 

Your appeal does not dispute PBGC's determination that a parentsubsidiary relationship exists between the Fund and1 .c. based on 

the Fund's 96.3% stock interest in 1 .w. I (parent to 

.cn 1 but you contend that the Fund cannot 

be a member of 1 .c. Icontrolled group because it is not a trade 

or business. You also contend, based upon factual and leqal qrounds, that 

no brother-sister controlled group exists between the F&d and theother 

Companies. 

Without analyzing the legal arguments you made, the Appeals Board 

determined the records in PBGC's possession are insufficient to establish - that a brother-sister controlled group relationship existed betweenand any of the Other Companies. Thus, we qranted vour - awweal L L with 

respect to the liability of the Other Companies. ow ever, as detailed 

below, the Appeals Board found that the Fund is a member of 1 .cm 

controlled group. 

C. Trade or Business 

Under ERISA § 4001(b) (1) [(29 U.S.C. § 1301(b) (1) I, "all employees 

of trades or businesses (whether or not incorporated) which are under 

common control shall be treated as employed by a single employer and 

all such trades and businesses as a single employer." Congress's 

intent for enacting 29 U.S.C. § 1301 (b) (1) was to prevent employers 

from avoiding liability "by fractionalizing their business 

operations. "'' 

While you acknowledge that a parent-subsidiary relationship exists 

between the Fund andlmc. lyou assert that the Fund is not an 

employer under ERISA § 4001(b) (1) [29 U.S.C. § 1301 (b) (1) 1 because the 

Fund is not conducting a trade or business. You also assert that the 

"Fund is a passive investment vehicle that has no employees, no 

involvement in the day-to-day operations of its investments and no 

income other than passive investment income such as dividends, interest 

and capital gains." We address these assertions below. 

""~ffective control" is demonstrated by ownership of at least 50 

percent of the combined voting power of all the voting stock of a 

corporation and by ownership of at least 50 percent of the profits, 

interest, or capital interest of a partnership. Treas. Reg. 5 1.414(c)- 

2 (c) (2) . 

'O PBGC v. Don's Trucking Co., 309 F.Supp. 2d 827, 831 n.7 (E.D. Va. 

20041, aff'd, PBGC v. Beverly, 404 F.3d 243 (4th Cir. 2005). See also 

Personnel, 974 F.2d at 794; PBGC v. Ctr. City Motors, Inc., 609 F.Supp. 409. 

411 (S.D. Cal. 1984). 
The Fund's Relationship with 1 INm 

In analyzing whether or not the Fund is a "trade or business," the 

Appeals Board concluded that it is appropriate to consider the duties 

and responsibilities delegated to and assumed by- who is the 

designated "General Partner" under the Partnership Agreement. We 

further took into account that, as a matter of law, an agency 

relationship exists between the Fund and under the Delaware 

Revised Uniform Partnership Act ("DRUP Act"), "each partner is an agent 

of the partnership for the purpose of its business, purposes or 

activities .'I2' DRUP Act § 17-403 provides that a general partner has 

the rights and powers to manage and control the business and affairs of 

the limited partnership" subject to the DRUP Act and the partnership 

agreement. 22 

As discussed above on page 3, the Partnership Agreement delegates 

'full control over the business and affairs of the partnership" tom 

D3 Thus, pursuant to the DRUP Act and the Partnershi agreement, an 

agency relationship exists between the Fund and ~7. 

1 YO~~JXG$?~ ou contend that (i . e . , the Fund's management 

company) , (the general partner), was responsible for the 

day-to-day management of the Fund. However, according to the terms of 

the Partnership Agreement: "The appointment of a Management Agent shall 

not in any way relieve the General Partner of its responsibilities and 

authority vested pursuant to Section 6.1 or relieve the General Partner 

of any of its fiduciary duties to the Partnership and its partner^."^' 

In addition, -in its Management Agreement withmreserved the 

right to make "all decisions, consents, and other determinations 

(including, without limitation, decisions, consents and other 

determinations relating to the acquisition and disposition of Fund 

investments, distributions by the Fund of cash and other securities and 

6 Del. C. 5 15-301 (2007) 

** 6 Del. C. § 17-403 (2007). 

" See Partnership Agreement, Sec. 6.1 

24 See e.g., 6 Del. C. § 15-301 (2007); &n. Title Ins. CO. v. E. W. Fin. 

Corp., 16 F.3d 449, 456 (1st Cir. 1994); Sher v. Johnson, 911 F.2d 1357, 1362 

(9th Cir. 1990) ; RESTATEMENT (SECOND) OF AGENCY 5 1, 212 (2006). 

Partnership Agreement, Sec. 5.1. We note that Section 6.1 of the 

Partnership Agreement vested the General Partner with a wide range of powers, 

including "the power on behalf and in the name of the Partnership to carry out 

any and all of the objectives and purposes of the Partnership and to perform 

all acts and enter into and perform all contracts and other undertakings which 

the General Partner deems necessary or advisable or incidental thereto, 

including the power to acquire and dispose of any security (including 

marketable securities) ." 
amendments to the Fund Agreement) .N26 

nagement Agreement and the Partnership 

Agreement, to assist in managing the Fund's 

investments ~d not 

to assist in 

providing investment and management 

that such Thus, the Appeals 

Board concluded that 

activities, and also compensation i.., 20% of all net 

profits realized) in exchan e for its services. Because vis the 

Fund' s agent, a11 ofdacts within the scope of suc agency are 

attributable to the Fund.27 

A~plication of "Trade or Business Test" to the Fund 

Although the term "trade or business" is not defined in ERISA, the 

IRC, or regulations issued by the Treasury Department, courts generally 

construe the term in accordance with the statute's purpose and use the 

test articulated in Commissioner v. Groetzinger, 480 U.S. 23 (1987), 

for purposes of distinguishing trades or businesses from purely 

personal activities or investment^.^^ 

The Groetzinger test has two prongs: (1) whether a taxpayer is 

engaged in an activity with "the primary purpose of income or profit" 

and (2) whether the act is conducted with "continuity and regularity" .29 

The first factor of the Groetzingertest is a subjective test that 

looks at the taxpayer's intent (i .e., whether the taxpayer entered into 

the activity with a profit motive). For purposes of determining the 

taxpayer's intent, courts evaluate a myriad of factors including the 

tax benefits obtained by the taxpayer and the circumstances surrounding 

the inception of the activity.30 

The second factor is an objective test that looks at how much time 

the taxpayer typically engages in the activity. Although there is no 

bright-line test for the amount of time that a taxpayer must spend 

engaging in the activity, such activity must be conducted with 

regularity. 31 

" Management Agreement, Pg. 1 

27 See Id. 

28 See Personnel, 974 F.2d at 794 

29 Groetzinger, 480 u.S. at 35 

'O Id. at 33-35 

j1 Groetzinger, 480 U.S. at 33-35 
You state in your appeal that w the general partner of the 

Fund, and various independent institutlona investors created the Fund 

for "the principal purposes of . . . creating and realizing long-term 

capital gains from investments . . . including . . . the general 

buying, selling, holding, and otherwise investing in securities of 

every kind and nature."32 

In addition, on the Fund's 1998 through 2002 U.S. Partnership 

Return of Income (Form 1065) that you provided with your appeal, the 

Fund reported that its principal business activity is "investment 

advisory" and its principal service is "investment services."33 

Furthermore, the Partnership Agreement provided that 

receive compensation in exchange for investment advisory an Pould management 

services, including consulting fees, management fees, and carried 

interest (i.e., 20% of the net profits realized by the Fund).34 Based 

on the Fund's tax returns and language in the Partnership Agreement, 

the Appeals Board concluded that the Fund meets the profit motive 

requirement described in Groetzinger. 

Although the Fund engaged in investment activities, such 

activities must be conducted with regularity in order to meet the 

second prong of the Groetzinger test. While PBGC's records do not 

contain any documentation detailing how much time 1 IN. Devoted to 

managing the Fund's portfolio, based on the size of the Fund's 

portfolio (e.g., in the Fund reported $469,549,711 in investments 

in other companies), the profits generated as a result of such 

investments (e.g., $207,203 in total investment income reported in 

 ), as well as the fees paid tome.g., $7,043,500 in management 

fees reported in . the Appeals Board concluded that 

management of the Fund's investments was conducted with re ularlty an 

thus the Fund, through activities of its agent meets the 

second prong of the Groetzinger test.35 

You also assert in your appeal that the Fund is not engaged in a 

trade or business because "investment activities do not constitute a 

trade or business." Essentially, you argue that the Fund is a passive 

investor. You state that '[iln the income tax context, it is 

universally accepted that passive investment activities do not 

constitute a trade or business," and you cite several cases, most 

32 See Partnership Agreement, Sec. 1.3; Appeal pg. 6 

We note that one of the IRS's "Principal Business or Professional 

Activity Codes" for Partnerships is Code 523900, "Other Financial Investment 

Activities (including portfolio management & investment advice)." See 2006 

Instructions for Schedule 1065, "U.S. Return of Partnership Income." The 

Fund's tax returns list "523900" as the "Business code number." 

3"ee Partnership Agreement, Sec. 3.2(c) (iii). 

j5 see U.S. Return of Partnership Income (Form 1065). 
notably Higgins v. Commissioner, 312 U.S. 212 (1941), Whipple v. 

Commissioner, 373 U.S. 193 (1963), and Zink v. United States, 929 F.2d 

1015 (5th Cir. 1991). Although those cases do not generally 

characterize passive investment activities as a trade or business, such 

characterizations, when read in context with the facts of each case, 

refer to individuals managing their own personal investments rather 

than to partnerships, like the Fund, whose purpose is to acquire, hold, 

and sell securities and other investment interests in United States 

industrial businesses. 

In Higgins, an individual taxpayer deducted expenses in connection 

with the management of his investments in stocks and bonds. The Court 

held that the taxpayer's investment activities did not constitute a trade 

or business because the taxpayer "merely kept records and collected 

interest and dividends from his ~ecurities."'~ 

The Fund, unlike the taxpayer in Higgins, is not: (1) an individual 

acting on his own behalf; (2) merely keeping records and collecting 

dividends and interest from investments; and (3) solely receiving a return 

as an passive investor. Instead, the Fund is a "trade or business" 

because it regularly is involved in investment activities of a much more 

active nature than those in "i;f""l This is reflected in the 

responsibilities of its agent, who: (i) provides investment 

advisory and management services to others (1.. , its partners) ; (ii) 

hires a third-party (i .e., l.H.b to assist in selecting and purchasing 

potential investments (e.g., the Other Companies) and in distributing the 

net profits and losses from these companies to itself and limited 

partners; and (iii) receives compensation for such services (e.g., 20% of 

all realized profits from the Fund's investments). 

In Whipple, an individual taxpayer, who owned a controlling interest 

in and managed several corporations, deducted a bad debt relating to a 

loan that he had made to one of the corporations, a soft drink bottling 

company. The Court held that the taxpayer was not entitled to the 

deduction because the debt was not in connection with activities the tax 

law recognizes as trades or busines~es.~' The Court characterized the debt 

as a non-business bad debt because the taxpayer 'was not engaged in the 

business of money lending, of financing corporations, of bottling soft 

drinks, or any combination of the three.rf38 

In addition, the Court stated that although the taxpayer's 

activities in the corporation, to which he loaned money, may have 

produced : 

'' Higgins, 312 U.S. at 218. 

'' Whipple, 373 U.S. at 201-204 

Whipple, 373 U.S. at 193. 
income, profit or gain in the form of dividends or enhancement 

in the value of an investment . . . [such a] return is 

distinctive to the process of investing . . . [which can be1 

distinguished from the trade or business of the taxpayer 

himself . . . [and] the product of the . . . [taxpayer's] 

services arise not from his own trade or business but from that 

of the c~rporation.~' 

The facts in Whipple are distinguishable because the Fund, as 

evidenced by its tax returns and Partnership Agreement, was directly and 

substantially involved in a recognized business activity e, providing 

investment advisory and management services) for the benefit of several 

other entities (i .e., its general and limited partners) . Thus, the Fund's 

activities differed from those of the taxpayer in Whipple, who had 

incurred personal investment losses on loans that the Court decided had 

not arisen from his own trade or busi vities . 40 Furthermore, in 

contrast to the taxpayer in Whipple as the Fund's agent was 

entitled to compensation for investment advisory and management services 

it performed. 

In Zink, a husband and wife invested in an airplane component 

business and deducted research and experimentation expenses pursuant to 

IRC § 174(a) (1). The- Court disallowed the deduction because the 

taxpayers' did not "participate . . . in the actual activities of 

developing or marketing aircraft components or . . . exercise any control 

over those activities other than the right to yank their investment^.^^ 

Accordingly, their activities in connection with . . . [such] products 

never surpassed those of investors" and did not constitute a trade or 

business. 42 

Unlike the taxpayers in Zink, the Fund, a business entity 

(partnership), was formed to select, acquire, dispose of, and manage 

investments (trades or businesses) on behalf of 

through its the Fund 

- through a 

issuance of over $ in debt instruments - acquired a controlling 

(96.3%) interest inllcm stock. This put the Fund in the - position where it, through could exercise control overmanagement. Such control with respect to management is 

consls ent with the Fund's stated purposes, which includes "exercising all 

rights, powers, privileges, and other incidents of ownership or possession 

with respect to investments held or owned by the Partnership" and 

"managing and supervising such investments." 

39 Id. at 202. 

40 Whipple, 373 U.S. at 202 

'"ink, 929 F.2d at 1023. 

42 Id. 
D. Assessment of Interest 

Thus, the "passive" investment activities described in Higgins, 

Whipple, and Zink, as well as the other cases you cite, are 

distin ishable fromthe much more active involvement of the Fund (through ~7 with respect to its investments. We further concluded, for the 

reasons discussed above, that the Fund's delegation of many of its 

Your appeal asserts that, if the Appeals Board finds the Fund liable 

under 29 U. S . C. § 1362 (b) (1) , PBGC should not assess interest on that 

liability for the period between through 

due to PBGC's delay. You state that the Fund should not incur interest 

management functions to other entities, which 

for that period because : (1) PBGC had known ab p of- 

=stock and the is not i controlled 

group since at least (2) PBGC did not notify the Fund of 

PBGC's controlled group determination before issuinq the 

case 

letter; (3) the Fund, -based on legal precedent regarding the 'trade or 

business" issue, "reasonably" believed during this period that it was not 

liable to PBGC; and (4) you did not receive the procedures for appealing 

that determination until 

occurred through its Management Agreement with es not establish 

that the Fund was merely a "passive investor." Accordingly, the Appeals 

Board, having fully analyzed the holdings in the court cases you cite in 

your appeal, decided that the Fund is a trade or business for purposes of 

controlled group liability under ERISA. 

ERISA § 4062(b) and PBGC's regulation at 29 C.F.R. § 4062.7 

establish the applicable liability for interest under 29 U. S. C. § 

1362(b) (1). ERISA § 4062(b) and PBGC's regulation do not provide for the 

abatement of interest for reasons of delay, or on any other grounds. The 

Appeals Board must follow ERISA and PBGC's regulations, and accordingly 

your request that PBGC not assess interest is denied. 

E. Reauest for Hearing 

PBGC's Rules for Administrative Review of Agency Decisions provide, 

at 29 C.F.R. § 4003.55, that the opportunity to appear before the Appeals 

Board "will be permitted at the Board's discretion." In general, the 

Appeals Board will permit an opportunity for a hearing before the Board 

if the Board determines that there is a dispute as to a material fact. 

Because there is no dispute as to the material facts in this case, the 

Appeals Board denied your request for an oral hearing. 

IV. DECISION 

Based on the foregoing facts and he Appeals Board 

decided that, under Title IV of ERISA, was under comon 

control with Fund -I f the date the Plan terminated. Accordingly, 

the Fund and are jointly and severally liable to PBGC under 
29 U. S. C. § 1362(b) (1) for the $3,234,699.00 in unfunded benefit 

liabilities of the Plan as of DOPT, plus applicable interest. Pursuant 

to 29 C.F.R. § 4003.59, your client has exhausted its administrative 

remedies and may seek judicial review of this decision. 

Sincerely, 

Charles Vernon 

Chair, Appeals Board 

Enclosure: Selected Pages of Form 10-K dated April 2, 1999.