INTERNATIONAL TELEPHONE & TEL. CORP. v. Alexander

• Citation: 396 F. Supp. 1150
• Decision Date: 19 June 1975
• Docket Number: Civ. A. No. 74-70.
• Parties: INTERNATIONAL TELEPHONE AND TELEGRAPH CORPORATION, Plaintiff, v. Donald C. ALEXANDER, Commissioner of Internal Revenue, Defendant.
• Court: U.S. District Court — District of Delaware

396 F. Supp. 1150

INTERNATIONAL TELEPHONE AND TELEGRAPH CORPORATION, Plaintiff, v. Donald C. ALEXANDER, Commissioner of Internal Revenue, Defendant.

Civ. A. No. 74-70.

United States District Court, D. Delaware.

June 19, 1975.

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COPYRIGHT MATERIAL OMITTED

James M. Tunnell, Jr., Morris, Nichols, Arsht & Tunnell, Wilmington, Del., John H. Schafer, Charles Lister and Jonathan M. Weisgall, Covington & Burling, Washington, D. C., for plaintiff.

W. Laird Stabler, Jr., U. S. Atty., Wilmington, Del., John J. McCarthy and Donald J. Gavin, U. S. Dept. of Justice, Washington, D. C., for defendant.

OPINION AND ORDER

SCHWARTZ, District Judge.

Plaintiff International Telephone & Telegraph Corporation ("ITT") seeks judicial review of administrative action taken by defendant Donald C. Alexander in his capacity as Commissioner of Internal Revenue. The challenged action relates to defendant's 1973 revocation of certain previously-issued private letter rulings, thereby giving rise to substantial unanticipated tax liabilities for a large number of ITT shareholders. Plaintiff contends the revocation was arbitrary, capricious, and beyond defendant's statutory authority, and would have the Court issue a declaratory judgment to that effect.

Defendant seeks, by preliminary motion, to test this Court's subject matter jurisdiction to entertain the instant action.

I. BACKGROUND

On or about April 9, 1969, the boards of directors of ITT and Hartford Fire Insurance Company ("Hartford Fire") executed a proposed plan of merger between Hartford Fire and a wholly-owned subsidiary of ITT known as "ITT Hartford Fire Insurance Corporation." The merger was conditioned, inter alia, upon the issuance of a ruling by the Commissioner of Internal Revenue that the proposed merger would qualify as a tax-free reorganization under Section 368(a)(1)(B) of the Internal Revenue Code. 26 U.S.C. § 368(a)(1)(B).

On April 15, 1969, representatives of Hartford Fire submitted a request for such a ruling to the defendant's predecessor as Commissioner of Internal Revenue. On October 13, 1969, the Internal Revenue Service issued a ruling that the proposed merger would qualify as a tax free reorganization if, prior to the date on which Hartford Fire shareholders were to vote on the merger, ITT were to unconditionally dispose of approximately 1.7 million shares of Hartford Fire common stock which it had previously acquired.

The following day, October 14, 1969, ITT requested a supplemental ruling from the Commissioner that a proposed sale of the Hartford Fire common to Mediobanca S.P.A. ("Mediobanca"), an Italian bank, would constitute an unconditional sale within the meaning of the October 13th ruling. On October 21, 1969, the Internal Revenue Service issued a supplemental letter ruling to the effect that the proposed sale would satisfy the requirements of its prior ruling. The ITT-Mediobanca transaction was thereafter consummated on November 3, 1969.

On May 26, 1970, an exchange offer was made to all Hartford Fire shareholders. The offer circular stated that ITT owned no shares of Hartford Fire, that it would not acquire any such stock if it would affect the tax-free character of the exchange, and that, in the opinion of tax counsel, the exchange would not give rise to shareholder tax liability if, among other things, ITT acquired no Hartford Fire common except in exchange for ITT voting stock. Pursuant to the exchange offer, ITT acquired substantially all outstanding shares of Hartford Fire common.

On March 15, 1974, after an investigation into the facts and circumstances surrounding the request for and issuance of the original and supplemental 1969 rulings, the defendant issued a "technical advice memorandum" which revoked both rulings retroactively. The revocation was predicated upon alleged misrepresentations and omissions by ITT in its application for the supplemental ruling as well as its failure to perform according to its terms the contract with Mediobanca for the sale of Hartford Fire stock. Shortly thereafter, the Internal Revenue Service asserted tax deficiencies against a large number of exchanging shareholders and requested others to waive the statutory period of limitations.

During this period of time, ITT advised all exchanging shareholders it would reimburse them in the event of a "final adjudication of taxability" for all taxes ultimately found owing as a result of the exchange of their shares. It further advised that "special counsel" had been retained to prepare and prosecute test cases, and that such counsel was available, at no cost, to assist individual exchanging shareholders in the prosecution of legal actions; ITT's special counsel have since filed petitions for over 600 exchanging shareholders in the Tax Court.¹

On April 9, 1974, ITT commenced suit in this Court, seeking a judgment declaring the Commissioner's 1973 revocation invalid. Defendant has responded with a motion seeking dismissal on four principal grounds: (1) plaintiff's lack of standing to contest the tax liability of third persons; (2) the absence of jurisdiction to issue declaratory or injunctive relief pursuant to the terms of 28 U.S.C. § 2201 and 26 U.S.C. § 7421; (3) the sovereign immunity of the federal government to taxpayer suits of the type here instituted; and (4) the absence of jurisdiction over defendant in his personal capacity. For reasons to be articulated more fully below, the Court sustains in principal plaintiff's standing to maintain the instant action, yet, on the present record, concludes that the action is not cognizable in this Court must be dismissed under the provisions of Sections 2201 and 7421(a).² As a result, the sovereign immunity and personal jurisdiction issues are not determined.

II. STANDING

One who seeks to challenge administrative action in a federal forum must, as a threshold matter, satisfy the reviewing court that he qualifies as a "proper plaintiff" to challenge the action in question. This requirement is generally referred to as "standing to sue." In the context of this case standing embraces both constitutional and nonconstitutional considerations. Constitutionally, the requirement is mandated by the "case or controversy" limitation of Art. III, § 2 and requires that a plaintiff allege some type of "injury in fact." Association of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150, 152, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970). The nonconstitutional dimension of the standing doctrine, founded largely upon policies of judicial self-governance, additionally requires a demonstration by the aggrieved plaintiff that the injury sustained is "arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question." Association of Data Processing Service Organizations, Inc. v. Camp, supra at 153, 90 S.Ct. at 830.

Does ITT have standing to challenge the retroactive revocation by the Commissioner of Internal Revenue of a prior private letter ruling? As a general rules, such administrative action is reviewable at the instance of a disgruntled taxpayer, either by way of refund litigation in the Court of Claims or a federal district court, or in an administrative challenge in the Tax Court. Standing in these cases presents no serious problem.³

Where, however, plaintiff is not an individual whose tax liability is directly affected by a ruling revocation and seeks in a district court action to challenge that revocation, substantial problems are presented with respect to that plaintiff's standing as well as the court's subject matter jurisdiction. Reserving for the moment the inquiry into this Court's jurisdiction to entertain the instant action, it must first be determined whether plaintiff's "third-party" status in the current tax dispute disentitles it to maintain this suit.

A. Injury in Fact

Plaintiff has sustained the requisite "injury in fact" to satisfy the case or controversy requirement of Art. III, § 2. As a result of the Commissioner's allegedly wrongful revocation ITT has suffered three types of injury which confer upon it "such a personal stake in the outcome of the controversy as to assure that concrete adverseness" Baker v. Carr, 369 U.S. 186, 204, 82 S.Ct. 691, 703, 7 L.Ed.2d 663 (1962), requisite to a proper presentation of issues for adjudication.

First, plaintiff states that it has been forced to defend numerous suits brought by former Hartford Fire shareholders who detrimentally relied upon ITT's representations in connection with the merger. Although ITT's liability to those shareholders is of a contingent nature at present, it is the necessity of defending these suits that provides plaintiff with a sufficient "stake in the outcome." Baker v. Carr, supra. Further, the fact that the shareholders suits are based upon the contents of ITT's exchange offer does not preclude their utilization as an "injury in fact" in the instant case since those suits arose as a direct result of the Commissioner's actions.

Secondly, plaintiff has agreed to indemnify exchanging shareholders for all tax liabilities incurred in the ITT/Hartford Fire merger. As a result of this agreement it is estimated that ITT may ultimately sustain a loss of as much as $100 million. A liability of this magnitude is clearly sufficient to insure "concrete adverseness." Id. It can be argued that ITT's indemnification obligation was wholly voluntary and constitutes an attempt to confer standing upon itself when none would otherwise exist. This objection, however, is more properly directed to the second prong of the standing test — whether plaintiff's interest is "arguably within" the zone of interests protected by the relevant statutory or constitutional guarantee; it does not diminish the fact that ITT has sustained a substantial economic injury.⁴

Finally, plaintiff alleges its credibility with its shareholders as well as other segments of the business community...