Opinion ID: 2589754
Heading Depth: 1
Heading Rank: 2

Heading: Preemption of the Gains Tax

Text: Even State tax laws of general application, representing a traditional exercise of State authority, may be preempted when they relate to ERISA plans ( see , Firestone Tire & Rubber Co. v Neusser , 810 F.2d 550, 556 [6th Cir]). While explicitly exempting other State laws of general application  State criminal law, for example  ERISA made no mention of tax law in the original preemption provision ( see , 29 USC § 1144 [b] [2] [A]; [4]). In 1983, Congress amended the statute to exempt Hawaii's Prepaid Health Care Act and at the same time affirmed that the preemption clause applied to any State tax law relating to employee benefit plans (29 USC § 1144 [b] [5] [B] [i]; see , HR Conf Rep No. 97-984, 97th Cong, 2d Sess 18, reprinted in 1982 US Code Cong & Admin News 4598, 4603). The fact that a State tax law of general application is at issue is therefore not determinative of ERISA preemption. Applying the broad commonsense meaning of the statutory phrase relate[s] to, we conclude that this gains tax has more than a tenuous, remote or peripheral connection to employee benefit plans and is therefore preempted by ERISA. We reach that conclusion from analysis of the structural, administrative and economic impact of the tax on the Plan, viewed against the backdrop of the terms and objectives of ERISA ( see , Mackey v Lanier Collection Agency & Serv. , 486 US 825, supra ; Firestone Tire & Rubber Co. v Neusser , supra ; Aetna Life Ins. Co. v Borges , 869 F.2d 142 [2d Cir]). The gains tax clearly impacts on the structure and administration of the Plan. As the dissenting Tribunal member noted, the gains tax would impose certain recordkeeping and reporting requirements on the Plan, mandating administrative procedures pertaining to asset disposition not required in other jurisdictions ( see , Tax Law § 1447 [2]; § 1448 [2], [3]). Far more significant than this administrative burden, however, is the influence the gains tax will necessarily have on the Plan's investment strategy. ERISA imposes Federal standards of conduct on the managers of benefit plans, and fiduciaries are required to tailor investment strategy to those guidelines ( see , 29 USC §§ 1101-1114; 29 CFR 2509.75-5, 2550.404a-1). Although real estate transactions such as the one in issue are sanctioned by ERISA, New York fiduciaries will have to consider the State law that, by directly taxing gains on the sale of such assets, makes them less attractive investments. By the same token, an administrator taking the cost of the New York gains tax into account may be required to retain an asset that would otherwise have been liquidated. As the Supreme Court has made clear, it is undesirable to require plans and employers to tailor their conduct to the peculiarities of the law of each jurisdiction ( Ingersoll-Rand Co. v McClendon , 498 US, at 142, supra ). Indeed, such a result is fundamentally at odds with the goal of uniformity that Congress sought to implement. ( Id. ; see also , FMC Corp. v Holliday , 498 US, at 58-60, supra .) Moreover, this is not a cost of doing business law, as appellants argue but a tax applied directly to the income derived from appreciation of a Plan asset. In the present case, the effect on the Plan's structure and administration is even more direct: this transaction was a response to ERISA's prohibited transaction rules, which required that some action be taken. The Tribunal noted that the sale was not the sole option available to the Plan. However, as Morgan points out, the other options  exacting a higher rent or requesting an extended exemption  were not feasible, forcing the Plan to pay either the gains tax on the profit realized or a penalty under ERISA. Either would affect the operation of the Plan. Finally, preemption in this case would be consistent with the favorable tax treatment given to benefit plans under the Internal Revenue Code. Congress designed ERISA to make sure to the greatest extent possible that those who do participate in    plans actually receive benefits and do not lose their benefits as a result of    failure to accumulate and retain sufficient funds to meet its obligations. (HR Rep No. 93-807, 93d Cong, 2d Sess 8, reprinted in 2 Sen Subcomm on Labor of Comm on Labor and Pub Welfare, Legislative History of ERISA, at 3129 [1976]; see also , Massachusetts v Morash , 490 US 107, 115.) In furtherance of this goal, earnings on a plan's assets are exempt from Federal taxation ( see , 26 USC § 501 [a]; § 401 [a]; see also , 26 USC § 512 [b] [5]). This favorable tax treatment was a mainstay of prior pension legislation and its continuation considered essential to ERISA ( see , Statement by Senator Humphrey, Cong Rec  Senate [Aug. 12, 1974], reprinted in 3 Legislative History of ERISA, op. cit. , at 4778). Unlike other forms of general State regulation that may have only incidental effect on plan resources, the gains tax directly depletes the funds otherwise available for providing benefits and flies in the face of ERISA's goal of assuring the financial soundness of such plans. ( Birdsong v Olson , 708 F Supp 792, 801 [WD Tex].) As Morgan points out, imposition of the gains tax on ERISA plans withdraws plan assets Congress sought to protect, levying against the very funds Congress denied the Federal treasury. Appellants urge that this tax is indistinguishable from others that have been allowed, but analysis of appellants' cases reveals material differences. For example, this tax is significantly different from one imposed upon employees regardless of whether their income was subsequently contributed into an ERISA plan ( Firestone Tire & Rubber Co. v Neusser , 810 F.2d 550, supra ), or a tax levy or withholding procedure on payments-out from the plan to the beneficiaries ( Retirement Fund Trust of Plumbing v Franchise Tax Bd. , 909 F.2d 1266). Unlike those examples, the gains tax here directly depletes Plan assets. As one court has noted, the gains tax is not like a stamp or documentary transfer tax  taxes generally imposed on the entire consideration paid, at a rate of less than 1%, irrespective of profit ( 995 Fifth Ave. Assocs. v New York State Dept. of Taxation & Fin. , 963 F.2d 503). Instead, this gains tax is contingent on the profitability of the underlying transaction: a 10% tax is imposed directly on the gain  as defined by the provisions of the gains tax  accruing to the transferor ( id. ; compare , Tax Law §§ 1402, 1402-a [real estate transfer tax]). Thus the gains tax is not, as appellants argue, akin to a sales tax, and as such a cost of doing business in New York. It is a direct tax on Plan profits. The magnitude of the effect is underscored by the estimate that most of the asset increase projected for ERISA plans in the next decade will be attributable to the income earned from existing assets in established ERISA plans ( see , Gregory, op. cit. , 48 U Pitt L Rev, at 436). Depletion of those earnings, projected as the primary source of future funding necessarily increases the cost of the Plan  for the employer or the employees  or decreases the benefits ( see , E-Systems, Inc. v Pogue , 929 F.2d 1100, 1103, cert denied sub nom. Barnes v E-Systems, Inc. , ___ US ___, 112 S Ct 585). Appellants would ignore the direct impact and make the test one of comparison only: a generally applicable law should not be preempted if it is applied to a covered plan in the same way, and for the same reasons, as it would be applied to any other citizen, even though application of the law may burden the Plan ( see , dissenting opn, at 56-57). That argument is unsupported and unsound. Appellants draw on language from the Ingersoll-Rand decision where the Supreme Court noted that it was not dealing with a generally applicable statute that makes no reference to, or indeed functions irrespective of, the existence of an ERISA plan. (498 US, at 139, supra .) Taken in context, however, it is plain that the Supreme Court was not making the sweeping declaration that all such laws are exempt from preemption but rather referring to the specific laws at issue in Mackey ( supra ) and Fort Halifax Packing Co. v Coyne (482 US 1). Similarly, appellants' reliance on Mackey is mistaken. The Supreme Court in Mackey did not exempt the Georgia garnishment scheme from preemption based on the failure of the statute to refer to ERISA plans, nor did it reject the notion that a law will be preempted because it burdens or affects a covered plan. [1] In Mackey , the Court reasoned that, because ERISA plans may sue or be sued, State law methods for collecting money judgments must, as a general matter, remain undisturbed by ERISA; otherwise, there would be no way to enforce such a judgment won against a plan. (486 US, at 834; see also , Retirement Fund Trust of Plumbing v Franchise Tax Bd. , 909 F.2d 1266, 1275, supra .) No similar reasoning underlies appellants' test. Thus, there is no basis for determining preemption by whether a general law applies to covered plans in the same way, and for the same reasons, as it applies to other citizens. [2] It is this proposed test that is pioneering (dissenting opn, at 60), both for its widespread implications  especially in the area of State taxation  and for its inattention to the actual impact a State law of general application may have on covered plans. Analyzed from the correct perspective of statutory principles and Supreme Court precedents, it is clear that this gains tax is preempted because it affects the structure, administration and economics of a covered plan, and therefore relate[s] to it in more than a tenuous, remote or peripheral way. Accordingly, the order of the Appellate Division should be affirmed, with costs. TITONE, J. (dissenting). In 1984, in order to comply with ERISA requirements, petitioner, the trustee of a large pension fund governed by the Federal ERISA statute (see , 29 USC § 1001 et seq.) , sold some real property that had previously been held under a leaseback arrangement. The issue in this appeal brought by respondent State Tax Appeals Tribunal is whether ERISA preempts the application of New York State's real property transfer gains tax ( see , Tax Law § 1441) to the gain from that sale. Relying on the generally broad preemption policy that is unquestionably reflected in the relevant ERISA provisions (29 USC § 1144 [a], [b] [5] [B] [i]), the majority holds that petitioner is exempt from the tax, essentially because the tax will have an economic impact on an ERISA covered plan. However, since all taxes inevitably have an economic impact, this criterion is clearly an inadequate one for determining whether a particular tax is preempted under ERISA. Furthermore, although the majority has attempted to supplement its economic-impact analysis with arguments about the tax's effect on the plan's structure and administration, its arguments are unconvincing. Finally, contrary to the majority's conclusion, the relevant case law suggests that this generally applicable tax on gains was not the type of local enactment that was within Congress's overall preemptive intent. Accordingly, I must, respectfully, dissent.