United States Steel Corp. v. MULTISTATE TAX COM'N, 72 Civ. 3438 (CHT).

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtJerome R. Hellerstein, Hellerstein, Rosier & Rembar, New York City, for defendants
Citation367 F. Supp. 107
Docket NumberNo. 72 Civ. 3438 (CHT).,72 Civ. 3438 (CHT).
Decision Date17 September 1973



White & Case, New York City (Thomas McGanney, New York City, of counsel), for plaintiffs.

Jerome R. Hellerstein, Hellerstein, Rosier & Rembar, New York City, for defendants.


TENNEY, District Judge.

In the instant action defendants, not having filed an answer, move pursuant to Fed.R.Civ.P. 12 to vacate the service of the summons and complaint and to dismiss the action on the grounds that this court lacks jurisdiction over the subject matter of the action and the persons of the defendants, and that the complaint fails to state a claim upon which relief can be granted. For the reasons cited infra, the motions are denied in all respects.

I. Background

In response to the widespread recognition that, as applied to the multistate corporations which dominate the nation's economy, traditional state tax administration was inadequate, ineffective and excessively costly both to the states and to businesses, the Multistate Tax Compact (hereinafter the "Compact"), allegedly designed to achieve greater uniformity of state taxation of interstate business and to reduce double taxation, purportedly went into effect in its party states on August 4, 1967, after seven states had adopted it. (Art. X, § 1 of Compact, Appendix A to Defs.' Brief in Support of Motion.) At present, 21 states have adopted the Compact.1

The Compact established the defendant Multistate Tax Commission (hereinafter the "Commission") to administer its provisions. (Compact, Art. VI.) The Commission is composed of a member from each party state who generally is that state's chief administrator of the types of taxes to which the Compact applies;2 each member, or Commissioner, is named as a defendant in the instant lawsuit. The Commission elects officers from among its members and appoints an Executive Director who is the Secretary and chief administrator of the Commission. At present, defendant Eugene Corrigan is Executive Director. The Commission has its headquarters in Boulder, Colorado, and is a citizen of the State of Colorado; it also maintains an office in Chicago and one in New York City.

Article VII of the Compact gives the Commission the power to adopt uniform regulations for the administration of tax laws which are uniform or similar in two or more party states and to prescribe uniform tax forms. The regulations adopted by the Commission are not binding upon the party states; each party state may individually consider such regulations for adoption in accordance with its own laws and procedures.

Before the Compact went into effect, the most serious problem in state corporate income tax law lay in the area of apportionment and allocation of the income of a multistate corporation to the states in which it is taxable. Article IV of the Compact seeks to alleviate this difficulty by allowing a multistate taxpayer to apportion and allocate its income under the apportionment formula and rules for specific allocation set forth in the Compact or by any other method available under state law. The Commission has adopted regulations dealing with the allocation and apportionment of income under Article IV. Plaintiffs state, however, that they believe only three party states (Oregon, Indiana and Alaska) had adopted any of these regulations as of December 31, 1972. (Pls.' Brief in Opp. at 13-14.)

Article III of the Compact provides that the party states will allow a "small taxpayer" (defined as one whose only activities within the taxing jurisdiction consist of sales and do not include owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax year within the state or subdivision is not in excess of $100,000) to elect to pay a tax on its gross sales in lieu of the tax on net income. Not all party states have adopted the option and evidently several of those which have adopted it have not yet adopted a related tax rate.

Article IX allows the Commission, at the option of the taxpayer, to arbitrate disputes concerning apportionment and allocation but only with respect to a claim of double or multiple (but not over-) taxation. The arbitration procedure requires the adoption by the Commission of a regulation for it to become effective. No such regulation is in effect.

The most significant power of the Commission (and the real bone of contention between the parties) is its authority under Article VIII of the Compact to conduct "interstate audits" of multistate corporations. Such audits may relate to any tax or license fee imposed in whole or in part for revenue purposes. In general, the Commission may conduct audits upon the request and on the behalf of one or more states party to the Compact or it may itself offer to conduct an audit based upon its determination that such audit would be "of interest" to a number of party states. The Commission has broad subpoena power and the authority to seek court enforcement in connection with the carrying out of its audit responsibilities. Article VIII is in force only in those party states which specifically have adopted it, 17 to date.3

Although several bills4 have been introduced in Congress for the purpose of obtaining Congressional consent to the Compact, Congress has yet to act.

The impetus for the instant lawsuit was a demand by defendant Corrigan that plaintiffs submit to the audits provided for in Article VIII of the Compact. Plaintiffs challenge the constitutionality of the Compact on the grounds: (1) that the Compact, and, therefore, any audit demanded pursuant thereto, is invalid under the compact clause, Art. I, § 10, Cl. 3, U.S.Const., because Congress has not given its consent; (2) that the Compact encroaches upon the power of Congress to regulate commerce among the several states under the commerce clause, Art. I, § 8, U.S.Const., and imposes unreasonable burdens in interstate commerce; (3) that the Compact violates the due process and equal protection clauses of the fourteenth amendment; and (4) that the Compact violates the fourth amendment's proscription against unreasonable searches and seizures. Jurisdiction is alleged under 28 U.S.C. §§ 1331 (cases arising under the Constitution wherein the value in controversy exceeds $10,000), 1332 (diversity of citizenship), and 1343(3) (deprivation under color of state law of rights secured to plaintiffs under the Constitution). The action is brought as a class action, seeks declaratory and injunctive relief, and requests the convening of a three-judge court under 28 U. S.C. §§ 2281 and 2284.

II. Subject Matter Jurisdiction
A. Eleventh Amendment Immunity

Defendants, in support of their motion to dismiss, argue, first, that this court has no jurisdiction over the Commission qua commission on the ground that, because the Commission is an agency of states which have not consented to be sued, the eleventh amendment to the United States Constitution bars this action. The Court disagrees.

The eleventh amendment provides:

"The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State."

To say that a state agency is entitled to eleventh amendment immunity presupposes the constitutional validity of that agency. Where, as here, it is charged that the agency itself is constitutionally invalid, the eleventh amendment is no bar.

"The Constitution of the United States, with the several amendments thereof, must be regarded as one instrument, all of whose provisions are to be deemed of equal validity. It would, indeed, be most unfortunate, if the immunity of the individual States from suits by citizens of other states, provided for in the 11th Amendment, were to be interpreted as nullifying those other provisions which confer power on Congress to regulate commerce among the several States, which forbid the states . . . without the consent of Congress, from . . . entering into any agreement or compact with other states . . . which provisions existed before the adoption of the 11th Amendment, which still exist, and which would be nullified and made of no effect, if the judicial power of the United States could not be invoked to protect citizens affected by the passage of state laws disregarding these constitutional limitations." Prout v. Starr, 188 U.S. 537, 543, 23 S.Ct. 398, 400, 47 L.Ed. 584 (1903) (emphasis added).

Defendants' reliance on Port of New York Authority and Water Front Commission of New York Harbor cases, Wolkstein v. Port of New York Authority, 178 F.Supp. 209 (D.N.J.1959); Rao v. Port of New York Authority, 122 F. Supp. 595 (E.D.N.Y.1954), aff'd per curiam, 222 F.2d 362 (2d Cir. 1955); Moroney v. Waterfront Commission of New York Harbor, 52 Misc.2d 424, 276 N.Y.S.2d 362 (Sup.Ct.1966); Bush Terminal Co. v. City of New York, 152 Misc. 144, 273 N.Y.S. 331 (Sup.Ct.1934), aff'd, 256 App.Div. 978, 11 N.Y.S.2d 554 (1939), aff'd, 282 N.Y. 306, 26 N.E.2d 269 (1940), for the proposition that a commission established by multistate compact is entitled to eleventh amendment immunity is erroneous since in those cases, unlike the case sub judice, the compact establishing the authority or commission had been approved by Congress so that the compact's validity was not at issue.

Even if there were no question of the constitutional validity of the Commission, the mere fact that an agency is a valid state agency would not automatically entitle it to eleventh amendment immunity as a matter of law. In each case, the facts must be closely scrutinized to determine whether the agency in question is, in effect, an arm or alter ego of the state so as to entitle it to...

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