Sixth Circuit Reverses Withdrawal Liability Judgment Against Spouse of Sole Shareholder Who Ran Jewelry Business

In Loc. No. 499, Bd. of Trustees of Shopmen’s Pension Plan v. Art Iron, Inc., No. 22-3925, __F.4th__, 2024 WL 4297674 (6th Cir. Sept. 26, 2024), Defendants Robert and Mary Schlatter appeal from the district court’s grant of summary judgment to the Board of Trustees of the Shopmen’s Local 499 Pension Plan (“the Plan”) in the Board’s suit seeking over one million dollars of withdrawal liability under ERISA from Art Iron, an Ohio corporation and major participating employer in the Plan, Robert Schlatter, Art Iron’s sole shareholder at the time of withdrawal, and his wife, Mary Schlatter, who owned and operated a jewelry business. The district court determined that the Schlatters were each personally liable for Art Iron’s withdrawal liability because each ran a trade or business under “common control” with Art Iron. Because they had a minor son at the time, the district court found that both of their interests in the businesses they ran were also attributable to their son under Treasury Regulation 26 C.F.R. § 1.414(c)-4(b)(6), and that there was a group of trades or businesses under common control with Art Iron. The Sixth Circuit affirmed the district court’s judgment as to Robert Schlatter and reversed and remanded the district court’s grant of summary judgment as to Mary Schlatter.

Art Iron’s liability is not disputed. “Once the liability of the principal employer is established, withdrawal liability extends to any enterprise that is (1) a trade or business and (2) under common control with the withdrawing employer.” The Sixth Circuit analyzed what constitutes trades or business under common control, noting that “trade or business” has not been expressly defined by ERISA, the applicable regulations, this court, or the Supreme Court. Two cases, Commissioner v. Groetzinger, 480 U.S. 23, 35, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987) and Pension Benefit Guaranty Corp. v. Findlay Industries, Inc., 902 F.3d 597 (6th Cir. 2018), provide the relevant guidance.

In Groetzinger, the Supreme Court considered whether a full-time gambler was engaged in a “trade or business” for purposes of the Internal Revenue Code by applying a two-factor, fact-intensive test considering (1) the primary purpose of the entity in question and (2) whether that entity’s activity is regular and continuous. The primary purpose for engaging in the activity must be for business and profit, not a sporadic activity, hobby, or an amusement. Because the taxpayer in Groetzinger spent sixty to eighty hours a week on gambling, the court found a sufficient level of continuity and regularity in his activity to constitute a “trade or business.” In Findlay, the Sixth Circuit considered whether a trust should be considered a “trade or business” within the meaning of 29 U.S.C. § 1301(b)(1). The court found that applying the Groetzinger test was not appropriate because an interpretation of the phrase “trade or business” that focused on the primary purpose of the activity was contrary to the purpose of ERISA and the plain language of the statute. But the Findlay court did not address whether the Groetzinger test for what constituted a “trade or business” under 29 U.S.C. § 1301(b)(1) was appropriate in a withdrawal-liability context of ERISA other than as to the treatment of leasing property.

In the present case, the court found that Groetzinger is the appropriate test for defining a “trade or business,” agreeing with her sister circuits that Groetzinger is the “most authoritative pronouncement available” for defining a “trade or business” under ERISA outside of the Findlay context. Applying this test, the court found that Robert Schlatter’s consulting business was a trade or business: (1) as primary shareholder of Art Iron, he controlled how his income was allocated to him, and (2) he provided regular consulting services to Art Iron for several consecutive years including the year Art Iron withdrew from the Plan. Even under the Findlay test, Robert Schlatter’s consulting business is a trade or business because he engaged in the broad idea of commerce with Art Iron. The court rejected his argument that there is a question of material fact as to whether his fees were income or wages. In tax filings, Robert Schlatter claimed his income as being from self-employment. He cannot contradict the sworn statements in his tax filings to create a genuine issue of material fact on appeal.

Mary Schlatter challenged the district court’s determination that her jewelry activity as a sole proprietorship was a “trade or business” under “common control” with Art Iron at the time of withdrawal, though she did not file a cross-motion or raise any issue in opposition to the Board’s motion. Under Sixth Circuit caselaw, the court found that she did not forfeit her right to raise arguments on appeal. Applying the Groetzinger’s continuous for-profit test, the court found that Art Iron failed to carry its burden to establish as a matter of law that the creation and sale of Mary Schlatter’s jewelry was sufficiently continuous and regular as to be considered a “trade or business” in the year of Art Iron’s withdrawal from the Plan. For these reasons, the Sixth Circuit determined that Mary Schlatter is not personally liable for Art Iron’s withdrawal liability.