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Volume 9 - Opinions of Counsel SBEA No. 69

Opinions of Counsel index

Exemptions - generally (Employee Retirement Income Security Act) - Real Property Tax Law, § 300:

Otherwise taxable property owned by a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA) is taxable.

Our opinion has been requested concerning the taxable status of real property owned by a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA). ERISA applies to most pension and welfare plans established or maintained by an employer or employee organization engaged in or affecting interstate commerce.

It has been suggested that ERISA preempts New York State local governments from collecting real property taxes from an ERISA qualified plan. The ERISA (29 U.S.C. §§ 1001-1381) preemption clause is quite broad: all state laws are superseded “insofar as they may now or hereafter relate to any employee benefit plan” (29 U.S.C. § 1144). {1}  In our opinion, however, the preemption clause does not apply to real property taxes.

The concept of federal preemption originates in the Supremacy Clause of the United States Constitution (Art.VI, c1.2), and, in general terms, refers to the power of Congress to supplant state law with respect to those matters which the federal government has the power to regulate under the United States Constitution. Nevertheless, in recognition of our federal system of government, preemption of state law is generally disfavored (see, e.g., Alessi v. Raybestos-Manhattan Inc., 451 U.S. 504, 101 S.Ct. 1895, 68 L.Ed.2d 402 (1981)). This presumption against preemption is overcome where “the nature of the regulated subject matter permits no other conclusion, or . . . Congress has unmistakably so ordained” (Florida Lime and Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 245, 250 (1963)).

The preemption by ERISA of state laws was designed to create a uniform national law governing employee benefit plans that would permit the uniform administration of plans covering employees in several states (see 120 Cong. Rec. 29,197 (1974) [remarks of Rep. Dent]; 120 Cong. Rec. 29942 (1974) [statement of Senator Javits]). Congress was aware of the administrative realities faced by ERISA plans and sought to “eliminate the threat of conflicting or inconsistent State and local regulation” (Fort Hamilton Packing Co. v. Coyne, 482 U.S. 1, 107 S.Ct. 2211, 2216, 96 L.Ed.2d 1(1986)).

The ERISA preemption, however, is neither absolute nor limitless. “Despite the breadth of the preemption clause, certain state laws ‘may effect employee benefit plans in too tenuous, remote or peripheral a manner to warrant a finding that the law relates to the plan’” (Morgan Guarantee Trust Company of New York &c. v. Tax Appeals Tribunal of the New York State Department of Taxation and Finance, 80 N.Y.2d 44, 50, 599 N.E.2d 656, 587 N.Y.S.2d 252, 255 (1992), citing Shaw v. Delta Airlines, Inc., 463 U.S. 85, 100 (1983)). {2}  

In Morgan, the Court of Appeals held that New York State’s ten per cent gains tax on real property transfers (Tax Law, § 1441) “relates to” qualified ERISA plans and is thus preempted by ERISA. The Court reached this conclusion after analysis of the structure, administrative and economic impact of the tax on the ERISA qualified plan, “viewed against the backdrop of the terms and objectives of ERISA” (Morgan, supra, 80 N.Y.2d at 51, 587 N.Y.S.2d at 256).

The Court of Appeals noted that the gains tax would impose certain record keeping and administrative procedures relating to asset disposition not required in other jurisdictions. In addition, the Court looked closely at the economic impact the gains tax would have on the Plan's investment strategy. {3]

The Court distinguished between the gains tax and a sales tax or other state imposed charges that have an economic effect on the ERISA plan:

[T]his gains tax is contingent on the profitability of the underlying transaction: a ten percent tax is imposed directly on the gain - as defined by the provisions of the gains tax - accruing to the transferor. . . . 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 (Morgan, supra, 50 N.Y.2d at 53, 587 N.Y.S.2d at 257).

In our opinion, real property taxes, special ad valorem levies and special assessments authorized and levied pursuant to the Real Property Tax Law are also distinguishable from the real property transfer tax held to be preempted in Morgan. All real property within the State is subject to real property taxation, special ad valorem levies and special assessments, unless exempt therefrom by law (RPTL, § 300). The RPTL does not distinguish between real property owned by a plan and other owners. It is, instead, a neutral exercise of traditional state authority that has only incidental effect on an ERISA plan.

The real property tax does not impact on the structure and administration of an ERISA plan. The RPTL does not impose record keeping or reporting requirements on a plan, mandating administrative procedures pertaining to property management not required in other states. The taxing jurisdiction prepares the tax bill based on the real property’s assessed value and the municipal tax rate, not according to the property's ownership. The property owner's sole responsibility is to pay the amount billed.

There is also only incidental effect on plan resources. The real property tax is calculated (in part) on the basis of property value, not on plan earnings, and is a traditional cost of doing business in New York and other states. The Second Circuit, in Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir., 1984), cert. den., 105 S.Ct. 2702 (1985), held that ERISA did not preempt a state law setting rates that hospitals must charge private payers, including benefit plans. The Court concluded that when “a State statute of general application does not affect the structure, the administration or the type of benefits provided by an ERISA plan, the mere fact that the statute has some economic impact on the plan does not require that the statute be invalidated” (Id. at 139). {4}

The real property tax, like the hospital charges mandated by state law, is a neutral cost of doing business in New York State. We believe that the real property tax affects plans in too remote a manner to warrant a finding that the law “relates to” the plan (Shaw, supra, 103 S.Ct. at 2901).

We have examined the legislative history of ERISA {5} and find no express intent by Congress to preempt state taxation of plan real property. We have also conducted a search of judicial decisions and find no court holding that the real property tax is preempted by ERISA or any other Congressional act. In the absence of legislative intent to preempt real property taxation, and in view of the lack of judicial decisions in this area, we believe that ERISA plan real property should be treated similarly to other taxable real property. To conclude otherwise would permit plans “a charmed existence that never was contemplated by Congress” (Rebaldo, supra, 749 F.2d at 139).

June 23, 1992

NOTE:  After this Opinion was issued, State Supreme Court (Degrasse, J.) held that ERISA property was not exempt from real property taxes (American Federation of Musicians' and Employers' Pension Fund, et al. v. Tax Commission of the City of New York, Sup. Ct. N.Y.Co., Index No. 351/92 (2/9/93, aff'd, 203 A.D. 2d 205, 612 N.Y.S.2d 857 (1st Dept., 1994), motion for leave to appeal denied, 84 N.Y.2d 803, 641 N.E.2d 157, 617 N.Y.S.2d 136 (1994)).

{1}  The preemption of state laws also applies to laws or regulations promulgated by a political subdivision of a state or any agency or instrumentality of either (see 29 U.S.C. § 1144(c)).

{2}  For example, the courts have held that certain common law or statutory causes of action touching upon employee benefit plan rights may survive ERISA preemption if the impact on the operation of the plan is too remote (see, Teper v. Park West Galleries, 431 Mich. 202, 427 N.W.2d 535 (1988) [wrongful employee discharge not preempted]; Sommers Drugs Co. v. Corrigan, 793 F.2d 1456 (5th Cir., 1986) [common law fiduciary duty of ERISA trustee survives ERISA preemption]; Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir., 1984) [ERISA held not to preempt a New York State law regulating hospital fees]; see also, Lane v. Goren, 743 F.2d 1337 (9th Cir., 1984) [dicta states that ERISA plans must comply with local zoning and health ordinances despite increase in operational cost]).

{3}  The Court recognized that the gains tax made New York real estate a less attractive investment and that the tax may have a chilling effect on an ERISA plan administrator’s plan to sell such real estate.

{4}  In Lane v. Goren, 743 F.2d 1337 (9th Cir., 1984), the Court held that ERISA did not preempt a pension plan employee’s state claim that the plan had fired him for reasons of race and age. The Court noted that the state anti-discrimination law affected the plan “in its role as an employer, and in a way that all other employers are affected.” Id. at 1340-1341.

{5}  See B.N.A., ERISA Selected Legislative History, 1974 - 1988, 1988.