MORGAN GUAR. v. TAX TRIBUNAL

Appeal from the Appellate Division of the Supreme Court in the Third Judicial Department. Robert Abrams, Attorney-General (Daniel Smirlock, Jerry Boone and Peter H. Schiff of counsel), for Commissioner of New York State Department of Taxation and Finance, appellant.

John A. Corry and Leslie J. Altus for respondent.

Charles Rothfeld and Donald M. Falk, of the District of Columbia Bar, admitted pro hac vice, for Lehndorff Babson Real Estate Counsel, amicus curiae.

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 U.S.C. § 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 U.S.C. § 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.

There are two relevant preemption provisions. The first of these States that "the provisions [of ERISA] shall supersede any and all State laws insofar as they may now or hereafter relate to any [covered] employee benefit plan" ( 29 U.S.C. § 1144 [a]). The second states, more specifically, that State tax laws that "relate to" ERISA plans are preempted ( 29 U.S.C. § 1144 [b] [5] [B] [i]).

As the majority stresses, the Supreme Court has consistently endorsed a broad construction of these preemption provisions (e.g., FMC Corp. v Holliday, 498 U.S. 52; Ingersoll-Rand Co. v McClendon, 498 U.S. 133, 139-140; Pilot Life Ins. Co. v Dedeaux, 481 U.S. 41; Shaw v Delta Air Lines, 463 U.S. 85, 98; Alessi v Raybestos-Manhattan, Inc., 451 U.S. 504, 525). Yet, the reach of ERISA's preemption clause is not limitless (see, Shaw v Delta Air Lines, supra, at 100, and n 21). Both 29 U.S.C. § 1144 (a) and (b) (5) (B) (i), whose identical language requires "the same preemption analysis" (Retirement Fund Trust of Plumbing v Franchise Tax Bd., 909 F.2d 1266, 1276), apply only to the extent that the challenged State law "relates to" a covered plan. Thus, notwithstanding the Supreme Court's general statements about Congress's broad preemptive intent, Congress chose to preempt something less than all local laws that affect or impact upon covered ERISA plans.

Unfortunately, the Supreme Court's discussions of what constitutes a law that "relates to" a covered plan have not, to date, produced a workable test for preemption. The Court has said that the term "relates to" should be given "its broad common-sense meaning" (Metropolitan Life Ins. Co. v Massachusetts, 471 U.S. 724, 739) and that a State law "relates to" a covered plan "`if it has a connection with or reference to such a plan'" (Ingersoll-Rand Co. v McClendon, 498 US, at 139, supra; accord, Shaw v Delta Air Lines, supra, at 96-97). The Court has also said that a State law may be preempted "even if [it] is not specifically designed to affect [covered] plans, or the effect is only indirect" (Ingersoll-Rand Co. v McClendon, 498 US, at 139, supra), but that there will be no preemption where the State law "affect[s] employee benefit plans in too tenuous, remote, or peripheral a manner" (Shaw v Delta Air Lines, 463 U.S. 85, 100, n 21, supra). While these formulations are somewhat helpful, none is sufficiently specific to provide a definitive basis for resolving the issue in this case: whether Congress intended to exempt covered plans from liability for generally applicable State taxes. Thus, further analysis and an exploration of the specific contexts in which 29 U.S.C. § 1144 (a) has been applied are required.

In our view, a simple reading of the relevant case law demonstrates that a generally applicable law does not "relate to" the plan upon which its burden is to be imposed unless the law either (1) specifically refers to covered plans or (2) does not operate, either in general or in the particular case, without reference to the plan's existence. In other words, the Federal ERISA statute does not require preemption of a generally applicable law if it is being applied to a covered plan in the same way, and for the same reasons, as it would be applied to any other entity, even though application of the law may, in fact, burden the plan.

Initially, the Supreme Court's opinion in Ingersoll-Rand Co. v McClendon ( 498 US, at 139-140, supra), on which the majority places much reliance, specifically appears to sanction this formula. Although the Ingersoll-Rand Court found the particular local law before it to be preempted by ERISA, the Court went on to suggest that the outcome would have been otherwise if it had been "dealing * * * with a generally applicable statute that makes no reference to, or indeed functions irrespective of, the existence of an ERISA plan" (id., at 139; emphasis supplied). Further, the Court bolstered the point by noting that a finding of preemption was warranted in the case before it because "the existence of a pension plan [was] a critical factor in establishing liability under the State's * * * law" (id., at 139-140), suggesting once again that the outcome would have been different if liability were being imposed without regard to the existence of a covered plan. A similar conclusion may be inferred from Mackey v Lanier Collection Agency Serv. ( 486 U.S. 825, 833, and n 8), in which the Supreme Court took note of the virtually universal assumption that ERISA plans may be subjected to liability for "run-of-the-mill state-law claims such as unpaid rent, failure to pay creditors, or even torts [they commit]."

Further, many of the lower Federal courts that have considered the ERISA preemption issue have reached their conclusions using the analysis suggested in Ingersoll-Rand. In Lane v Goren ( 743 F.2d 1337, 1340), for example, the Ninth Circuit Court of Appeals held that a generally applicable antidiscrimination law was not preempted by ERISA because it was being applied to a covered plan "only * * * in [the plan's] capacity as an employer, and [only] in a way that all other employers are affected." Significantly, the Lane court contrasted the State antidiscrimination statute before it with the antidiscrimination statute at issue in Shaw v Delta Air Lines (supra), which was specifically directed toward the structure of certain covered employee benefit plans (see, 463 US, at 96-97; see also, 743 F.2d 1340-1341 [distinguishing Alessi v Raybestos-Manhattan, Inc. (supra) on the ground that it involved a State statute "directed at or affect(ing) the internal operations of the trust"]). Moreover, the Ninth Circuit squarely rejected the argument that the statute at issue in Lane should be held preempted because its application would increase the plan's cost of doing business. In the court's view, that argument was not persuasive because the same could be said about virtually any local law that regulates zoning, health and safety (id., at 1340).

A similar view was adopted by the Sixth Circuit in Firestone Tire Rubber Co. v Neusser ( 810 F.2d 550, 556), in which the court acknowledged the broad reach of ERISA's preemption provisions but nevertheless upheld a municipal income tax applied to wages contributed directly to a covered ERISA plan because it was a "neutral * * * tax of general application" "affecting * * * employees in their capacity as employees, without regard to their status as participants in an ERISA plan." Like the Lane court, the Firestone court rejected the contention that a State statute that increases the cost of doing business should be deemed preempted for that reason alone (id., at 555; accord, Rebaldo v Cuomo, 749 F.2d 133, 139 [2d Cir], cert denied 472 U.S. 1008 ["mere fact that the statute has some economic impact on the plan does not require that the statute be invalidated"]). The position that generally applicable State laws are not preempted if they burden covered ERISA plans only in the same way that all other similarly situated citizens would be burdened was also adopted in Retirement Fund Trust of Plumbing v Franchise Tax Bd. (supra) and In re Seolas ( 140 B.R. 266 [ED Cal]). In light of this formidable list of cases, it is difficult to understand the majority's unqualified assertion that "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" (majority opn, at 54).

Finally, a clear pattern emerges from a review of the facts in virtually all of the leading Federal ERISA preemption cases, and that pattern supports the foregoing analysis. The courts tend to find preemption either where a State law refers specifically to covered ERISA plans (FMC Corp. v Holliday, supra; Mackey v Lanier Collection Agency Serv., supra; Shaw v Delta Air Lines, supra; Alessi v Raybestos-Manhattan, Inc., 451 U.S. 504, supra; E-Systems, Inc. v Pogue, 929 F.2d 1100, cert denied sub nom. Barnes v E-Systems, Inc., ___ US ___, 112 S Ct 585; General Motors Corp. v California State Bd. of Equalization, 815 F.2d 1305, cert denied sub nom. General Motors Corp. v Bennett, 485 U.S. 941; In re Seolas, supra; Birdsong v Olson, 708 F. Supp. 792) or where the particular application of a "generally applicable" State law depends on the existence of a covered plan (Ingersoll-Rand Co. v McClendon, supra; Pilot Life Ins. Co. v Dedeaux, 481 U.S. 41, supra; Cefalu v B.F. Goodrich Co., 871 F.2d 1290). In contrast, where the challenged law is a "generally applicable" one and is being applied to a covered plan in a way that is no different than it would be applied to all other citizens, the courts tend to hold that its application is not preempted (Mackey v Lanier Collection Agency Serv., supra; Retirement Fund Trust of Plumbing v Franchise Tax Bd., supra; Firestone Tire Rubber Co. v Neusser, supra; Lane v Goren, supra; Aetna Life Ins. Co. v Borges, 869 F.2d 142, cert denied 493 U.S. 811; In re Seolas, supra).

Thus, there exists a substantial body of case law that strongly suggests the validity of respondent's contention that generally applicable State laws are not preempted when they "[make] no reference to, [and] indeed function irrespective of, the existence of an ERISA plan" (Ingersoll-Rand Co. v McClendon, 498 US, at 139, supra [emphasis added]). Even more importantly, with one possible exception of dubious precedential worth, none of the leading Federal cases goes so far as to find preemption — as the majority does here — where a State law of general application is being applied to a covered plan in the same way as it would be applied to any other entity doing business in the State. Since nothing in the majority's opinion provides a persuasive rationale for its pioneering position, we conclude that that position is analytically unsound.

The precise basis of the majority's holding remains unclear. The majority begins with a brief reference to the legislative history of 29 U.S.C. § 1144 (b) (5) (B) (i) (majority opn, at 50-51), the specific ERISA provision dealing with preemption of local tax laws, but it draws no useful conclusions from the cited history. This restraint seems well advised, since the legislative history establishes no more than that Congress did not wish to give State tax laws favored status vis-a-vis the preemption rule. It would require a great leap of logic to infer from this history that Congress intended to accord State tax laws a disfavored status and to mandate their preemption in all circumstances.

The majority also seems to adopt petitioner's argument that State tax laws are preempted under ERISA because, by their nature, they deplete plan assets and thereby undermine one of the central purposes of the Federal legislation: to ensure "to the greatest extent possible that those who do participate in * * * plans * * * do not lose their benefits as a result of * * * failure to accumulate and retain sufficient funds to meet [plan] 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]). However, the argument has little support in the case law.

In Lane v Goren (supra, at 1340), the court specifically rejected a preemption argument based on the fact that the local law increased the cost of doing business, thereby reducing plan assets. In Arkansas Blue Cross Blue Shield v St. Mary's Hosp. ( 947 F.2d 1341, 1348, cert denied ___ US ___, 112 S Ct 2305), the court stated that, with regard to the preemption analysis, economic impact may be relevant, but it should not be dispositive. The problem of fund depletion was expressly considered in E-Systems, Inc. v Pogue (supra) and Birdsong v Olson (supra, at 801), but even in those cases it was not the dispositive factor, since the challenged tax statute in both instances made specific and direct reference to ERISA plans.

The primary weakness of the fund-depletion argument is that it is based on a skewed view of Congress's purpose in enacting ERISA. The goal of this legislation was to safeguard the soundness of employee benefit funds, not to maximize their profitability (In re Seolas, supra). This goal was to be achieved by providing a uniform national system of substantive and procedural rules to govern the administration of these plans — a system that was not to be disrupted or undermined by conflicting (or even harmonizing) local legislation. It does not follow from Congress's stated goal of protecting plan assets, however, that Congress also intended ERISA's preemption provisions to protect plans from the ordinary costs of doing business in various localities and thereby assure plan participants the maximum possible benefits.

In an apparent effort to reconcile its argument with Federal cases in which local taxes affecting covered ERISA plans have been upheld (e.g., Firestone Tire Rubber Co. v Neusser, supra), the majority contends that the gains tax challenged here is different because it directly depletes plan assets (see also, Birdsong v Olson, supra, at 801). However, the argument does not withstand analysis. First, it is inconsistent with the majority's own suggestion that some taxes that directly deplete plan assets, such as sales, stamp and documentary transfer taxes, are permissible (majority opn, at 53). Second, it cannot logically be reconciled with the majority's central asset-depletion theory, which presumably should apply without regard to whether the depletion occurs through direct or indirect means. Indeed, taken to its logical conclusion, the majority's asset-depletion theory would seem to require linedrawing based not on the direct or indirect nature of the tax, but rather on the amount of money involved. Of course, that is an unwieldy and inherently implausible means of determining whether preemption is required.

Apparently recognizing these serious flaws in its asset-depletion theory, the majority also relies on the tax's impact on the plan's "structure" and "administration" as a basis for finding preemption. However, the majority's analysis on these points is equally flawed.

The majority concludes that the tax law at issue here affects the "structure and administration" of the plan because it imposes "certain recordkeeping and reporting requirements * * * mandating administrative procedures * * * not required in other jurisdictions" (majority opn, at 51). Yet, the recordkeeping and reporting requirements imposed by New York's gains tax law are certainly no more burdensome than were the recordkeeping and reporting requirements established by the garnishment laws that were held not to be preempted in Mackey v Lanier Collection Agency Serv. (supra) or the levy and withholding procedures that were held not preempted in Retirement Fund Trust of Plumbing v Franchise Tax Bd. (supra). Furthermore, "[w]hat triggers ERISA preemption is not just any indirect effect on administrative procedures but rather an effect on the primary administrative functions of benefit plans, such as determining * * * eligibility for a benefit and the amount of that benefit" (Aetna Life Ins. Co. v Borges, supra, at 146-147). Clearly, requiring a plan to keep some additional records for tax purposes does not fall within this category.

As for the majority's repeated appeals to the gains tax's impact on plan "structure," it is significant that no specific effect is ever identified. A plan's "investment strategies," a consideration stressed by the majority, are plainly not part of the plan's "structure" — a term that denotes internal relationships, rules and methods of operation. Moreover, however it is characterized, the fact that a particular State law may influence a plan's investment strategy is an unsatisfactory ground for finding preemption because the same could be said about a host of local laws, including zoning laws, that inevitably have an affect upon citizens' economic choices. Indeed, a similar argument was recently rejected in In re Seolas (supra), where the court declined to find a local usury law preempted despite the fact that the law incidentally influenced an ERISA plan's investment choices.

Finally, the majority's reliance on the plan's exemption from certain Federal taxes is misplaced. If Congress had wished to insulate covered ERISA plans from local income and gains taxes, it could easily have specifically provided as much, as it, in fact, did in the case of Federal income and certain real property gains taxes (see, 26 U.S.C. § 401 [a]; § 501 [a]; § 512 [b] [5]). Instead, it provided for a rule of preemption that applies only to the extent that the local tax "relates to" covered ERISA plans. Thus, it is evident that no blanket prohibition against State taxation was intended. Further, all that can really be inferred from the enactment of the Federal taxation exemption is that, as a matter of national policy, Congress elected to use its broad taxing authority to promote the growth of ERISA plans. Nothing in that legislation, or in the relevant provisions of the ERISA statute itself, suggests the existence of an entirely different congressional intention to override local tax laws that do not affirmatively promote such growth in the same manner.

CONCLUSION

A review of the case law, as well as the language and purpose of the ERISA preemption provision, reveals no sound reason to hold a generally applicable tax on gains from real property sales to be preempted solely because the entity to be taxed happens to be the operator of a covered ERISA plan. Although Congress intended to protect ERISA plans from State laws that would regulate or "relate to" their operations as covered pension and welfare programs, it clearly did not intend to immunize such plans against all local legislation that might burden or otherwise affect them. The test for preemption that respondent advances — which would reject preemption when a generally applicable State statute does not refer to covered plans and, in fact, functions irrespective of such plans' existence — would seem sufficient to protect both ERISA's goals and the legitimate, non-plan-related goals of the States. Accordingly, I dissent from the majority's position and vote to reverse the Appellate Division order precluding imposition of the tax.

Chief Judge WACHTLER and Judges SIMONS and BELLACOSA concur with Judge KAYE; Judge TITONE dissents and votes to reverse in a separate opinion in which Judge HANCOCK, JR., concurs.

Order affirmed, with costs.