Source: http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20050615_0000694.SNY.htm/qx
Timestamp: 2017-02-19 12:00:52
Document Index: 641088088

Matched Legal Cases: ['§ 1001', '§ 401', '§\n511', '§ 512', '§ 401', '§ 17651', '§ 17631', '§ 401', '§ 512', '§\n23732', '§ 514', '§ 1144', '§ 1341', '§\n502', '§ 1132', '§ 514', '§ 1144', '§ 514', '§ 514', '§ 1144', '§ 514', '§ 514']

| HATTEM v. SCHWARZENEGGER
ALEX HATTEM, solely in his capacity as a participant in a pension plan funded by by The Long-term Investment Trust; J.P. MORGAN CHASE BANK, not in its individual capacity but solely in its capacity as trustee for The Long-term Investment Trust; AT&T INVESTMENT MANAGEMENT CORPORATION, not in its individual capacity but solely in its capacity as The Long-Term Investment Trust's "Named Fiduciary," Plaintiffs,
ARNOLD SCHWARZENEGGER, in his Official Capacity as Governor of the State of California; GERALD A. GOLDBERG, in his Official Capacity as Executive Officer of the California Franchise Tax Board; DESMOND PRESS in his Official Capacity as Program Manager of the California Franchise Tax Board, and DOES 1-10, Defendants.
OPINION AND ORDER Plaintiffs, respectively a participant, a trustee, and a
fiduciary in a pension plan funded by The Long-Term Investment
Trust, allege that California statutes that tax the unrelated
business taxable income of the Trust are preempted by the federal
29 U.S.C. § 1001 et seq., and seek declaratory and injunctive
relief accordingly. The parties now cross-move for summary
judgment. Defendants' motion will be granted, and that of
plaintiffs will be denied.
Unless otherwise noted, the following facts are drawn from
plaintiffs' Local Rule 56.1 statement of undisputed material
facts, submitted in support of their own motion for summary
judgment, which defendants have fully incorporated in support of
their motion. In 1984, AT&T Corporation established the AT&T
Master Pension Trust (amended in 1996 to change its name to The
Long Term Investment Trust) ("Trust"), which has as its sole
purpose the holding and managing of the assets of various
ERISA-covered pension plans established and maintained by AT&T
and its affiliates. At all times, the Trust has been, and
continues to be, a qualified tax-exempt trust under the Internal
Revenue Code ("IRC"), 26 U.S.C. §§ 401(a) and 501(a), subject to
federal income taxes only to the extent that it receives
unrelated business taxable income ("UBTT"), pursuant to IRC §
511. Since at least 1994, the Trust has earned income from a
variety of investments, including limited partnership interests
acquired with Trust assets. Since such income from the Trust's
limited partnership investments may constitute UBTI as defined in
IRC § 512, the Trust files federal tax returns and pays federal
taxes as appropriate. Plaintiffs filed the instant complaint on March 11, 2004,
challenging a California tax provision that imposes a separate
state tax on UBTI earned by trusts otherwise tax-exempt under IRC
§ 401(a). See Cal. Rev. & Tax § 17651(b) (imposing UBTI tax on
trusts exempt under Cal. Rev. & Tax § 17631, which in turn,
defines as tax-exempt those organizations, with certain
exceptions, exempt under IRC § 401(a)). California's definition
of UBTI mirrors that found in IRC § 512, see Cal. Rev. & Tax §
23732. The Trust, accordingly, is subject to California's UBTI
tax, and between 1994 and 2002, defendants have collected
$6,149,438.29 in taxes on the Trust's UBTI. Plaintiffs contend
that any such tax is preempted under ERISA § 514(a),
19 U.S.C. § 1144(a), and that defendants' collection of these taxes is thus
illegal. Plaintiffs seek declaratory relief as to the preemption
of any California tax law imposing a tax on the Trust's UBTI and
enjoining further collection of any such taxes. (Compl. ¶
31.)*fn1 Both parties now move for summary judgment.
Summary judgment is appropriate when "the pleadings,
56(c). Here, however, there are no material disputed facts, and
the case turns purely on issues of statutory interpretation,
appropriately adjudicated on a motion for summary judgment. See Metro. Life Ins. Co. v. Bigelow,
283 F.3d 436, 440 (2d Cir. 2002).
II. Tax Injunction Act
As a preliminary matter, defendants argue that plaintiffs' suit
is barred in its entirety by the Tax Injunction Act ("TIA"),
28 U.S.C. § 1341, which provides that
The Supreme Court has held that the purpose of the TIA is "to
limit drastically federal district court jurisdiction to
interfere with so important a local concern as the collection of
taxes," California v. Grace Brethren Church, 457 U.S. 393, 408
(1982), quoting Rosewell v. LaSalle Nat'l Bank, 450 U.S. 503,
522 (1981), and defendants cite to Seventh and Ninth Circuit
cases for the proposition that civil suits asserting ERISA
preemption are not excepted from the TIA's proscription. See
Darne v. Wisconsin, 137 F.3d 484 (7th Cir. 1998); Ashton v.
Cory, 780 F.2d 816 (9th Cir. 1986). (D. Mem. 14-17.)
But defendants too lightly disregard the clear Second Circuit
precedent cited by plaintiffs. (P. Reply Mem. 6-8.) For the TIA
to operate as a bar to suit, a "plain, speedy and efficient
remedy" must be available in state court. In Travelers Ins. Co.
v. Cuomo, 14 F.3d 708 (2d Cir. 1993), rev'd on other
grounds sub nom. New York State Conference of Blue Cross &
Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995),
New York taxpayers sued as plan fiduciaries to enjoin the
enforcement of New York statutes imposing surcharges plaintiffs
alleged were preempted by ERISA. Id. at 712. Affirming the
district court's holding that such an action was not barred by
the TIA, the Second Circuit held that no such "plain, speedy and
efficient" remedy exists where plaintiff taxpayers sue to enjoin practices
violative of ERISA because "Congress has divested state courts of
jurisdiction over such claims." Id. at 714, citing ERISA §
502(e), 29 U.S.C. § 1132(e)(1). Although the Supreme Court
reversed the Second Circuit's decision, it did so on unrelated
grounds, remarking only that "[n]either party challenges [the
conclusion of the district court and court of appeals that no
`plain, speedy and efficient remedy' exists in state court
because ERISA divests state courts of jurisdiction] and we have
no occasion to examine it." Travelers Ins. Co., 514 U.S. at 652
n. 4. Accordingly, Travelers Insurance Co. v. Cuomo remains
good law in this Circuit for the proposition that no "plain,
speedy and efficient" remedy exists in state court for the type
of complaint brought here. Accordingly, the TIA does not bar this
ERISA, enacted in 1974, aims at the comprehensive and exclusive
federal regulation of employee welfare and pension benefit plans,
see generally Travelers Ins. Co., 514 U.S. at 650-51, and,
accordingly, preempts state laws "insofar as they . . . relate to
any [ERISA-covered] employee benefit plan." ERISA § 514(a),
29 U.S.C. § 1144(a). In determining which state laws are preempted
under § 514(a), courts must apply the starting presumption that
"the historic police powers of the States were not to be
manifest purpose of Congress." Travelers Ins. Co.,
514 U.S. at 655, quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230
(1947) (internal quotation marks omitted). There can be no
question that taxation goes to the heart of a state's traditional
regulatory power, Case of the State Freight Tax, 82 U.S. (15
Wall.) 232, 272 (1872), and, thus, that plaintiffs bear the
"considerable burden of overcoming `the starting presumption that
Congress does not intend to supplant state law.'" De Buono v. NYSA-ILA Medical and Clinical Services Fund,
520 U.S. 806, 814 (1997), quoting Travelers Ins. Co.,
514 U.S. at 654. On the other hand, this burden is no higher for state tax
laws than for any other state law not excepted from ERISA
preemption under the savings clause of § 514(b),
29 U.S.C. § 1144(b). De Buono, 520 U.S. at 814 n. 11.
Although § 514(a) provides that state law is preempted under
ERISA where it "relate[s] to any [ERISA-covered] employee benefit
plan," the Supreme Court long ago rejected the most literal and
expansive reading of the "relate to" language: "If `relate to'
were taken to extend to the furthest stretch of its
indeterminacy, then for all practical purposes pre-emption would
never run its course, for really, universally, relations stop
nowhere." Travelers Ins. Co., 514 U.S. at 655 (internal
quotation marks and citation omitted). The Supreme Court's
consideration of the "relate to" language across several cases
has yielded the following two-part inquiry: "A law `relate[s] to'
a covered employee benefit plan for purposes of § 514(a) if it
[1] has a connection with or [2] reference to such a plan."
California Div. of Labor Standards Enforcement v. Dillingham
Constr., 519 U.S. 316, 324 (1997) (internal quotation marks and
In turn, a state law "references" an ERISA-covered plan where
"a State's law acts immediately and exclusively upon ERISA plans
. . . or where the existence of ERISA plans is essential to the
law's operation." Id. at 325. Determining whether a state law
"has a connection with" an ERISA-covered plan, by contrast,
requires examination of "`the objectives of the ERISA statute as
a guide to the scope of the state law that Congress understood
would survive,' as well as ? the nature of the effect of the
state law on ERISA plans." Id., quoting Travelers Ins. Co.,
514 U.S. at 656, 658-59. Where burdens imposed by state law on
ERISA plans are so great as to operate as a regulation of the
plans themselves, that is, to compel plan structure or choices, state law will be preempted as inconsistent with "the nationally
uniform administration of employment benefit plans," Travelers
Ins. Co., 514 U.S. at 659, 662, that is a goal of ERISA. State
laws which only incidentally affect plan administration in a
manner "no different from myriad state laws in areas
traditionally subject to local regulation" are not preempted.
Id. at 668; see also District of Columbia ...