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Additionally, the four remaining trustees agreed to resign after the IRS requalification. In return, the Labor Department stated that it would terminate the "asset management portion" of its investigation. Under this arrangement, the Victor Palmieri Co. would manage most of the fund's real estate assets. This agreement would not become final for another 2 months. In the meantime, the trustees continue to control the fund's assets, making monthly reports to the IRS.

The four holdover trustees did resign and have since been replaced. But there is still a long distance to go in reforming the fund.

This case has significance for all working Americans, not just the hundreds of thousands of Teamsters directly involved. It is the first major coordinated enforcement effort under ERISA.

We want to know how well it has gone, where its problems have been, and what the agencies have learned about their procedures as this. case has progressed. It is our hope that the representatives of the Department of Labor and IRS who are with us today and tomorrow will provide the answers to these questions.

[The complete opening statement follows:]

OPENING STATEMENT OF CHAIRMAN GIBBONS

CENTRAL STATES TEAMSTERS AND ERISA ENFORCEMENT, JULY 19-20, 1977 We are here today to continue our review of the progress made by the Internal Revenue Service and Department of Labor in their investigations of the Teamsters Central States Pension Fund (the Fund)-the first major enforcement effort under the Employee Retirement Income Security Act of 1974 (ERISA). Our primary purposes are to review the numerous actions and developments since our first series of hearings on this matter last March and April and to assess them in light of the basic intent of Congress in enacting ERISA to preserve and protect employee pension rights and benefits.

Tomorrow, we will be stepping back from the Central States matter and taking a broader look at agency enforcement and compliance efforts under the ERISA program. At that time, we hope to gain some insights into the IRS and DOL policies and operations in administering the pension reform law.

To quickly review the series of events that have occurred in this case to date, over a year ago the IRS revoked the tax-exempt status of the Central States Pension Fund. At the outset of our recent hearings on this matter, held in March and April of this year, the IRS and Labor Department announced a series of out-of-court agreements and reforms to be undertaken by the Fund which would permit the tax-exempt status to be restored. The agencies said at that time that certain asset management and benefit administration issues "have been resolved in a manner that meets the Government's objectives".

At the heart of this blueprint for reform were various commitments relating to the management of the Fund's investment assets. The trustees agreed, first, to transfer the control of all the assets to independent money managers and, second, to allow outside professionals to review all the loans and transactions since February, 1965. Additionally, the four remaining trustees agreed to resign after the IRS requalification. In return, the Labor Department stated that it would terminate the "asset management portion" of its investigation. Since April, a lot of water has passed under the bridge, as follows:

In mid-April, a preliminary agreement to place control of the Fund assets with the Crocker Bank of San Francisco, California, was announced; and the Fund adopted certain plan amendments sought by the IRS.

In the last week of April, the IRS requalified the Fund subject to a series of conditions; in so doing, the Service expressly refused to certify the actuarial soundness and actuarial assumptions of the Fund.

Further, the four holdover trustees, including Teamster President Fitzsimmons, did resign from the Board and were shortly thereafter replaced by other Union and management officials.

In mid-May, despite the announced designation of Crocker Bank as fiduciary to manage and control all assets and to name all subsidiary managers-the trustees themselves chose three new money managers, placed $45 million of

Fund assets under their control, and apparently agreed to give them another $105 million in the next several months. Also, in mid-May, IRC Commissioner Kurtz indicated to me his understanding that the Central States Fund intended to put into effect by next year a new "supplemental" plan, which I presume is intended to address the Fund's actuarial problems.

During June, further developments of significance occurred. On June 1, Secretary Marshall announced that he had turned over additional evidence of possible criminal violations to the Justice Department, and he added that Labor's civil ERISA investigation would be "substantially concluded" by the end of the year.

On June 7, the Fund submitted to the IRS a first monthly report of progress in carrying out the conditions set forth in the IRS requalification letter, including the review of certain benefit applications (279 participants and beneficiaries have so far been found to be entitled to additional retroactive benefits); the establishment within the Fund of an Internal Audit Staff; and the development and computerization of benefit information. This monthly report also describes the "independent review of all loans" and transactions as being performed inhouse and indicates that this will be followed by an in-house determination of whether individual loan analyses should be referred to outsiders.

In mid June, the "agreement in principle" with the Crocker Bank broke down completely, and the Trustee's announced their intention to name Equitable Life Assurance Society as managing fiduciary and a group of subordinate managers, including Victor Palmieri and Company for much of the real estate.

In early July, the IRS completed its consideration of the Fund's back tax liability for the ten open years and concluded that no taxes are owed.

Finally on July 7, an elaborate set of preliminary agreements between the Fund and Equitable and the other investment managers was reached. Under these preliminary agreements, the new managing fiduciary, real estate and securities managers will not assume control of the assets until the agreements are "closed" and the assets are accepted, a process that is expected to be concluded in September.

This is my chronology of many of the important developments which have occurred in recent months. While it appears that some progress has been made in reforming the Fund, there is still a long distance to go. It will be impossible, for instance, to determine how to make the Fund actuarially sound until a wealth of new data is made available. We want to be sure that this data will be gathered and acted upon.

This case has significance for all working Americans, not just the hundreds of thousands of Teamsters directly involved. It is the first major coordinated enforcement effort under ERISA. We want to know how well it has gone, where its problems have been, and what the agencies have learned about their procedures as this case has progressed. It is our hope that the representatives of the Department of Labor and IRS who are with us today and tomorrow will provide the answers to these questions.

Mr. GIBBONS. Our first series of witnesses this morning is a panel composed of Mr. Alvin D. Lurie, Assistant Commissioner for the IRS, and Mr. Charles Miriani, who is District Director for the Chicago office of the Internal Revenue Service, and Mr. Edwin Trainor, regional commissioner, Midwest region, Internal Revenue Service. PANEL CONSISTING OF ALVIN D. LURIE, ASSISTANT COMMISSIONER (EMPLOYEE PLANS AND EXEMPT ORGANIZATIONS), INTERNAL REVENUE SERVICE; CHARLES MIRIANI, DISTRICT DIRECTOR, CHICAGO DISTRICT, INTERNAL REVENUE SERVICE; AND EDWIN TRAINOR, REGIONAL COMMISSIONER, MIDWEST REGION, INTERNAL REVENUE SERVICE, ACCOMPANIED BY DENNIS FOX, ASSOCIATE CHIEF COUNSEL, AND JAMES KEIGHTLEY, DIRECTOR, DISCLOSURE DIVISION

Mr. GIBBONS. We are supposed to have the Secretary of Labor here at 10 o'clock, and I would ask you gentlemen to stick around and

maybe we can work out after the Secretary of Labor has finished his statement a panel discussion on what we have learned to date on this matter.

So, Mr. Lurie, we will recognize you first.

Mr. LURIE. Thank you, Mr. Chairman. While you have identified some of the people at the table with me, let me identify all of them and just introduce you to them again, although at least most of them have been with you here at the March hearing 4 months ago.

Edwin Trainor is the regional commissioner sitting to my immediate right, and Charles Miriani is the District Director of Chicago, sitting at the far right.

To my immediate left is Dennis Fox, associate chief counsel with principal responsibility for this case since the departure, or resignation, of Charles Saunders, who was our witness and chief counsel at the last hearing, and James Keightley, who is here with us this morning, but was not here last time. He is the director of the disclosure division, office of the chief counsel.

In view of your schedule and my late arrival, we will keep our remarks brief. We have submitted a statement for the record, and I would summarize for you what I think are some of the highlights of that statement, although your own introductory statement certainly very well describes the burden of my remarks.

Our purpose in being here today at your invitation is to give you an update on this case since we met with you 4 months ago.

Before proceeding, I must ask you to take note of the statutory provisions that limit the scope of our testimony here today. We adverted to them in our last testimony, and the principal provisions that create problems for us are section 6103 of the Code and certain penalty provisions that provide new stiffened penalties and new tightened disclosure restrictions as a result of the Tax Reform Act of 1976.

I am sure you are aware of these provisions. They impose confidentiality restrictions upon us, but, nevertheless, we have been advised by Chief Counsel that it would be proper for us to discuss in general terms the procedures that were followed, as these have been made expressly disclosable under provisions of 6104 of the Code; and I hope that, primarily within the authority of that section, we will be able to provide you with satisfactory answers to most of your questions.

The Service, as you had noted, rejected retroactively the longstanding qualification of the fund. That occurred on June 25, 1976, and that revocation was effective for tax years after 1965.

On four occasions following that revocation on June 25 of 1976, the Service extended relief under the provisions of section 7805 of the Code for the purpose of protecting the innocent employers and employees.

We wanted to protect them from the adverse tax consequences during this period of disqualification of the plan.

The fund, the Central States Fund, requested our requalification in an application that was submitted to us under date of September 20, 1976. In reviewing that application, we wanted to make sure not only that the plan was amended to qualify with the new requirements of ERISA which were imposed upon all plans that had been in existence prior to the effective date of ERISA, but we were concerned that the CSF had proper safeguards and controls to provide protection of the

fund assets and that procedures were instituted to remedy any of the conditions that led to disqualification in the first place.

The Department of Labor joined us in this effort, in this review, and during this review by the Service and the Department of Labor of the CSF, in conjunction with the fund's efforts to reestablish its qualification, it was determined there were major areas that required remedying if we were to issue a determination of requalification under ERISA.

Mr. PICKLE. May I interrupt the witness?

Mr. LURIE. Yes, sir.

Mr. PICKLE. Are you reading from a prepared statement?

Mr. LURIE. I am actually trying to summarize the prepared statement that is part of the record. I am not reading from the statement that you have before you. I am trying to highlight that statement for the purpose of producing our discussion this morning.

Mr. PICKLE. I have just now been given a copy of your statement. I didn't know you had a written statement.

Mr. LURIE. I appreciate that. That statement, I think, has been made part of the record.

Mr. PICKLE. I understand. I just had not been given a copy of it. Mr. LURIE. Yes.

Now, you will recall that just prior to your March 15 hearing, the Service and the Department of Labor issued identical press releases announcing the terms of an understanding that had been arrived at with the fund whereby the fund agreed to take certain steps in the interests of the participants.

CSF, the Central States Fund, has since that time made significant progress in restructuring its modus operandi in accordance with this agreement, and throughout this process we have been monitoring the progress of Central States Fund to bring about these changes, and we will continue to do so for an indefinite period.

Also, pursuant to that agreement, the Service on April 26, 1977, issued a new determination letter requalifying Central States Fund, subject to explicit conditions which were conditions subsequent, I might say which were enumerated in that letter.

This requalification was, however, only effective for tax years beginning after December 31, 1975. The effect of this is that as long as the fund is operated in accordance with the requirements of the Code and the conditions enumerated in that determination letter of requalification, contributions of employers will continue to be deductible under section 404 of the Code and there will be no tax for participants until they start to receive benefits under the plan.

The conditions that I mentioned, on which your determination letter was conditioned principally, included the following: appointment of an independent investment manager or managers for essentially all the fund's assets; establishment of an internal audit staff to monitor the fund's affairs; the effective date and amount of certain previously rejected benefit payments must be rescheduled in accordance with the plan's provisions.

Also, an independent review of loans and related financial transactions entered into by the fund from February 1965 through April 30, 1977, must be effectuated in order to determine whether the fund has any enforceable causes of action or other recourse arising from these

transactions; and publication must be effected annually in at least one newspaper in every State of an annual certified financial statement of the fund.

Now, since the issuance of our requalification letter which I have just been referring to, we have been monitoring the fund to determine its progress in effecting changes in its operation and specifically in carrying out the conditions of the requalification letter.

Another of the conditions, incidentally, requires the fund, as you have noted in your opening statement, Mr. Chairman, to make monthly status reports to the Service and the fund has indeed discharged its obligations to date by filing two such reports with us.

Those indicate that some of the conditions of the requalification letter have already been satisfied. The Service entered into a closing agreement with the fund for the purpose of fixing the tax liability of the fund for the 11 tax years preceeding this requalification of the fund.

Now that, Mr. Chairman, I think, describes the principal procedural steps and actions that have occurred since we have met with you that have given rise to both the requalification of the fund by the Service and the settling of the tax liabilities for the years preceding requalification.

Now, I would be very happy and my associates would be happy to answer any additional questions that I am sure you will have. I hope this has provided you with at least a framework for where we are at this moment in regard to our dealings with the fund; and, subject to the disclosure restrictions under section 6103 that I have already adverted to, we would be very happy to answer your questions. [Mr. Lurie's prepared statement follows:]

STATEMENT OF ALVIN D. LURIE, ASSISTANT COMMISSIONER, IRS

We are here today in response to your request that the Service give you a status report on its examination of the Central States, Southeast and Southwest Areas Pension Fund (CSF).

Before addressing this matter, however, I wish to take note of the statutory provisions that may limit the scope of our testimony here today. As I am sure you are aware, the statutes dealing with the confidentiality and disclosure of tax information were considerably tightened by the Tax Reform Act of 1976.

However, I have been advised by our Chief Counsel's office that it would be proper for the employees of the Service to discuss in general terms the procedural handling of this case.

I would now like to comment upon the more recent events which have transpired in our review of the Central States Fund activities since the Service last appeared before your committee.

As you know, the Service revoked the qualification of the Fund on June 25, 1976 with respect to tax years after 1965. Since that time, the Service has periodically extended relief under section 7805 (b) of the Code to protect innocent employers and participants from the adverse tax effects of revocation.

The CSF asked us to requalify the Fund in a letter filed with the Internal Revenue Service on September 20, 1976. The application was submitted with a restated plan which included the amendments that CSF felt were necessary to bring their plan into conformity with the Employee Retirement Income Security Act of 1974 (ERISA).

In reviewing this application, we wanted to make sure that the plan was amended to conform with ERISA, and that CSF had the organizational controls and safeguards necessary to insure proper implementation of the plan and protection of the Fund's assets. During the review by IRS and DOL of CSF activities and in conjunction with the Fund's efforts to establish a more efficient operation, it was determined that there were areas that required attention if the plan was to qualify under ERISA. These areas were analyzed and CSF agreed

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