Opinion ID: 619848
Heading Depth: 1
Heading Rank: 2

Heading: Trades or Businesses

Text: We first address whether the solvent affiliated organizations MCOF and MCRI are “trades or businesses” within the meaning of the MPPAA. The district court did not err in finding that they are. Appellant MCOF owned the lumberyard in O’Fallon, Missouri that was used and leased by SCOFBP. Appellant MCRI held and continues to hold parcels of land in Rock Island, Illinois, which it leases to a third-party company. Both MCRI and MCOF are for-profit limited liability companies. Each has an operating agreement detailing the type of business the company intends to conduct, initially “to hold real estate and investments approved by the Manager.” Payments on the triple-net leases held by MCRI and MCOF were paid into their bank accounts and the mortgage payments were withdrawn from them.2 Both applied for and were issued federal employer identification numbers. Both main- 2 A “triple-net lease” is one in which the tenant is responsible for most obligations such as maintenance, operating expense, real estate taxes, and insurance. See Central States, Southeast and Southwest Areas Pension Fund v. Fulkerson, 238 F.3d 891, 893 (7th Cir. 2001). No. 10-3633 5 tained offices, elected officers, and kept formal records of activities and expenditures. Both employed professionals to provide legal, management, and accounting services on a contract basis, although neither admitted to having any permanent employees. Although the MPPAA does not define “trade or busi- ness,” this court has adopted the test established in Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), to determine whether an enterprise constitutes a trade or business. Under Groetzinger, the Court must consider whether the organization engaged in an activity (1) with continuity and regularity and (2) for the primary purpose of income or profit. Id. These criteria are intended to distinguish a trade or business from investments, hobbies, or “amusement diversion[s].” Groetzinger, 480 U.S. at 35; Central States, Southeast and Southwest Areas Pension Fund v. Fulkerson, 238 F.3d 891, 895 (7th Cir. 2001). Appellees argue that Groetzinger is inapplicable here because MCRI and MCOF were established as limited liability companies. That argument finds support in some case law. See Fulkerson, 238 F.3d at 895 (“Section 1301(b)(1) presents no interpretive difficulties when it is used to impute withdrawal liability to another corporation or other formally recognized business organization that is under common control with the obligated entity.”). Because formal business organizations ordinarily operate with continuity and regularity and are ordinarily formed for the primary purpose of income or profit, it seems highly unlikely that a formal for-profit business organization would not qualify as a “trade or business” 6 No. 10-3633 under the Groetzinger test. More recently than Fulkerson, however, we have applied the Groetzinger test to a formal business organization, see Pioneer Ranch, 494 F.3d at 577 (applying Groetzinger test to hold that a limited partnership was a trade or business), so we do so here. In evaluating whether an enterprise meets the Groetzinger test, we are mindful of the purpose of the MPPAA, which is to “prevent the dissipation of assets required to secure vested pension benefits.” Central States, Southeast and Southwest Areas Pension Fund v. Slotky, 956 F.2d 1369, 1374 (7th Cir. 1992); see also Ditello, 974 F.2d at 890. For example, leasing property to a withdrawing employer is a “trade or business” within the meaning of the MPPAA. Leasing property “is an economic relationship that could be used to . . . dissipate or fractionalize assets.” Ditello, 974 F.2d at 890. Unrelated real estate activity, even activity that does not produce a net gain, also can be “for the primary purpose of income or profit” where that activity increases equity, appreciates value, and generates tax deductions that reduce the overall tax burden. Central States, Southeast and Southwest Pension Fund v. Personnel, Inc., 974 F.2d 789, 795-96 (7th Cir. 1992). Actions such as negotiating leases or researching, maintaining, or repairing properties are also “business or trade conduct” and should be considered for the “continuity and regularity” prong of the Groetzinger test. See Fulkerson, 238 F.3d at 895. Additionally, creating a formal business entity, having employees, and claiming business exemptions and deductions also point to a “trade or business.” Pioneer Ranch, 494 F.3d at 577-78. No. 10-3633 7 In contrast, personal investments are things like holding shares of stock or bonds in publicly traded corporations. Personnel, 974 F.2d at 796. Ownership of this type of property “without more is the hallmark of an investment.” Fulkerson, 238 F.3d at 895. Owning property can be considered a personal investment, at least where the owner spends a negligible amount of time managing the leases, see id. at 896, although a more substantial investment of time may be considered regular and continuous enough to rise to the level of a “trade or business,” see Personnel, Inc., 974 F.2d at 795. Likewise, renting apartments above a residential garage was held not to be a “trade or business,” even when the owner realized income, where the owner’s primary purpose for renting the apartments was the added security from the tenant’s presence. Central States, Southeast and Southwest Areas Pension Fund v. White, 258 F.3d 636, 643 (7th Cir. 2001). Appellants argue that MCRI and MCOF were Cappy’s personal investment activities and had no connection with SCOFBP. The MPPAA does not, however, require an economic nexus between the obligated organization and trades or businesses under common control, and we have declined to impose such a non-statutory requirement. Fulkerson, 238 F.3d at 895 n.1; see also White, 258 F.3d at 641 (again rejecting an economic nexus requirement). Furthermore, we have held that leasing property to a withdrawing employer itself is categorically a “trade or business.” Ditello, 974 F.2d at 890. Thus, the district court did not err by holding that MCOF, which owned the lumberyard that 8 No. 10-3633 was used and leased by withdrawing employer SCOFBP, is a “trade or business” for purposes of the MPPAA. The district court also did not err by holding that MCRI is a trade or business for purposes of the MPPAA. Appellants argue that MCRI is a personal investment analogous to the individually-owned leased property in Fulkerson or the above-the-garage rental apartments in White. Fulkerson and White, however, presented unusual situations that tested the outer bounds of the “personal investment” concept. Unlike the activity at issue in Fulkerson or White, MCRI is a for-profit LLC. It earned rental income, paid business management fees, and claimed business-related income deductions on its federal income tax returns. It applied for and was issued a Federal Employer Identification Number and contracted with professionals to provide legal, management, and accounting services on a contract basis, although it does not admit to having any permanent employees. Thus, MCRI is more akin to the limited partnerships at issue in Pioneer Ranch. Appellants attempt to distinguish Pioneer Ranch, where we determined that a limited partnership was a “trade or business,” by calling attention to the part of the partnership agreement in that case stating that the purpose of the company was to engage in the business of farming. Appellants claim that there is no similar statement by MCRI or MCOF in this case. The district court, however, pointed to analogous language both from MCRI and MCOF’s operating agreements and from a response by appellants to a request for admission. All clearly No. 10-3633 9 stated that MCRI and MCOF are businesses created for the primary purposes of generating income or profit. MCOF leased property directly to SCOFBP, the withdrawing employer, and therefore is a “trade or business” for the purposes of the MPPAA. MCRI, also a formal business organization, engaged in regular and continuous activity for the purpose of generating income or profit and thus is also a “trade or business” for purposes of the MPPAA.