DocketNumber: 15-cv-07826 (LAK)
Citation Numbers: 220 F. Supp. 3d 523
Judges: Kaplan
Filed Date: 12/2/2016
Status: Precedential
Modified Date: 7/25/2022
MEMORANDUM OPINION
Plaintiff-relator Eric Rasmusen brought this New York False Claims Act case on behalf of the State of New York for damages stemming from allegedly improper deductions in the state income tax returns of Citigroup Inc. (“Citigroup”). Citigroup removed the case from the state courts and now moves to dismiss the complaint for failure to state a claim upon which relief may be granted. The Court, however, concludes that it lacks subject matter jurisdiction and remands the case.
Facts
The Internal Revenue Code (“IRC”) generally permits a corporate taxpayer that sustains a net operating loss {ie., an excess of expenses over revenues in a given year) (an “NOL”) to carry that loss backward for up to two years and forward for up to twenty years and deduct it against otherwise taxable income in the years with respect to which the NOL is carried back or forward.
During the time period relevant here, New York imposed a franchise tax on the “entire net income” of banking corporations,
“A net operating loss deduction shall be allowed which shall be presumably the same as the net operating loss deduction allowed under section one hundred seventy-two of the internal revenue code, except that”6
certain modifications are required.
In 2008, in response to the global financial crisis, Congress passed the Troubled Asset Relief Program (“TARP”).
From 2008 to 2010, the Internal Revenue Service (“IRS”) issued a series of notices (the “IRS Notices”) announcing that it would not treat Treasury’s purchase or sale of equity interests under TARP as “ownership changes” triggering Section 382.
Rasmusen filed this qui tora suit under seal in state court in 2013, alleging that Citigroup violated the New York' False Claims Act
Discussion
The complaint asserts a single claim via two distinct legal theories. In the first, Rasmusen contends that “because the IRS Notices were promulgated improperly by the IRS, Citigroup was not entitled to rely upon them to reduce its taxable income for purposes of the IRC, or, for that matter, the New York Tax Law.”
Citigroup moves to dismiss on three grounds. First, it contends that the suit is barred by the New York False Claims Act’s public disclosure rule. Next, Citigroup argues that the complaint fails to state a claim for violation of the New York False Claims Act. Finally, Citigroup faults Rasmusen for failing to allege scienter with the requisite degree of specificity.
All three of Citigroup’s arguments are potentially meritorious. Before reaching the merits, however, the Court must assure itself of its jurisdiction.
I. Overview of Federal Question Jurisdiction
A defendant may remove an action from state to federal court under Section 1441 of the Judicial Code
The Supreme Court has laid out a four-part test for determining whether an embedded federal question affords a basis for removal to federal court. The asserted federal issue must be “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”
Complications arise in cases, like the one at hand, where a plaintiff pursues a single claim via distinct legal theories that implicate federal issues to varying degrees. The possibility that a plaintiff may prevail on at least one theory independent of the disputed federal issue will call into question whether adjudication of the federal issue is truly “necessary” under the first prong of the Grable-Gunn test. Accordingly, the Second Circuit has held that “[wjhere a federal issue is present as only one of multiple theories that could support a particular claim ... this is insufficient to create federal jurisdiction.”
II. The Complaint Does Not Necessarily Raise a Federal Issue
Citigroup removed this case on the basis of federal question jurisdiction and cast as the federal issue plaintiffs contention “that three separate interpretations of federal law by a federal agency were each invalid because they were allegedly inconsistent with three separate federal statutes and improperly promulgated as a matter of federal administrative law.”
In so framing the federal question said to be presented, Citigroup addresses only the first of Rasmusen’s two theories of recovery — that the IRS Notices were invalid and that Citigroup’s reliance on them led it to claim improper deductions on its federal and, by extension, state tax filings.
Rasmusen’s alternative theory of recovery is even further removed from a substantial federal question. Rasmusen contends that, even if the IRS Notices were sound as a matter of federal law, New York law incorporates only the IRC’s definitions of net income and NOLs deductions and not the IRS’ interpretation of them. In effect, he concedes in this alternative argument that Citigroup was eligible for the NOL deduction on its federal tax filings, but insists that the New York Tax Law diverges from federal law on this issue.
It is true of course that New York interprets its tax laws to accord with federal law whenever possible.
That fact distinguishes this case from Broder
Rasmusen, on the other hand, alleges that Citigroup violated the New York Tax Law (and thus the New York False Claims Act) notwithstanding its compliance with federal law as articulated in the IRS notices. Whether or not he prevails on that argument, he has alleged it in a way that decouples his prospects of success on the state law claim from the federal issue.
Accordingly, the Court concludes that the federal issue fails under the first “necessarily raised” prong of the Grable-Gunn test and does not address the remaining three elements.
Conclusion
For the foregoing reasons, this Court lacks jurisdiction over the subject matter of this action. The case is remanded to the state court from which it was removed. Citigroup’s motion to dismiss [DI 12] is denied without prejudice given the Court’s lack of jurisdiction.
SO ORDERED.
. The Court draws these facts from the complaint and accepts them as true for the purposes of this motion. See Ashcroft v. Iqbal, 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. 26U.S.C. §§ 161, 172(b).
. N.Y. Tax Law §§ 1450-68 (Consol. 2010) (repealed eff. Jan. 1, 2015).
. Id. § 1453(a)(1).
. Id. § 1453(b).
. Id. § 1453(k-l) (emphasis added).
. DI 1-1 ¶¶ 19-20.
. DI 1-1 ¶¶ 19-20.
. DI 1-1 ¶ 21.
. DI 1-1 ¶¶ 28-30.
. Notice 2009-38, issued in April 2009, announced the IRS’ position that Treasury’s purchase of stock would not trigger Section 382. DI 1-1 ¶ 25. In December 2009, the IRS superseded Notice 2009-38 with Notice 2010-2, which extended the IRS’ position to cover Treasury’s sale, in addition to its purchase, of stock through TARP. Id. ¶ 26.
. DI 1-1 ¶ 35.
. N.Y. State Fin. L. §§ 187-94 (McKinney 2016).
. DI 1-1 ¶¶ 36-39.
. Dll-1.
. DI 1-1 ¶ 33.
. DI 1-1 ¶ 34.
. DI 1-1 ¶¶ 36-37.
. 28 U.S.C. § 1441.
. 28 U.S.C. § 1331.
. Grable & Sons Metal Prods. v. Darue Eng'g & Mfg., 545 U.S. 308, 312, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005).
. In re Lehman Bros. Sec. & ERISA Litig., 2012 WL 983561, at *6 (S.D.N.Y. Mar. 22, 2012).
. Gunn v. Minton, 568 U.S. 251, 133 S.Ct. 1059, 1065, 185 L.Ed.2d 72 (2013) (citing Grable, 545 U.S. at 314, 125 S.Ct. 2363); accord New York ex. rel. Jacobson v. Wells Fargo Nat’l Bank, N.A., 824 F.3d 308, 315 (2d Cir. 2016) (identifying the four requirements as the “Grable-Gunn test”).
. Broder v. Cablevision Sys. Corp., 418 F.3d 187, 194 (2d Cir. 2005).
. DI 1 ¶ 13.
. In addition to proving that Citigroup took a deduction for which it did not qualify, Rasu-musen would need to prove that it acted with the requisite mental state to prevail on his New York False Claims Act claim. See People v. Sprint Nextel Corp., 26 N.Y.3d 98, 112, 21 N.Y.S.3d 158, 42 N.E.3d 655 (2015). The Court, of course, makes no comment on the strength of that argument.
. DI 16 at 14 ("Although it was nonsensical for the IRS to declare that buying shares does not lead to increased ownership, no one other than Treasury or Citigroup has standing to challenge [the validity of the IRS Notices] as a matter of federal tax liability.”).
. See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) (recognizing that a federal court properly may dismiss for lack of jurisdiction an ostensible federal claim where the claim is "wholly insubstantial and frivolous”) (internal quotation marks omitted); see also Fair v. Verizon Commc’ns, Inc., 2014 WL 2624758, at *1 (S.D.N.Y. June 5, 2014) (applying that principle to dismiss for lack of jurisdiction where plaintiff was prevented by statute from bringing the sole federal claim in the complaint”).
. See DI 1-1 ¶ 34 (alleging that the IRS Notices interpreting Section 382 "were not adopted or incorporated into the New York State Tax Law”).
. Michaelsen v. N.Y.S. Tax Comm’n, 67 N.Y.2d 579, 583, 505 N.Y.S.2d 585, 496 N.E.2d 674 (1986); Delese v. Tax Appeals Tribunal, 3 A.D.3d 612, 613-14, 771 N.Y.S.2d 191, 194-95 (3d Dep’t 2004); see, e.g., Office of Tax Policy Analysis Tech. Servs. Div., New York State Dep't of Taxation & Fin., Advisory Op. No. TSB-A-07(2)C (2007) (applying Treasury regulations to interpret Section 382 for purposes of New York tax calculations).
. See Dreyfus Special Income Fund v. N.Y.S. Tax Comm’n, 126 A.D.2d 368, 372, 514 N.Y.S.2d 130, 133-34 (3d Dep’t 1987), aff’d, 72 N.Y.2d 874, 532 N.Y.S.2d 356, 528 N.E.2d 509 (1988).
. For this reason, a decision on the merits in this case would have no preclusive affect on later cases interpreting federal law. Thus,
.The Court does not rule on the merits of this argument. However likely it may be that a New York court would disagree with Ras-musen and find that there is no daylight between the federal and state law regarding Citigroup’s eligibility for the NOL deduction, that is not inevitable. But that is the claim that Rasumusen brought and the one with respect to which the. Court must assess its jurisdiction, no matter its dubious merit.
. 418 F.3d 187.
. 824 F.3d 308.
. See 418 F.3d at 191, 195.
. 824 F.3d at 310 (emphasis added).