John G. Roberts, Jr.: We will hear argument next this morning in Case 09-223, Levin, the Tax Commissioner, v. Commerce Energy. Mr. Mizer.
Benjamin C. Mizer: Mr. Chief Justice, and may it please the Court: Respondents are natural gas suppliers who object to the way Ohio taxes them. Their suit belongs in State court rather than Federal court for two independent reasons. First, principles of comity and federalism dictate that the State court should resolve challenges to the validity of their own tax laws. And second, the Tax Injunction Act squarely prohibits Federal courts from issuing declaratory judgments holding State tax laws unconstitutional. Although either of these grounds would independently support reversal of the Sixth Circuit here, the analysis can really begin and end with the comity doctrine, because that is where the lower courts have shown confusion in the--
Stephen G. Breyer: Before you get into that, I have a question that there may be an obvious answer to, but I haven't found it. My understanding is -- it's a standing question. My understanding is that they are asking as relief, and the only relief they ask for, is to raise the taxes of a competitor. Am I right?
Benjamin C. Mizer: --That is how they have -- that is the case, correct.
Stephen G. Breyer: Okay. If that's correct, I have found no case that -- I haven't looked that hard, but certainly no case in this Court -- that said there is standing for a firm to challenge the taxes of a competitor where the remedy is: Raise his taxes. If there were standing for such a thing, it would -- I'm surprised that there aren't competitors all over the country doing business out of State bringing diversity cases in Federal court, saying: My competitor's taxes should increase; it's all very complicated, but the Commissioner didn't properly follow State law. Now, I have found no case, certainly not in this Court, which said: Where all you want is to raise the tax of a competitor, you have standing. So perhaps this is well-settled that you can do it, but I thought I would raise that for both of you at the beginning in case there is something you want to say about it, which might save me a little time looking it all up.
Benjamin C. Mizer: Well, I think there is a good reason that there -- there aren't cases in the Federal courts to that effect, but it's not a standing problem. And to address the standing point directly, it's because they do claim an injury that is cognizable. Under Dennis v. Higgins, they are claiming a dormant Commerce Clause injury.
Stephen G. Breyer: I have no doubt, and the standing rule I think is clear, that if we're saying because I am injured, and they have injury, you can't -- you must give me reduction in my tax. That's what those cases say. I have no problem with that. Absolutely clear. You can do it. But where all you want is to raise somebody else's taxes, that I had thought -- and probably wrongly, but I had thought there is a prudential standing rule that says you cannot bring such a lawsuit. And I don't see why you should be able to. It seems to me it would be a nightmare if you could, which doesn't surprise. So there we are. That's the question. And you will tell me: No, it's all clear; they can do it. And I would like some citation or something and explain why they should be able to do it. But you don't want to, anyway. It's really for them.
Benjamin C. Mizer: I am not aware of any prudential standing rule, Your Honor, any case, but that's because the Tax Injunction Act and the comity doctrine have always prohibited such a case. And so that's why there's a lack of citation in the--
Anthony M. Kennedy: Well, I suppose in discrimination cases, if there is a discrimination men versus women one way to resolve it would be to have either -- either rule apply to both sides.
Benjamin C. Mizer: --That's right. And the Court has said that in cases like Davis and McKesson, where a tax credit has been struck down as unconstitutional for either dormant Commerce Clause or equal protection reasons. And this Court, in Davis and McKesson, said: Well, you can extend the credit if you wish or you can also contract the credit, but either way--
Antonin Scalia: On the other hand, until the Administrative Procedure Act was enacted, which -- which eliminated all prudential bars to standing -- it clearly was the law that you could not complain about preference, unlawful preference, being given by the government under regulatory provisions to a competitor. The law was: That's tough luck. There was no standing. And that was a prudential law, I assume. And I don't know why it's any different from the tax law.
Benjamin C. Mizer: --And cases would have existed challenging State tax laws, regardless of the APA for Federal challenges, because the -- and those cases all would have existed in the State courts, because that is where State tax laws and State administrative procedures are best challenged. The -- the rule of comity holds that the Federal courts should not entertain a challenge to a State tax law where that challenge would either disrupt the operation of the State tax regime or would intrude into the meaning or application of the State tax law. Both of those elements are true here. This suit is disruptive because the suit goes to the very core--
Sonia Sotomayor: --State law is unclear here that would require Federal interpretation?
Benjamin C. Mizer: --At pages 27 to 33 of the blue brief, we identify all of the ways in which the parties, the State and the Respondents, dispute the application and meaning of State tax law, particularly as to what taxes should be compared for apples and oranges purposes. And the tax -- the Ohio tax question that's at issue is: What is a franchise tax versus what is a State tax? There is also the disruption of the application of State tax law here, because any remedy that would be afforded would necessarily alter the way that the State can -- can tax--
Sonia Sotomayor: So why can't the Pullman doctrine or the Burford doctrine, abstention doctrines, be enough to counsel Federal abstention in this case? Why do we have to create another exception to Hibbs and not go to another established abstention doctrine?
Benjamin C. Mizer: --The Court doesn't have to create anything, Your Honor, because Fair Assessment and Great Lakes already say that the Burford and Pullman principles get sort of bonus points in the tax context. And then--
Sonia Sotomayor: So why did you -- did you argue Pullman in the court below?
Benjamin C. Mizer: --Yes, the principles of abstention were argued in the district court and--
Sonia Sotomayor: No, no, no, no. Did you cite Pullman and did you argue it on a Pullman abstention basis?
Benjamin C. Mizer: --To be frank, I don't know if Pullman was -- was specifically cited, but that's because Fair Assessment itself, which was heavily cited in the lower courts, incorporates the principles of Pullman and Burford and says that these tax questions raise -- that these tax challenges raise questions about the meaning of State law, about the operation of a complicated regulatory regime, and so they are better left to the State court. The -- the application of the State law here is particularly disruptive, because the tax laws being challenged intersect integrally with the regulatory regime. Just to give one example, among the taxes that Respondents are objecting to is the gross receipts tax, which public utilities, the local distribution companies, pay, but the non-public utilities like Respondents do not pay. The gross receipts tax is relevant on both the tax and regulatory side of the ledger, because it's a tax but it's then also a cost that as we explain at page 6 of the blue brief, may be included in the gas cost recovery formula for the rate that the public utilities may charge their customers. And those rates are approved by the Public Utilities Commission of Ohio. So if the gross receipts tax is eliminated, it will affect the regulatory side of things as well. And that distinguishes this case from Hibbs.
Samuel A. Alito, Jr.: Do you think it's -- it's correct -- in relation to Hibbs, is it accurate to say that you think that this case is different from Hibbs for essentially three reasons: That this one involves a complicated analysis of State law and Hibbs did not; that this one would potentially have a substantial financial effect on the State and in Hibbs that would not happen; and this case involves claims under the dormant Commerce Clause and equal protection rather than the Establishment Clause? Does that -- are those -- does that capture it or is there something more?
Benjamin C. Mizer: The first two especially capture it, Your Honor. And I think the third point is really just an additional explanation of the first two points, because in an establishment clause challenge like Hibbs, the remedy is often going to be very simple. In Hibbs, for example, there was a credit being challenged. And the Federal court could simply pull the thread of that credit, and the rest of the fabric of the Arizona tax scheme would remain intact. Here, by contrast, if the thread of the gross receipts -- sorry, of the sales tax and the commercial activities tax is pulled, the fabric of the State's taxation and regulatory regime will unravel.
Samuel A. Alito, Jr.: Well, suppose if this -- you have the dormant Commerce Clause claim and it doesn't require a complicated analysis of State law. You have different rates of taxation, let's say, for two different categories of entities, and it's really not a very important tax credit, so pulling the thread isn't going to have much effect. And this case -- then the case would come out differently? Comity would not bar that action?
Benjamin C. Mizer: I think it would be a much closer case, Your Honor, but still there would be an interest in allowing the State courts to resolve that challenge, because as the Court has explained, when a State court is -- is trying to address a constitutional challenge that involves the application of State law, it can engage in constitutional avoidance in ways that the Federal courts cannot. The State courts also have greater competency, of course, with their own tax law, and they have a greater remedial panoply available to them. So, in your hypothetical, Justice Alito, the -- the Federal court could not order a decrease in the taxes of the challenger because that, as Hibbs explains, would be revenue depleting, whereas if it were in State court, the State court could decrease the revenue -- sorry -- decrease the taxes of the challenger, and then that would allow the State courts most naturally to remedy the--
Sonia Sotomayor: Let's assume that States have a law that said, we are going to do different tax schemes for African Americans than from whites. And they do exactly what is done here. They are going to tax on one thing but not on another. They are going to give an exemption in one area, but not another. Is that a case that would have to be -- an equal protection challenge that would have to be decided in State court?
Benjamin C. Mizer: --Fair Assessment says in footnote 4 that if it doesn't -- if such a challenge doesn't require scrutiny of the meaning and application of State laws, then it may -- Fair Assessment suggests that such a case might be able to proceed in Federal court. But if the -- if the challenge does require scrutiny of State law or resolution of -- of unclear State law questions, then it should be in State court, and there is no reason--
Sonia Sotomayor: I don't know if that is an answer to my question or not. I -- I -- the only thing I changed in the hypothetical was that the challenge was an equal protection challenge race -- based on a suspect classification. But the credit system is no different. Would or would not that require--
Benjamin C. Mizer: --I see, Your Honor. And if it were equally complicated, then it is a challenge that should go to the State courts, because there is no doubt that the State court can handle Federal constitutional questions and along the way, they might be able to construe the State law in a way that avoids the constitutional shoals--
Anthony M. Kennedy: And you reach that conclusion under the comity principles of Fair Assessment?
Benjamin C. Mizer: --I do, but also because the Tax Injunction Act would exclude the case if it would have revenue depleting effects--
Anthony M. Kennedy: Revenue depleting.
Benjamin C. Mizer: --on the State coffers. And the remedy might, in that case, have such an effect if -- if the -- if the result is to tilt the balance heavily against a party who then needs to have its own taxes assessed.
Anthony M. Kennedy: I am curious to know why neither opinion in Hibbs addressed the comity principle and I would like your view on that. I know what you are thinking. Your answer is: Well, you tell me,-- [Laughter] --but, why wasn't that addressed in your view?
Benjamin C. Mizer: Well, it was fully briefed in Hibbs, and that is I think why the Court addressed comity in footnote 9. And footnote 9 of Hibbs simply says that the comity doctrine doesn't cover such a challenge. And the explanation, I think, of footnote 9 is that the Court cited both Fair Assessment and Great Lakes. And those cases stand for the proposition that when a -- a tax challenge has a disruptive effect, for all practical purposes, on the collection or administration of the State tax regime, then comity bars it. And so when the Court in footnote 9 of Hibbs said challenges are barred by comity if they arrest or countermand State tax collection, it was -- it was speaking about the kind of cases at issue--
Ruth Bader Ginsburg: It wasn't brought up -- comity wasn't brought up in Hibbs because if the -- if there was an alleged constitutional violation, then there was only one way to go. The parochial -- the payments to the parochial schools could not be -- had to be eliminated, so there was no question of abstention versus invalidation or doing something else that was fancy. That's -- that's why this case is nothing like that, because there was only one way -- only one cure. But you mentioned here there were various things. What -- the Federal court could -- is -- is being asked to increase somebody else's taxes. That's a very strange notion. But what could the State court do? The same case in State court -- and let's assume there is a constitutional violation, either the Commerce Clause or the equal protection. What could the State court do that a Federal court couldn't?
Benjamin C. Mizer: --I think there are three options available to the State court. First, it could decrease the -- the taxes on the challengers, even if they don't ask for such a decrease. They could also increase the challenges -- the taxes on the local distribution companies, or they can do what the Ohio Supreme Court has done in the education context, for example, which is to declare unconstitutionality and then leave it for the General Assembly, the Ohio legislature, to fix the problem and then come back with a remedy. If -- if that kind of relief were ordered by the Federal court, it would mean Federal court oversight essentially of Ohio budgetary processes, which this Court has repeatedly discouraged--
Samuel A. Alito, Jr.: May I come back to your answer to Justice Ginsburg's question? Would it be beyond the ability of the Arizona courts, had that case been -- had Hibbs been brought in Arizona, to hold that under whatever principles of severability Arizona has, the tax credits for some private schools could not be stricken without striking the entire provision?
Benjamin C. Mizer: --I think the entire provision would have to be stricken in Hibbs because of the nature of the as-applied challenge there. They were saying that all the money was going to private schools, private religious schools--
Samuel A. Alito, Jr.: The point is that -- that one possible -- if there was an Establishment Clause violation, one remedy would be to prohibit credits for payments made to religiously affiliated schools, but allow the credits for other private schools. But under principles of severability, couldn't an Arizona court say that can't be severed from -- from allowing the credits for payments to secular private schools?
Benjamin C. Mizer: --That's probably right, Your Honor, and the -- what it illustrates is that often State courts have available to them remedies that Federal courts may not, particularly when plaintiffs have pleaded the case in such a way as to tie one hand behind the Federal court's back.
Samuel A. Alito, Jr.: Doesn't that suggest Hibbs should have come out the other way?
Benjamin C. Mizer: Well, to be frank, Your Honor, the State of Ohio joined an amicus brief urging the opposite outcome in Hibbs. But we are not urging the overrule of Hibbs here. We think that, even on Hibbs' own terms, the Tax Injunction Act applies here to preclude this challenge in Federal court. And to return to Justice--
Anthony M. Kennedy: If -- just one more. If the remedy is likely to be we will leave it up to the legislature -- you had -- you had two or three different optional remedies -- would we say that that is an adequate State remedy?
Benjamin C. Mizer: --Yes, I believe so, Your Honor. Because so long as the challenger would be able then to -- to seek some sort of contempt action if the -- if the remedy were not--
Anthony M. Kennedy: Contempt of the legislature? Contempt did you say?
Benjamin C. Mizer: --Of the -- of the tax commissioner. If the tax commissioner is continuing to collect unconstitutionally unbalanced taxes, then I should think that there should be some enforceability there. But the adequacy of the challenge available is -- is measured, as this Court explained in Rosewell, purely by procedural measures. And so for -- in Rosewell the question was whether or not the parties could go to State court and would procedurally be able to get access to State court to resolve their claim and that is clearly true and no one contests that here. The -- to return to Justice Sotomayor's question about the -- the racial cases, that may seem troubling, if a racial challenge is excluded from Federal court, but -- but there is no doubt that State courts can resolve such claims and in fact the Ohio Supreme Court handles tax cases as a routine matter.
Ruth Bader Ginsburg: Where is -- the cases running up to Hibbs, those were all cases that involved racial discrimination, and they were in the Federal courts.
Benjamin C. Mizer: They were, Your Honor, and in -- in every case that we have examined one of two things was true: Either the party was claiming standing not based on the fact that he himself was subject to unconstitutional taxes; or the party was not -- did not have an adequate remedy in the State court. For example, in the Griffin case this Court said that the problem was that in Virginia nothing was being done to remedy the -- the unconstitutional burdens imposed there. And so the lack of an adequate remedy both under the comity doctrine and under the Tax Injunction Act allowed the plaintiffs there access to the Federal courts. And so the comity rule that we are advocating, which is clearly laid out in both Fair Assessment and Great Lakes, would not have any effect on those cases because of the lack of an adequate remedy.
Stephen G. Breyer: Is there anything -- I see in their complaint, they ask for "such other relief to which plaintiffs are entitled. " and therefore the judge, despite what they say, might just say: Well what you are entitled to is you are entitled to pay fewer taxes. Is that a plausible thing, in which case it would interfere with the revenue collection of the State.
Benjamin C. Mizer: We think--
Stephen G. Breyer: What is -- what's your -- you better give me your accurate assessment, not just agree with me, because I would like to know what you -- I want to know both sides.
Benjamin C. Mizer: --The Tax Injunction Act would bar the Court, I think, from entering an order that says the taxes on the challengers are decreased, which illustrates the reason that the State of Ohio with its sovereign interest in its own tax policy--
Stephen G. Breyer: But I have no idea -- why I am asking the question is I have no idea or little idea of the underlying State law merits. And my suspicion is in about 10 or 15 minutes I will hear that the State law merits are such that it's virtually impossible that they are going to say to us: Pay fewer taxes. Rather they will say to our competitors: Pay more taxes. So now is your chance to reply to that hypothetical argument just in case they make it. [Laughter]
Benjamin C. Mizer: --Well, first of all, Your Honor, the -- the merits of this case are very much like the merits of General Motors Corporation v. Tracy, which this Court decided about 13 years ago. But the merits also illustrate the complexity of any remedy that -- that would be ordered in this case, because if it's so simple as the Federal court simply saying that the local distribution companies, the public utilities, now must pay the sales tax and the commercial activities tax, then suddenly those entities would be subject to five taxes, a -- a much greater burden then is imposed on the Respondents. And then the General Assembly would have to go back to the drawing board to adjust the taxes on the local distribution companies. So even if the simple remedy that they ask for is entered by the Federal courts, still the State of Ohio has to respond by readjusting its sales tax and its commercial activities tax; and in that event it first of all could easily end up in a net revenue loss for the coffers of the State of Ohio. It also would mean that the regulatory side of thing would be affected, which brings us back to the Burford principles we discussed earlier, because the taxes, as I said, are integrally connected to the way Ohio regulates public utilities. And those public utilities have obligations to a captive market that the Respondents don't have to meet. They serve customers in their area no matter what, whereas Respondents don't have to--
Antonin Scalia: Yes, but this -- but this doctrine, I -- I am not very sympathetic to that argument because this is a doctrine that is directed to the State collecting taxes, not to interfering with State regulation. That -- that's a different doctrine.
Benjamin C. Mizer: --But Your Honor, I think that Great Lakes and Fair Assessment stand for the proposition that when a Federal court issues an order that invalidates a State tax law, that has a disruptive effect on the collection of taxes; and that would be true here because the State of Ohio would no longer be able -- would not be able to collect five different taxes from local distribution companies without being -- turning around and facing a new challenge on -- on unconstitutionality of that burden by the local distribution companies. And so the -- the complicated nature of the tax-regulation interplay here is all the more reason that this case belongs in State court, for the State courts to resolve those interconnected questions in ways that they are fully equipped to answer. The other factor that was relevant to the Court's analysis--
John Paul Stevens: I'm just a little puzzled. I think you are giving the State court an awful lot of power. Can it do it without new legislation? They have to adjust these other taxes, maybe the expenses they deduct in their regulatory filings and all the rest. But I don't know that the State court has any more authority to grant a judicial remedy than the Federal court would have.
Benjamin C. Mizer: --The State court might be able to enter a remedy, Justice Stevens, that is so simple as enjoining the sales tax exemption and the commercial activities tax exemption for local distribution companies, and then also saying that because the LDCs have to pay those taxes they no longer have to pay the gross receipts tax and the other two taxes that are imposed on them. That's an order that the Federal court couldn't issue because under principles of both the Tax Injunction Act and the -- and comity--
John Paul Stevens: But the Tax Injunction Act goes to the authority or the jurisdiction of the court to entertain the case in the first place. I'm not sure the Tax Injunction Act prohibits the remedy that you describe, because there is a difference between filing the suit and entering relief after the suit's been filed.
Benjamin C. Mizer: --With respect, Your Honor, I think that Great -- that Grace Brethren squarely stands for the proposition that a Federal court shouldn't enter an order that says that the State tax law is -- that declares the State tax law unconstitutional and then enjoins it. And that is exactly what would be required in order to eliminate the additional taxes on local distribution companies. And that analysis is done at the front end, not at the end after the Court has resolved the constitutional merits and then says, well, I guess I am not able to enter the order that makes the most sense here to resolve the constitutional question. If there are no further questions I would like to reserve the balance.
John G. Roberts, Jr.: Thank you, counsel. Mr. Fitch.
Stephen C. Fitch: Mr. Chief Justice, and may it please the Court: Justice Breyer, if I can go directly to your question with respect to standing. Standing has never been raised in this--
Stephen G. Breyer: That's all right. It's in the jurisdictional amount.
Stephen C. Fitch: --I understand, Your Honor. But because it has never been raised. I do not have a good answer for you. What I can say to the Court is that in Hibbs -- recognizing Hibbs was an Establishment Clause claim -- the Court struck down the credit. There is a recent case out of the First Circuit in Coors where Coors reversed their prior case out of -- involving the Butler Act out of Puerto Rico, and that involved beer distributors challenging a credit or an exemption that Puerto Rico was--
Stephen G. Breyer: They might want to -- in all the Court's cases, the challenger wanted -- he said: I don't care; either make them pay or give me my money back.
Stephen C. Fitch: --Well--
Stephen G. Breyer: So that -- that should be your case, I would have thought. But you're not saying it so you can get into Federal court. Now, that's how I read it. And that seems -- that's worrying to me.
Stephen C. Fitch: --Well, Justice Breyer, so -- what I would say is that--
Stephen G. Breyer: The Establishment Clause, I would add, there is a lot of reason for thinking it's special in respect to standing, because there is no other way to challenge the Establishment Clause. And that is a long-festering disagreement within this Court, but I'm not sure you can apply these rules to everything else.
Stephen C. Fitch: --And I understand that, Your Honor. And I guess the point that I'm trying to make is because that issue was not raised, based upon Hibbs, based upon the decision in Coors, we did not see a standing issue based upon this competitive situation you're talking about. If in fact that is an appropriate question for additional briefing, we would obviously welcome that opportunity--
Stephen G. Breyer: But you see what is worrying me. What's worrying me is, is there are businesses all over the country and there's Federal tax law, too. And suddenly people begin to think: Hey, this is a terrific idea; I am going to go through my competitor's tax returns and I will discover taxes they should have paid but didn't, and all of a sudden we will face a lot of lawsuits challenging other people's taxes. That's what is worrying.
Stephen C. Fitch: --Okay. And I would disagree with you, Justice Breyer, for this reason. There are already substantial limitations on when this type of case can be brought. We start with the TIA. It says if we are -- we can't restrain the collection of taxes. We have the abstention doctrines that have been mentioned. We have the fact that the Court in a merits situation has to give deference to the States. And so the point I'm trying to make is that we believe this is a very narrow window. There is only a very narrow window open. What we are doing is challenging an exemption granted to a competitor.
Stephen G. Breyer: And this is not true of the other cases. What do you think of the other half of their argument? I'll have to think about the standing thing to see if I want to press it or not. But the other half is: Look at your case. Your case would just be like -- just like the other cases, if you just said: Give us a refund, as they did in the other cases. But you haven't said that, because that would run afoul of the Tax Injunction Act. Rather, what you have said is: Raise their taxes. So the point of the State is: Now, wait a minute. Leaving all of the things aside, you asked for other appropriate relief, and it's highly probable in such situations that a Court could -- would say: Give them the exemption. And if it's going to say, give them the exemption, hey, this is now not within Hibbs. So what's your response to that?
Stephen C. Fitch: Your Honor, I don't -- as my friend Mr. Mizer said, I don't believe a court could say: Give them an exemption.
Stephen G. Breyer: Why not?
Stephen C. Fitch: It would be in violation of the TIA.
Stephen G. Breyer: No, no. There's a lot of things they could say--
Stephen C. Fitch: It would interrupt -- interrupt -- it would impede the collection of taxes.
Stephen G. Breyer: --Of course. Of course. Absolutely right. That's what worrying me. That isn't the answer. That's the question. And -- and the -- it's what Justice Kennedy said in respect to discrimination problems. Usually, either remedy is at issue. You can't control the remedy because you asked for all other appropriate relief. Ergo, it falls afoul of the Tax Injunction Act. What's your response to that?
Stephen C. Fitch: And I -- I'm -- I'm sorry, Justice Breyer. We are saying that if we ask for the other relief, if we ask for us to get the exemption, that would impede State taxes--
Stephen G. Breyer: You didn't ask only for the other relief. You asked for such other relief to which plaintiffs are entitled. And what they say -- now I repeat the argument. Okay.
Stephen C. Fitch: --We did include that phrase. The relief we are seeking, Your Honor, is the declaratory relief and injunctive relief that we have spelled out with respect to the exemption.
Antonin Scalia: I think your--
Ruth Bader Ginsburg: Suppose the answer -- suppose the answer--
Antonin Scalia: --I think your answer is that relief that would violate the Tax Injunction Act is not appropriate relief.
Stephen C. Fitch: That's correct, Your Honor.
Antonin Scalia: And therefore not covered by your plea.
Stephen C. Fitch: And that was not what we were seeking.
Antonin Scalia: Makes sense to me.
Ruth Bader Ginsburg: --Well, there's another little problem. Do you know of any case where a benefit that A enjoys is taken away from A in a suit where A is not a party? I mean, you are fighting the Ohio tax commissioner. You want to take a benefit away from these LDCs, but they are not in the suit. Don't -- isn't there a little due process problem with that?
Stephen C. Fitch: The response, Justice Ginsburg, is this. Number one, in part it takes away a tax benefit from the LDC; in part it takes away a tax benefit from the customers of the LDC. I know that doesn't make us any more sympathetic. But the sales tax is paid by the customer. Now, with respect to the joinder of necessary parties, the motion that was filed by the State, which started all of this 3 years ago after a complaint, also included a motion to dismiss for failure to join necessary parties. That has also never been addressed. We responded to that. The court decided not to refer to it. We made an argument that it was not necessary in this case to join the LDC's. The Court has deferred and did not rule.
Ruth Bader Ginsburg: What was that argument? That you're taking a benefit -- you're saying: The only relief we want is to take this benefit away from people who are not in the lawsuit?
Stephen C. Fitch: Well, our argument was simply, Your Honor, that we are challenging the exemption issued by the State. If the -- two points, quickly. If the LDCs -- at that time, four; now two -- were -- wanted to be involved, they could certainly move to intervene. The second point was if the Court, of course, ruled that they were necessary parties, then we would have the opportunity to adjoin them.
Samuel A. Alito, Jr.: Well, in Hibbs, were all the beneficiaries of the provision that was challenged parties--
Stephen C. Fitch: I'm sorry?
Samuel A. Alito, Jr.: --In Hibbs, were all of the beneficiaries of the provision that was challenged parties in that case?
Stephen C. Fitch: They were not, Your Honor. They were not.
Samuel A. Alito, Jr.: Was there a due process problem there because of that?
Stephen C. Fitch: I cannot identify a due process problem there, Your Honor. There is an issue that has been raised by several of the justices I'd like to address, I think Justice Stevens in particular, with respect to: What if this went to State court? And I would disagree with my friend. If this went to State court, we believe that under State law in the education cases that Mr. Mizer were referring to. It's called the Duroff case, and we have the citation if the Court would like it. What the Court said was, once we declare the matter unconstitutional, our job is at an end; that it had to go back to the legislature. We challenged the proposition raised in the amicus brief and raised today, the notion that if this was in a State court, that a State court could go rewrite this statute--
John G. Roberts, Jr.: You conceded -- I'm sorry. You conceded below, to quote footnote 2 of the opinion below, that there is an adequate State court remedy available.
Stephen C. Fitch: --In State court. We conceded that we could bring this action in State court. We could seek the injunction in State court. We could seek the declaratory judgment in State court. But when we speak to remedy, the point that we are trying to make, Your Honor, because it is the remedy where the Federal court interference becomes the greatest. What we are saying is: We do not believe a State court has necessarily brought our remedies. And our--
Sonia Sotomayor: So you are claiming that the Federal court could only power -- only power would be to declare it unconstitutional and send it back the State legislature to decide what to do? Or you are claiming the Federal court has a power the State court doesn't have, which is to order the exemption to be rescinded? I'm not sure what your point is.
Stephen C. Fitch: --Okay. The point, Your Honor, is this: We believe the Federal court and the State court would have the power to declare under the dormant Commerce Clause and Equal Protection Clause, that this exemption is unconstitutional, that either court could, at that point, enjoin prospectively the operation of that exemption. The question then becomes: What happens then?
Stephen G. Breyer: So then, in your opinion, your next-door law firm, next to you, brings a case and says: Mr. Fitch should pay $1,000 more taxes next year because he deducted $2,000 that was illegal. You see that? You see? Now I'm trying to bring it home. There is something wrong with this picture, and I can't quite put my finger on it.
Antonin Scalia: Your next-door neighbor has to be a competitor of yours before it would be an exact parallel, right?
Stephen C. Fitch: I believe that is correct, Justice Scalia.
Stephen G. Breyer: I mean, your next-door neighbor in your business, which would be a competing law firm.
Stephen C. Fitch: Yes. But if I can try to bring that point home, because I--
Stephen G. Breyer: But they don't actually bring you into the case. [Laughter]
Stephen C. Fitch: --If I could try to bring that point home, Justice Sotomayor. What we say is we are asking the Federal court to rule on the constitutionality on our Federal claims, enjoin this exemption and the court's work is at an end at that point. What we believe will happen at that point is that the legislature will be faced with a choice. How to deal with this--
Ruth Bader Ginsburg: Why should -- why should the Federal court make that choice? I mean, in the -- in the Federal cases where extension versus invalidation has come up, those were all Federal laws and the court said in the interim, we are going to extend the benefit, we are not going to take away benefits from anyone. Every one of those cases they extended a benefit until -- unless and until Congress acts, but there was some comfort there because they were dealing -- the Federal court is dealing with Federal legislation. It seems to me that -- that there is that choice, the State courts are much better equipped to say what should happen in the interim until the legislature acts.
Stephen C. Fitch: --We do not believe that the Federal court could extend that benefit. I think we are in agreement there, Justice Ginsburg. We--
Ruth Bader Ginsburg: The State court could.
Stephen C. Fitch: --We questioned whether the State could. We questioned whether if the State court found it was constitutional, whether under Ohio law the State court could extend that benefit. We think this is a legislative issue. And there is a point I need to make, because in the briefs and in the argument today you are saying there are two choices. The two choices are you either extend the exemption to everyone or you eliminate the exemption. I need to make this point tying into Mr. Mizer's comments about regulation. There is another option which is the regulatory option. What we are dealing with here is our utility mandate. It may be that the legislature opts on a regulatory basis to eliminate this problem and that goes to footnote -- the footnote we have in the brief--
John Paul Stevens: That raises another -- another problem for me. Your basic standing is similarly situated competitors, one is being taxed and the other is not. But you are not similarly situated competitors because they are regulated utilities and you are unregulated. Isn't that right?
Stephen C. Fitch: --No, Your Honor. No, Justice Stevens, that's -- that is not correct and that is the whole basis for our filing this complaint, if you looked at the complaint. That is what the Court said in General Motors v. Tracy.
John Paul Stevens: Right.
Stephen C. Fitch: And what our -- what our complaint lays out is the sea change of change, we have gone from a regulated situation to essentially an unregulated situation on the gas commodity piece. There are two pieces. There is delivery, there is gas commodity. The gas commodity piece has been essentially deregulated and that is what the Court was focused on in Tracy. What our complaint very clearly lays out is we believe there has been a change, a factual change in circumstance that will result in a different ruling in Tracy.
Antonin Scalia: Counsel, I -- I hate to introduce another procedural glitch into this thing, but as I -- as I understand it, the State's motion to dismiss was under -- under 12(b)(1), which is a motion to dismiss for lack of subject matter jurisdiction, and that was granted by the court. The TIA is assuredly a jurisdictional statute, but I had never thought that the comity doctrine was a doctrine of jurisdiction. In fact, by -- almost by definition it says the court has jurisdiction but nonetheless should decline to exercise any. You didn't make that objection, though.
Stephen C. Fitch: I'm sorry, Your Honor?
Antonin Scalia: You did not make that objection.
Stephen C. Fitch: We did not -- we did not make that objection, I do not believe. That is the entire discussion of Justice Brennan in his concurring opinion in Fair Assessment, and we think it is an -- an extremely important point. The district court has jurisdiction in this case. It has jurisdiction. The question is, does comity -- should comity tell it not to use that jurisdiction. And what we are really fighting about here is what are those standards that a district court is going to use to decide whether to -- to use comity to not exercise that jurisdiction. And what we are saying -- what we are saying in our case is Hibbs did address comity. The issue was before the Court in comity and Hibbs said, and now four circuits have followed that ruling in Hibbs as well as lower courts and have said, if you are not seeking to impede State tax collection, comity does not bar--
Ruth Bader Ginsburg: But that's because there was only one way to go. Either the benefit is removed or it's not. There wasn't the other possibility of decreasing the taxes on your client. There wasn't an extension versus invalidation. It was if the constitutional claim was good, it had to be invalidated, the credit had to be invalidated.
Stephen C. Fitch: --And -- and I think what we are trying to say, Justice Ginsburg, in our -- in our case is we are not trying to seek invalidation. We -- we -- we are not going to seek the benefit for us.
Ruth Bader Ginsburg: It is not up to you to make that decision, if the State can go either way. I mean in the extension versus invalidation cases this Court made it very clear, you could go one way or the other, and that was a decision for the court to make, not the litigant.
Stephen C. Fitch: But, Your Honor, the point we are making is that some court somewhere has to make the decision whether this exemption violates the dormant Commerce Clause in the equal protection case. And it was our judgment that the best forum for that was in Federal court. And again, and I -- and I -- if I am not responsive to your question, I apologize, but what we are saying is that, we want to reach the merits on that question of constitutionality. And once that is done, the remedy is going to lie with the State. We are not going to ask the Federal judge to decrease our taxes. We question whether a State judge could decrease our taxes. We want that declaration and we want that injunction. That's what -- that's what we are seeking in this case. And we--
Samuel A. Alito, Jr.: Do you -- do you recognize that comity is broader than the Tax Injunction Act, and if it is, how do you justify your argument that would essentially limit the comity doctrine to the contours of the Tax Injunction Act?
Stephen C. Fitch: --Justice Alito, what the court has said, not only this Court but the First Circuit said in Coors, is what the Sixth Circuit says is that comity extends broader than the TIA. What they point to repeatedly is Fair Assessment, because Fair Assessment got damages and it was on a comity basis that the Court held in Fair Assessment that you couldn't get around your own liability by bringing a damage claim. So there's one example. We believe to some extent, National Private Truck Council is an example. Because in National Private Truck Council, recall we are dealing with a State court action, not a Federal court action. In a National Private Truck Council what the court held was under 1983, a State court -- a -- a -- a Federal court would not order -- a State court was not obligated to grant injunctive relief to grant attorneys fees under 1988, and that was based on comity. In that case there was still an issue of tax collection and impeding tax collection, but certainly that appeared to us to be at least an example of where comity would be brought in to TIA, because the TIA didn't apply in -- in National Private Truck Council. There was reference to Burford before, as Justice Scalia mentioned. This is not an abstention case. There is no question of State law that has to be interpreted here. There is no doubt who pays the tax and who doesn't pay the tax. There is no doubt who is an LDC and who is not an LDC.
John Paul Stevens: Let me just go back to my question before. I understand your point about regulation and nonregulation, but -- but your competitors are subject to a different taxing regime than you are; is that correct?
Stephen C. Fitch: They are, Your Honor.
John Paul Stevens: And isn't -- is not the reason they are subject to a different tax regime is historically they were in regulated utilities?
Stephen C. Fitch: To -- to -- to some extent I believe that's correct, Justice Stevens, but my response would be this: If we want to get into them, what taxes do they pay, versus what taxes do we pay -- that's a merits question. That's a merits question. Is this a compensatory tax? I mean, have we made our case -- do they have a defense because they pay different taxes than we do -- that we do, and therefore the State should be permitted to do that? We would like to reach that question. But that's a merits question, that's not a -- not a jurisdictional question.
Sonia Sotomayor: And you don't think that the very question of what taxes you compare and don't compare is a matter of interpreting State law? You don't think that the meaning of State law in terms of what is comparable or not, is not implicated by any of these questions?
Stephen C. Fitch: We -- we believe it is not, Justice Sotomayor. You can -- you can look at the taxes and see who they apply to. It -- it is not a matter -- I -- I strongly disagree with -- with my counterpart. This is not a matter of interpretation. And one of the justices asked the question about, was extension -- was Pullman -- was Pullman ever raised? Pullman was never raised. My recollection is that in the original motion, they raised Younger, but they quickly dropped Younger because there is no, you know, pending State -- pending State proceeding.
Ruth Bader Ginsburg: But the idea was the Federal court should abstain. Abstention doctrines are not the most easy to grant, so -- but they did bring up abstention.
Stephen C. Fitch: Well, but -- very early on they raised it. They dropped it. It was -- it was not followed up on, Your Honor. So -- so the point we are -- we are -- here's the point we are trying to make, as we see it. We believe the footnote in Hibbs was correct; in all of the Court's prior cases there has been an issue of a taxpayer trying to avoid their own tax and thus impede State tax collection. We read Hibbs to say under the TIA or comity, you are not precluded from original Federal court jurisdiction if you are not attempting to impede State tax collection. We do not believe there is any significant difference between our case or that analysis and the -- the case in Hibbs. As I said, that -- we now have four circuits that have followed that. But if I -- if I can bring us--
Sonia Sotomayor: When you say that there is no impeding of State court process or taxes, because neither a Federal or State court could order the reduction of the exemption--
Stephen C. Fitch: --That -- that is correct, Your Honor.
Sonia Sotomayor: --That is -- even though the practical consequence is that that is a remedy that the State could choose, or must consider.
Stephen C. Fitch: It -- it could, Your Honor. But -- but--
Sonia Sotomayor: That wasn't an issue, however, in Hibbs.
Stephen C. Fitch: --That -- that's right. And the line that is repeated in a number of cases is, the net effect, whether you are talking about the credit in Hibbs or whether you're talking about the exemption in our case, is if the Court puts on that order and the legislature does not come up with a remedy, is that the State would have more money. In fact it is a question to us, why -- since we have chosen to limit our remedies by seeking a Federal court forum, it -- it--
Stephen G. Breyer: Or why isn't this a Hibbs? You read the -- clearly the other side says to read the footnote, not as destroying the comity principle. You know, this is right on the merits. It still exists, comity. And you say a strong case for withholding the -- the Federal court's jurisdiction on grounds of comity or withhold -- not hearing the case, is the natural remedy -- which is to give you a refund -- is available in State court. Go apply for a refund. No problem. And that -- and the answer, you know, and then you don't get into all the problem of trying to assess somebody else's liability, et cetera. What is wrong with that, precisely?
Stephen C. Fitch: --What's wrong with it, Your Honor, is because what we are trying to do is fix a problem. The question is, are we forced -- are we limited only to seeking a refund?
Stephen G. Breyer: Why not?
Stephen C. Fitch: What we're -- because that's not.
Stephen G. Breyer: So not give it -- up to the State? You could say give us a refund or raise their taxes, one or the other. What's wrong with that?
Stephen C. Fitch: The point that we tried to get across in our brief, Your Honor, is that we are in a competitive situation where we are trying to solve a problem, the problem of policy that has been adopted in Ohio or freeing up this--
Stephen G. Breyer: If doesn't solve the problem for you if you get a refund?
Stephen C. Fitch: --It does not.
Stephen G. Breyer: Why not?
Stephen C. Fitch: The problem remains.
Stephen G. Breyer: Why?
Stephen C. Fitch: Well, the problem remains because the exemption still exists.
Stephen G. Breyer: Well, no, no, you have it, too -- they -- they work it out, so it equally applies to everybody including your clients, so you are all on the same footing. Now what is the problem with that?
Stephen C. Fitch: And I guess we have to be careful with the term "refund", because what I am saying is -- is that we are dealing with primarily -- we have three taxes to deal with. One of them is the sales tax, that's what is paid by the consumer; that would require all the consumers to seek, you know, refunds. It's much cleaner in our view to simply go and get a determination whether this exemption was unconstitutional. We have forgone the -- the request for damages, we have forgone request for attorneys fees because we have not alleged the 1983 claim. We are trying to fix a problem. Justice Breyer, if I can in wrapping this up. We recognize -- we recognize that this Court has competing interests that it has to weigh in resolving this question. What we are trying to say is that as I said a minute ago, if you put that in context, the context is there are numerous protections that are already in place for the State to protect them from Federal court interference, and we believe that the decision in Hibbs and the circuits that have followed Hibbs strikes a proper balance for this reason: You -- you -- first of all you protect State tax collection, which has been the historic concern of this Court. Second, the broad jurisdiction that Congress has given in 1331 in a declaratory judgment statute, is harmonized with the historic comity concerns. Third, the Court -- as this Court spoke in -- in Hertz, just very recently, as opposed to some vague intrusion test, you have got a clear test that the Court can apply early on to decide whether I got jurisdiction or not. And finally, the historic right of a plaintiff, which this Court has long recognized -- if there is concurrent jurisdiction, the historic right of a plaintiff to choose the forum in which to have their claims adjudicated is preserved. If there are no further questions I -- I yield my time.
John G. Roberts, Jr.: Thank you, Mr. Fitch.
Stephen C. Fitch: Thank you, members of the Court.
John G. Roberts, Jr.: Mr. Mizer, you have five minutes remaining.
Benjamin C. Mizer: First off, Justice Scalia's question about the 12(b)(1) dismissal motion. This Court, just a couple of terms ago in the Sinochem case, said that the -- that a Federal court can answer questions of Younger abstention before answering questions of Article 3 abstention. And so both of these, both the comity and TIA questions in this case, are threshold non-merits questions that can be reached under -- under the Steel Company approach.
Antonin Scalia: All threshold non-merits questions are jurisdictional questions?
Benjamin C. Mizer: No. The point isn't that they are jurisdictional; the point is that in Sinochem -- the holding in Sinochem, for instance, was that--
Antonin Scalia: What is the case you're citing.
Benjamin C. Mizer: --It's Sinochem v. Malaysian -- Malaysia International Shipping. And the holding was that the -- the formula--
Antonin Scalia: Do you have a volume anywhere?
Benjamin C. Mizer: --I don't have a volume number at the moment.
Antonin Scalia: Okay.
Benjamin C. Mizer: But the -- the holding was the forum non conveniens doctrine can be addressed before jurisdictional questions, and along the way the Court said that Younger -- specifically said that Younger can be answered before Article 3 standing.
Antonin Scalia: Okay, fine. It can be answered before jurisdictional questions, but you moved to dismiss for want of jurisdiction.
Benjamin C. Mizer: Well--
Antonin Scalia: And -- and that is not a basis for dismissal here. The -- the basis is failure to state a claim, I guess, on which a Federal court can grant relief. But I -- anyway.
Benjamin C. Mizer: --Well, in any event, Your Honor, we do submit that the Tax Injunction Act and the jurisdictional doctrine which would prevail.
Antonin Scalia: That is so -- okay.
Benjamin C. Mizer: And on Justice Stevens' question about the similarly situated or not similarly situated nature of public utilities and nonpublic utilities, Mr. Fitch has pointed to the continuing deregulation in the wake of General Motors Corporation v. Tracy. But as the Ohio Supreme Court just explained in the Columbia Gas case that we cite in our brief, that continuing deregulation does not change the -- the fundamental holdings in Tracy: That when there is a regulatory burden imposed on a public utility to serve a captive market, that makes that entity not similarly situated to other entities. And the other point about Tracy and Columbia Gas is that both of those challenges came up to this Court through the lower courts, through the State courts of Ohio. And so the State courts are perfectly capable of handling this case.
Sonia Sotomayor: Could you answer your adversary's point that neither the Federal nor the State courts would have the power to -- to order the reverse, to order the exemption to be eliminated vis-à-vis -- or to order them to have the exception? They are claiming that's a -- even in State court, that would not be a remedy that could be ordered.
Benjamin C. Mizer: I disagree with that contention, Your Honor. The -- Ohio's courts have struck down tax credits on dormant Commerce Clause and equal protection grounds, and so there is precedent for Ohio courts dealing with a challenge like this. He provides no citation of the inability of State courts--
Sonia Sotomayor: Can you -- can you give me the cite for that case?
Benjamin C. Mizer: --Sure. The MCI Telecom Corporation v. Limbaugh. It's available at 625 Northeast 2d 597, and that's a 1994 Ohio case. Also, SSA Folio Collection v. Tracy at 73 Ohio State Third 119. The Sinochem citation, Justice Scalia, is at 549 United States 422.
Stephen G. Breyer: Have you found any authority on the following proposition: That a plaintiff, an out-of-State company, brings a suit in Federal court, where the normal relief would be to give him a refund. He says: I don't want a refund; I just want a declaration; I want to you declare this unconstitutional. Have you found any case like that?
Benjamin C. Mizer: Yes. I think Mr. Fitch was correct to cite the Coors Brewing and U.S. Brewers cases out of the First Circuit. And those cases illustrate the point that Justice Alito asked about, which was the continuing scope of the comity doctrine, because--
Stephen G. Breyer: Wait. Forget comity. I'm just asking you -- I want to read the right authority. Can a person, in other words, get around the Tax Injunction Act by pleading his claim and just saying: I don't want an injunction; all I want is a declaration? It seems to me it should have come up in history. So I can have the First Circuit cases to look at. Anything else?
Benjamin C. Mizer: --The First Circuit cases are the most on point, but the other sister circuits who have joined the First Circuit in the circuit split at issue in this case hold to the similar effect, and those--
Stephen G. Breyer: Well, then why don't they win? Because their first thing, they say: Declaration. They just want a declaration. Strike their second claim. All they want is a declaration.
Benjamin C. Mizer: --Because of Grace Brethren, Your Honor. If we are talking about the Tax Injunction Act, Grace Brethren holds that even a declaration of unconstitutionality is problematic under the Tax Injunction Act.
John G. Roberts, Jr.: Thank you, counsel. The case is submitted.


Earl Warren: Mr. Openheim, you may proceed.
Walter E. Barton: Mr. Barton. Mr. Openheim is in the next case, Your Honor.
Earl Warren: Oh, pardon me. Mr. Barton, yes, you may proceed.
Walter E. Barton: Before -- Mr. Justice, may it please the Court. Before attempting to argue the -- to answer the argument of the counsel on the other side, I'd like to call the attention of the Court to our contention that the questions argued by petitioner are not properly before this Court. The only question in the Tax Court was whether the petitioner or the respondent rather, was a transferee of the assets of the estate of Milton J. Stern deceased. Now, that appears on page 4 of the record which is in the deficiency letter sent to Mrs. Stern, the respondent. And then, in the pleadings, in the petition, the answer and the reply the reference is made 25 times I believe it is to the liability of the respondent as transferee of the estate of the decedent. And that is what the Tax Court decided. If Your Honors will turn to page 16 of the record, it is argued and decided that the petitioner is liable as transferee of the estate of Milton J. Stern, deceased. Now, the argument has been addressed to the proposition of whether she is a transferee of the decedent. Of course, if these proceeds had been paid to the estate and turned over by the executor to Mrs. Stern, we've never would have gone into the Tax Court because necessarily, she would have been a transferee there of assets of the estate. Another question which does not -- was not contended for in the Tax Court and wasn't raised there was the question with respect to the cash surrender values of the policies. The only question down below was whether or not she was liable for the proceeds of the insurance. So on those two issues, we contend that those questions are not properly before the Court. I don't want to take too much time on that. I think that is --
Speaker: Could I ask you a question?
Walter E. Barton: Yes, Your Honor.
Speaker: You mean that on the first aspect of the Government's case, the Tax Court decided it under a mistake of time.
Walter E. Barton: I don't think I meant to say that, Your Honor. What I said was the question presented to the Tax Court was whether the petitioner was a transferee of the estate of the decedent. Never any question presented the Tax Court as to whether she was a transferee of the decedent himself, and of course, there is an immense difference between being a transferee of the decedent and a transferee of the estate of the decedent.
Speaker: Yes but the insurance policies were never part of the estate.
Walter E. Barton: The -- the insurance proceeds never were paid to the estate and as I said, if they had been and then had been paid over to this widow beneficiary, we never would even gone into the Tax Court.
Speaker: But surely, the Tax Court must do understood that the proceeds were payable to her under the policy.
Walter E. Barton: The Tax Court did understand that I -- I'm sure the Tax Court understood it but the only issue presented was whether she was a transferee of the estate and that's what the Tax Court decided in the order.
Speaker: Well, isn't that just a short or long way of saying that she was a transferee, but --
Walter E. Barton: Well -- I -- that may be the views, Your Honors, but I don't believe it is. I think if we have entirely different questions in the case as to whether it's a transfer of property in the form of proceeds or cash surrender values from the decedent, then what we would have if the question were whether she was a transferee of the estate of the decedent.
Hugo L. Black: Yes. Is there any difference between the transfer of the estate of the deceased, transfer of assets of the estate?
Walter E. Barton: I beg your pardon.
Hugo L. Black: What they said was the transfer of the assets -- the transferee of assets (Inaudible). I presume they met by that if that's the policy (Inaudible)
Walter E. Barton: Well, if they had gone in the estates then no question would have ever risen, because necessarily she had been liable if the estate had gotten these assets and turned them over to her.
Felix Frankfurter: Suggestion that should have gone.
Walter E. Barton: I beg your pardon.
Felix Frankfurter: The suggestion is that it should have gone in the estate.
Walter E. Barton: Well, it should have gone to the estate under the way the policy was set up because the policy was payable to the -- to the insured's beneficiary, the widow.
Hugo L. Black: Unless the Government's right -- it's the Government's right to trust fund.
Walter E. Barton: Well, then --
Hugo L. Black: They -- they will transfer his asset, it should (Inaudible)
Walter E. Barton: Well, of course the Government doesn't even contend they were in his estate. They -- they only argued that he ought to change the beneficiaries so it did go in his estate the way I understand the argument.
Hugo L. Black: (Inaudible)
Walter E. Barton: Well, the cash surrender values are a different matter of course that -- the cash surrender values never either went into the estates, so we'd have the same question there.
Speaker: (Inaudible)
Walter E. Barton: It could not levy on it after his death.
Speaker: (Inaudible)
Walter E. Barton: It couldn't levy on it after his death.
Charles E. Whittaker: Suppose that a 90 days of levy and the one appearing on the record 4, is it?
Walter E. Barton: I think I said 4. Yes, that's the --
Charles E. Whittaker: Let's see. Page 4 --
Walter E. Barton: Page 4 in the first paragraph, constituting your liability as transferee of assets to the estate of Milton J. Stern. Now, most -- assuming the questions are probably before the Court, the Government's argument principally is predicated on the theory that there's the same kind of a transfer here as would be involved in the case of a estate tax. If Your Honors care to turn to page 10 of our brief, we have set out there the sections of the estate tax law, which in our opinion clearly indicate that proceeds of insurance were not the property of the decedent. For instance, 811 provides that the gross estates shall include all the value of all property at the time of the decedent's death. Now, in 811 (a), to the extent of the interest therein of the decedent at the time of his death. Now, that would be stocks or real estate or something he might own that would go to his heirs or to his executor. Now, when you get down to the next sections about life insurance, it doesn't say anything about the interest of the decedent in the life insurance. It says to the extent of the amount receivable by all other beneficiaries as insurance showing that Congress in enacting the legislation never considered that the decedent had an -- a property interest in the proceeds of life insurance. If that -- if the Congress have so considered, it wouldn't have been necessary to have incorporated these two sections about proceeds going to this executor or proceeds going to any other beneficiary. Now, Chief Justice Vinson, when he was on the Court of Appeals in the John Hancock Life Insurance case, wrote an opinion in which he pointed out the distinction I have quoted on page 11 of my brief. A paragraph of his opinion in which he shows that the statute has two lines he says. One is the interest of the decedent with respect to property which he makes the transfer. The other is insurance which goes to the beneficiary and he states that the statute proceeds to impose a lien on the estate property to the extent of the decedent's interest at the time of transfer or to the extent of the beneficiary's interest under the insurance contract. So it isn't necessary and this -- in the -- it's Chase National Bank case didn't hold that there was a transfer of life insurance proceeds from the decedent to the beneficiary. In that case, the Court said, it was the termination of the power to control of the insured over the policy at the time of his death which rendered the proceeds includable in his gross estate. Not because he owns the proceeds and by imperative reasoning not because he own the cash surrender values but because at his death, the power to change a beneficiary terminated and shifted the economic benefit of that policy into the hands of the beneficiary. And that the Court said in the Chase National Bank case was the basis for the tax. Now, there are other cases where there are properties included in the gross estate which the decedent doesn't own a property in at the time of his death. For instance, transfers in contemplation of death maybe made years before. Revocable transfers and interests in joint tenancies or tenancies by the entireties. They're all segregated in the estate tax law, separate and apart from the one section that refers to property in which the decedent has an interest showing that all kinds of properties may be included in the gross estates including life insurance proceeds with respect to which the decedent didn't own a property interest up to time of his death. Now, then the Eight and the Ninth Circuits in two different cases each which I have cited on page 12 of the brief have held that the fact that there is a transfer rendering property includable in the gross estate at the time of death has nothing to do with the transferee liability and in income tax case. And in fact, in that case, it was a tenancy by the entirety and joint tenancies and they said there wasn't any property interest that went to the survivor which constituted property under Section 311 of the Internal Revenue Code. Now, the Government in its brief in a petition for certiorari admitted that they couldn't get certain property and the joint names of the decedent and its widow that is some bonds and some real estate. Now, those properties were includable in the gross estate just same as insurance. So I don't see how there can be any distinction between properties of that kind and life insurance. As a matter of fact, life insurance is -- policy is a contract where the insured pays a premium in consideration for the payment of proceeds to his beneficiary. As soon as that policy is signed, the insurance company is liable for the full amount if the insured dies the next day which demonstrates, we think that when the insurance company pays the proceeds, the insurance company pays its own money and it doesn't pay anything that belongs to the insured. Now, as Justice Harlan this morning pointed out all five Circuit Courts of Appeals which are passive on this question have held that there's no transfer of proceeds and there's been no Circuit Court of Appeals that's held of the contrary.
Speaker: When you say proceeds, you mean death benefit.
Walter E. Barton: Well, that's the proceeds of insurance within the meaning of the transferee section of the income tax law, Section 311. Now, I like just to make one statement before proceeding a little further, I understood the counsel to say that the record showed that the insured paid the premiums up to the day of his death. The record doesn't show in any respect who paid the premiums or how long. It shows that these policies were taken out in getting about 1910 up to about 1935. And the widow, the respondent here was made beneficiary in 1919, after they married and she's made beneficiary in the last policy in 1935. He died in 1939. There's no change in beneficiary between 1949. There's no -- no change in beneficiary from the time these -- from 1935 up to the day of his death. Now, these tax years are 1944 to 1947. The Court of Appeals below made the statement that there's no evidence of insolvency before death. There's no evidence that he took out these policies or maintained them to defraud, defeat the creditors. And I would say further there's no evidence whatever in the case as to whether the insured paid any premium from these policies during the taxable years 1944 to 1947, or after that -- after the date of his death. And as to all of that, the Government has a burden of proof under Section 1119 (a) because the Government has a burden of proving transferee liability and the burden is not on the taxpayer.
Hugo L. Black: What was the cash surrender value on the day of his death?
Walter E. Barton: Well, the cash surrender value, it's been in the record. Let's say there are -- I think about $27,000.
Hugo L. Black: What was the payment of (Inaudible).
Walter E. Barton: I think there are about (Inaudible) $47,000. The cash surrender value is $27,000 and the proceeds are $47,000. Now, that's on page 13 of the record.
Felix Frankfurter: Now, is there any evidence in the record of 174 the tax (Inaudible) that he paid the premiums during the years when his estate is depleted?
Walter E. Barton: There's no evidence, Your Honor.
Felix Frankfurter: Or why -- or through the premiums, he pleaded as a estate or surrendered (Inaudible).
Walter E. Barton: Your Honor, there is no evidence whatsoever. As I stated, there was a -- this case went to the Tax Court on a stipulation principally and there was no evidence, no statement made in the stipulation as to who paid the premiums or how long the period.
Felix Frankfurter: You mean for all we know, she might have paid them?
Walter E. Barton: For all you know, she might have paid them or for all we know, he may have paid them all in a lump sum in the beginning as far as the evidence goes. Now, the Tax Court said in the opinion they assumed that he paid the premiums because we stipulated, he took out the policies but there's no evidence, one way or the other as to who paid the premiums and I say the burden is on the Government under a case of this kind and the Government never produced any evidence with --
Felix Frankfurter: Mr. Davis said that we may dispose of the case on the assumption of trying to put out the policy if he was not himself -- on the same basis of the two -- although the evidence in the record doesn't disclose it. That he paid the premiums (Inaudible) the right of the policy --
Walter E. Barton: Well, the Tax Court assumed that he paid the premiums. I don't believe they said up to the date of his death.
Felix Frankfurter: Well, the assumption that she might have paid them is not to be entertained.
Walter E. Barton: Well, I don't like to say, I don't like to admit something that isn't in the records, Your Honor, because --
Felix Frankfurter: But if it's in the record that he pays them --
Walter E. Barton: It isn't in the record he paid them.
Felix Frankfurter: It's not. But they made that assumption.
Walter E. Barton: The Tax Court said that it was stipulated that Dr. Stern took out the policies. Therefore, we assume he paid the premiums. That's what the Tax Court said.
Hugo L. Black: Suppose that instead of insurance $40,000 worth of personal property has been turned over to a custodian. Then he understands that the payment back if the man wanted to pay at the time of his death, $27,000 surrendered over. Otherwise, he was (Inaudible), would there be any difference from your position -- turned over to the widow (Voice Overlap)
Walter E. Barton: (Voice Overlap) -- If he turned this property over to the widow with the rights to revoke it --
Hugo L. Black: No, it's just -- sure. Turned it over to a custodian $40,000 (Inaudible) and with the understanding that it goes to the widow because he doesn't take anything back from -- before he died. But then after the very moment of his death, he can get in fact, $27,000 there.
Walter E. Barton: Well Your Honor --
Hugo L. Black: Is there any difference so far as the legal question that you're arguing?
Walter E. Barton: I -- I don't believe it would and here's the case that I'm sorry I didn't find until after a brief was filed, a decision of this Court in Jones versus Clinton. Quite an old case but I think it's sound, 101 U.S. 225.
Hugo L. Black: 225?
Walter E. Barton: That's right, 101 U.S.225. Now, the bankrupt made a voluntary assignment of all of these assets. Now, prior to the assignment, I don't know how long before but prior to that time and I don't believe there's any evidence, while the evidence was, he was solvent when he did it. He gave a deed to his wife of certain real estate and also included in this deed, certain life insurance policies but he kept in the deed a power to revoke it and take it back or a power to appoint it. Now, the question was whether when he made the assignment of all of his assets to the assignee. That included his power of revocation of that assignment to his wife. This Court held it did not. This Court said that power is not an interest in property which can be transferred to another or sold on execution or devised by will. The grantor could indeed escape the power either by deed or will, but he could not best power in any other person.
William O. Douglas: That would be (Inaudible)
Walter E. Barton: Well, that would be, yes, because -- yes Your Honor, the bank --
William O. Douglas: The Congress (Inaudible)
Walter E. Barton: The bankruptcy law today provides that shall -- the bankrupt shall have title to all of the trustees, title to all property and that there shall be included all of the bankrupt's powers which he can exercise for his own benefit. So, that would be carried to the present time.
Felix Frankfurter: Mr. Barton, may I assume Justice Black's question in a more practical if I may say so or more concrete aspect in Massachusetts and in one or two other states that you are (Inaudible). In Massachusetts, one of the key -- no, one of the important source of insurance writing is through the savings bank. They are authorized and have been for now what, 30 odd years or more. Writing insurance on the theory that insurance is nothing but a form of savings.
Walter E. Barton: Well, Your Honor --
Felix Frankfurter: And it has the basis of it in the vast amount as you probably know, a very great deal of insurance is written through the savings bank of Massachusetts.
Walter E. Barton: Well, I --
Felix Frankfurter: Now, that's between another form of the general question that Justice Black asked, as in this to be treated like money in the borrowing savings bank or whatever savings bank here.
Walter E. Barton: Well, the reason, Your Honor is of course, I don't know what kind of a policy it would have in the savings bank, but the --
Felix Frankfurter: (Voice Overlap)
Walter E. Barton: The --
Felix Frankfurter: -- you'll have somebody, your beneficiary will file the revocation.
Walter E. Barton: The insured on a level premium payment plan as the counsel this morning stated pays more in the early years in the cost of mortality. The laws of the state require a solvency reserve, which is the excess over the level premium over the -- over the cost mortality and then with the accumulation of interest. Now, the cash surrender value might be equivalent to the reserve or maybe like deduct the cancelation charge, but the fact that there is a reserve doesn't mean that the insured owns that reserve fund. Now, if the insured wants to borrow money from the insurance company, it comes out of the reserve. He's got to pay an -- he got to pay an interest on that. Now, if that were his own money, he wouldn't have paid any interest on it. And the reserve fund under the law and investment of the insurance company, accumulates interests. Who pays an income tax without interest? It isn't the insured causing interest that goes into that reserve fund belongs to the insurance company.
Felix Frankfurter: Well, the fund of course, there's no trust fund in any sense of a reach in which part of it is mine but that's no more -- that's equally true or untrue of a savings bank account and any of the savings bank. Nobody owns an adequate cost --
Walter E. Barton: That's right.
Felix Frankfurter: -- the actual money in the vault.
Walter E. Barton: Now, the insured has a right to recover the cash surrender value of his policy if he surrenders his policy.
Hugo L. Black: But that's his, isn't it?
Walter E. Barton: I beg your pardon.
Hugo L. Black: That's his because I've always thought of my --
Walter E. Barton: Well, Your Honor, (Voice Overlap) I believe that Your Honor is incorrect in that. Now, I have cited --
Hugo L. Black: Well, I can get it today if I happen to have a policy that has --
Walter E. Barton: Yes, but you don't own that until you surrender your policy.
Hugo L. Black: I -- I don't know -- I don't have the money in my hand but if the company is any good, I've got the right to give right away.
Walter E. Barton: Yes, but you can't get it except to surrender your policy and terminate your contract insurance.
Hugo L. Black: That's right.
Walter E. Barton: That's right. But that does not mean that you own that cash surrender value. You've got to surrender for the cash surrender value policy.
Hugo L. Black: Well, (Inaudible) equivalent of the cash surrender value.
Walter E. Barton: Yes, well, that is -- that is true perhaps, Your honor, but then the question gets around to the proposition of whether the cash surrender value passes to the beneficiary at the time of the decedent's death.
Hugo L. Black: (Inaudible) -- whatever maybe -- whatever the cash surrender value (Inaudible) in Dr. Stern's lifetime, have looked to that pay the efficiency of an income tax with parole.
Walter E. Barton: Well, if they had made an assessment, then a lien automatically would have attached to all of his property and I would say an insurance policy is a property. Now, first in this case, this tax wasn't assessed until almost six years after he died --
William J. Brennan, Jr.: The deficiency?
Walter E. Barton: The deficiency.
Hugo L. Black: But require tax which he owed (Voice Overlap) --
Walter E. Barton: It -- yes, it's approved before his death. There isn't any doubt about that. Now then, we -- we have in our brief contended, there is no transfer of the cash surrender value or the proceeds. I don't believe the Government contends very seriously about the proceeds. The question there is the beneficiary, a transferee of property of a taxpayer. Now, they argue that by analogy, you can go to the transferee section under estate tax law. Well, the transferee section in the estate tax and the income tax law both originated in 1926. They read exactly the same way except in income tax, it said that the property of the taxpayer and the other said property of the decedent. Now, in 1918, was the first time that life insurance is brought into the estate tax. And in the same law, they made the beneficiary of the policy personally liable for the tax to the extent of the proceeds produced the estate tax. Now, that was 1918. In 1926, the transferee provision in both sections of the law were put into effect, and it was not until 1942 that Congress amended the estate tax section and brought in a beneficiary of an insurance policy although that beneficiary had been liable all these years from 1918 and of course in 1926 where the transferee section was first enacted They amended the law and made the beneficiary subject to the summary process of assessment, but that amendment did not make the beneficiary viable for the tax. The beneficiary is already liable under the former section and here under 827 (b), the beneficiary is liable. So, we say and as the Court of Appeals in the Rowen case in New York said, the fact that Congress didn't changed the law in the income tax showed that Congress didn't intend to produce the same result that they did in the estate tax when they did amend the law. Now, then if we should be wrong --
Hugo L. Black: That argument -- that argument does depend on whether she is a transferee or not, does it? But you're saying there is that Congress is taking hold of this thing and legislate it but they didn't choose to pose a liability under the (Inaudible)
Walter E. Barton: Well, the liability of the beneficiary of life insurance was already existent in the case of the estate taxes, it had been from 1918. So, all Congress did in 1942 was not to make the beneficiary liable but to bring the beneficiary under that summary procedure.
Hugo L. Black: Well then is your case based entirely on whether -- it was (Inaudible) then entirely on whether we agree with you that she's not a transferee?
Walter E. Barton: Well, if you should hold that she is a transferee then we've got to find out what is the transferee liability. And there, we say, you have to look at estate law. Now, the only Court that's held that state law doesn't apply is in the Bess case which is going to be argued right away and I don't want to go into that too much, but that New Jersey law was almost word for word like the Kentucky law and the Third Circuit in the Bess case said that if you look to the state law of New Jersey. The widow beneficiary is not liable for the tax of the decedent but the Court in the Bess case says you don't look to state law, you look to general law, but I don't know where you look for the general law. That's what the Court said up in the Rowen case. The Third Circuit didn't point out any law you looked to but we say that you got to look the state law under the Kentucky law. There's no liability.