Sunvestment Energy Group NY 64 LLC v. National Grid USA Services Co., Inc.

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF NEW YORK

SUNVESTMENT ENERGY GROUP NY 64 LLC and

SARANAC LAKE COMMUNITY SOLAR, LLC,

individually and on behalf of all others similarly situated, 5:22-cv-1085 (BKS/TWD)

Plaintiffs,

v.

NATIONAL GRID USA SERVICES CO., INC. and

NIAGARA MOHAWK POWER CORPORATION,

Defendants.

Appearances:

For Plaintiffs:

David E. Kovel

John R. Low-Beer

Andrew M. McNeela

Kirby McInerney LLP

250 Park Avenue, Suite 820

New York, NY 10177

Seth H. Handy

Handy Law LLC

42 Weybosset Street

Providence, RI 02903

For Defendants:

Richard H. Brown

Michael J. Fitzpatrick

Day Pitney LLP

605 Third Avenue, 31st Floor

New York, NY 10158

Hon. Brenda K. Sannes, Chief United States District Judge:

MEMORANDUM-DECISION AND ORDER

I. INTRODUCTION

Plaintiffs Sunvestment Energy Group NY 64 LLC (“Sunvestment”) and Saranac Lake

Community Solar, LLC (“Saranac”) bring this proposed class action against Defendants National

Grid USA Services Co., Inc. (“ServCo”) and Niagara Mohawk Power Corporation (“Niagara

Mohawk”) (collectively, “National Grid”) seeking a declaration that certain payments they make

to Defendants are not taxable as income to Defendants. (Dkt. No. 1). Plaintiffs also seek

injunctive and monetary relief and assert claims for breach of the covenant of good faith and fair

dealing, restitution and unjust enrichment, and violation of New York Public Service Law § 65.

(See generally id.). Presently before the Court is Defendants’ motion to dismiss the complaint

pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). (Dkt. No. 23). The parties

filed responsive briefing. (Dkt. Nos. 30, 33, 34, 41, 42). For the following reasons, Defendants’

motion is granted and the complaint is dismissed for lack of subject-matter jurisdiction.

II. FACTS1

Defendants are subsidiaries of National Grid plc, a large publicly listed utility “focused

on transmission and distribution of electricity and gas.” (Dkt. No. 1, ¶ 21). Niagara Mohawk is a

New York corporation “engaged in the regulated energy delivery business” which provides

electric and natural gas service to customers in New York. (Id. ¶ 22). ServCo is a Massachusetts

1 The facts are drawn from the complaint and the outside documents submitted by Defendants with their motion to

dismiss and by Plaintiffs with their opposition. (Dkt. Nos. 23-2 through 23-10; Dkt. Nos. 30-1 through 30-7); see

Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000) (noting that a district court resolving a motion to dismiss

for lack of subject-matter jurisdiction under Rule 12(b)(1) “may refer to evidence outside the pleadings”). The Court

also takes judicial notice of public Internal Revenue Service documents. See Casey v. Odwalla, Inc., 338 F. Supp. 3d

284, 294 (S.D.N.Y. 2018) (noting that courts may take judicial notice of “public documents or matters of public

record” and “records of administrative bodies” (citations omitted)). The Court assumes the truth of, and draws

reasonable inferences from, the uncontroverted factual allegations. Tandon v. Captain’s Cove Marina of Bridgeport,

Inc., 752 F.3d 239, 243 (2d Cir. 2014).

corporation that “provides administrative and support services, including tax policy advice and

tax accounting services” to Niagara Mohawk and other subsidiaries of National Grid plc. (Id.

¶ 23). ServCo “has a U.S. Tax Department that sets tax policies for the National Grid operating

companies.” (Id. ¶ 24). Plaintiffs are “independent renewable energy generators” who operate

solar projects in New York. (Id. ¶¶ 1, 18–19).

Pursuant to the “New York Standardized Contract for Interconnection of New Distributed

Generation Units” (“SCI”), National Grid “connects Plaintiffs’ projects with the grid and

subsequently purchases electricity generated by them.” (Id. ¶ 3; see also Dkt. No. 23-7 (excerpts

of the “New York Standardized Interconnection Requirements and Application Process For New

Distributed Generators and Energy Storage Systems 5 MW or Less Connected in Parallel with

Utility Distribution Systems” (the “Tariff”))).2 Sunvestment signed an SCI with Niagara

Mohawk on June 14, 2018 to operate a 4.06-megawatt solar project in Geneseo, New York, and

an SCI was signed on behalf of Saranac on August 2, 2017 to operate a 2.06-megawatt solar

project in Saranac Lake, New York. (Dkt. No. 1, ¶¶ 18–19). Under “applicable law and tariffs

and the SCIs that Plaintiffs signed,” Plaintiffs are required to pay National Grid “for any

upgrades or modifications to the power grid that are necessary to interconnect their projects, and

that thereafter become the property of National Grid.” (Id. ¶ 5). These interconnections are

known as “interties.” (Id.; see also id. ¶ 55 (“Under the SCIs that National Grid signed with each

Plaintiff . . . , Plaintiffs must pay all interconnection costs.”)). More specifically, the SCIs

Plaintiffs entered into provide the following:

During the term of this Agreement, the Utility shall design, construct

and install the Dedicated Facilities. The Customer shall be

responsible for paying the incremental capital cost of such

2 Plaintiffs allege that Defendants “compete with Plaintiffs” and therefore “have an interest in increasing [Plaintiffs’]

costs.” (Id. ¶¶ 4, 47–54; see id. ¶¶ 39–46 (alleging that “investor-owned electric utilities” view governmental policies

supporting the distributed generation of renewable energy as a “threat to their profitability”)).

Dedicated Facilities attributable to the Customer’s Unit. All costs

associated with the operation and maintenance of the Dedicated

Facilities after the Unit first produces energy shall be the

responsibility of the Utility.

(Dkt. No. 23-8, at 5; Dkt. No. 23-10, at 5; see also Dkt. No. 23-7, at 5 (Tariff providing that

“[a]pplicants are responsible for payment of utility system modification cost estimates”)).

National Grid claims that it must pay income tax on these payments (“interconnection

payments” or “system modification costs”). (Dkt. No. 1, ¶ 6). Accordingly, National Grid

“passes through” to Plaintiffs an amount “equal to the purported income tax minus National

Grid’s tax savings from depreciating the newly acquired assets” (the “tax gross-up”). (Id.). In

2019, National Grid invoiced Sunvestment $315,931, which included an “Income Tax Liability”

amount of $17,556.76 for “upgrades to interconnect” Sunvestment’s project. (Id. ¶ 18).

Sunvesment paid the invoice. (Id.). Similarly, National Grid invoiced Saranac for $336,390,

including an “Income Tax Liability” amount of $40,000.47 (Id. ¶ 19). Saranac “paid the tax.”

(Id.). Plaintiffs dispute that National Grid in fact owes income tax on the interconnection

payments Plaintiffs make. (E.g., id. ¶ 4 (“Defendants wrongfully passed through to Plaintiffs and

the Plaintiff Class a charge related to a purported federal tax that was not actually owed.”)).

According to Plaintiffs, National Grid “continues to charge Plaintiffs for the tax gross-up on the

cost of the transmission upgrades and annual operations and maintenance charges for those

upgrades.” (Id. ¶ 93).

A. Relevant Tax Law and IRS Guidance

The Internal Revenue Code provides: “Except as otherwise provided in this subtitle,

gross income means all income from whatever source derived.” 26 U.S.C. § 61(a). Section 118,

in turn, provides:

(a) General Rule. In the case of a corporation, gross income does

not include any contribution to the capital of the taxpayer.

(b) Exceptions. For purposes of subsection (a), . . . the term

“contribution to the capital of the taxpayer” does not include—

(1) any contribution in aid of construction or any other

contribution as a customer or potential customer . . . .

Id. § 118(a), (b)(1). Plaintiffs allege that Section 118 “and its legislative history . . . state

explicitly that [contributions in aid of construction (“CIACs”)] are taxable because they are

payments made by customers to enable utility service” and are in effect “advance payments for

service.” (Dkt. No. 1, ¶ 60 (emphasis omitted)). Independent generators like Plaintiffs, however,

“are not customers . . . but rather sellers of electricity to the utility.” (Id.). Guidance issued by the

IRS in 1988 similarly distinguishes between payments by customers and contributions by

independent generators:

In a CIAC transaction the purpose of the contribution of property to

the utility is to facilitate the sale of power by the utility to a

customer. In contrast, the purpose of the contribution by a

Qualifying Facility [under the Public Utilities Regulatory Policies

Act of 1978] to a utility is to permit the sale of power by the

Qualifying Facility to the utility. Accordingly, the fact that the 1986

amendments to Code section 118(b) render CIAC transactions

taxable to the utility does not require a similar conclusion with

respect to transfers from Qualifying Facilities to utilities.

Notice 88-129, 1988 WL 561200, at *1, 1988 IRB LEXIS 3720, at *2–3 (IRS 1988).

Notice 2016-36, the most recent IRS guidance on the issue, “provides a safe harbor for

transfers of property from either an electricity generation or cogeneration facility or an energy

storage facility to a regulated public utility, used to facilitate the transmission of electricity over

the utility’s transmission system, to be treated as a contribution to the capital of a corporation

under § 118(a), and not a contribution in aid of construction (CIAC) under § 118(a).” Notice

2016-36, 2016 WL 3211403, 2016 IRB LEXIS 383, at *1 (IRS 2016). The parties’ dispute

regarding whether interconnection payments are includible in gross income is a dispute over

whether Notice 2016-36’s safe harbor extends only to independent generation projects that

connect to a utility’s transmission system, as National Grid contends, or extends also to projects

that connect to a utility’s distribution system, as Plaintiffs contend. (See Dkt. No. 1, ¶ 64; id. ¶ 65

(explaining that a utility’s transmission network “carries electricity over long distances through

high-voltage wires” whereas a distribution network “carries that same power to end users over

smaller wires at lower and safer voltages”)). Generally, National Grid takes the position that the

use of the words “transmit” and “transmission” in Notices 88-129 and 2016-36 indicates that

payments for interconnections to a utility’s distribution network are includible in the utility’s

gross income. (Id. ¶ 64). As Plaintiffs point out, however, Notice 2016-36 states: “[A] generator

(such as a solar or wind farm) may contribute an intertie to a utility that qualifies under the new

safe harbor even if the generator is interconnected with a distribution system, rather than a

transmission system, if all [other] requirements [for the safe harbor] . . . are met.” Notice 2016-

36, 2016 WL 3211403, 2016 IRS LEXIS 383, at *14.

B. Prior Attempts to Resolve the Tax Dispute

On June 28, 2016, following the issuance of Notice 2016-36, Robert Ermanski, National

Grid’s Director of U.S. Tax Research & Planning Office, emailed David Selig, the principal

author of Notice 2016-36. (Dkt. No. 1, ¶ 72). Mr. Ermanski’s email memorialized a phone call in

which Mr. Selig “confirmed that Notice 2016-36 was indeed intended to cover transactions of

this type,” i.e., transactions involving “distribution” system interconnections. (Id.). Mr. Ermanski

wrote that the “continued use of the restrictive term ‘transmission’” in Notice 2016-36 “may

cause taxpayers to conclude incorrectly that the new safe harbor is only permitted when

electricity which passes through a ‘distribution’ system intertie is ultimately delivered to the

utility’s ‘transmission’ system” and “urge[d] IRS to provide . . . clear written guidance”

clarifying this point. (Id. (emphasis omitted)).

Following the issuance of Notice 2016-36, National Grid commissioned an opinion from

Ernst & Young LLP regarding the application of the safe harbor to interconnections with a

distribution system. (Id. ¶ 80). Ernst & Young concluded that “strict construction of Notice

2016-36 dictates that the use of the safe harbor set forth in such notice is limited to transfers of

property to a regulated public utility that are then used by such utility to facilitate the

transmission of electricity over the utility’s transmission system.” (Id.; see id. (alleging that Ernst

& Young’s analysis was “strained, result-oriented, and fundamentally flawed”)). However, Ernst

& Young acknowledged that it was “possible a compelling position could be developed” in

support of Plaintiffs’ interpretation of the safe harbor. (Id. ¶ 82).

Plaintiffs further allege that independent generators have “unsuccessfully challenged the

tax gross-up in administrative proceedings” before the public utility commissions in Rhode

Island and Massachusetts. (Id. ¶ 83). In a proceeding commenced in January 2014 before the

Rhode Island Public Utilities Commission (“RIPUC”), National Grid argued that “RIPUC lacked

jurisdiction to decide the federal tax question” and “could only decide whether the charge was

‘reasonable,’ and not whether National Grid actually owed the tax.” (Id. ¶ 84).3 RIPUC issued a

final order on November 27, 2017, holding that “the pass-through tax charges were reasonable in

this proceeding.” (Id. ¶ 87); see In re Petition of Wind Energy Dev., LLC, No. 4483, 2017 WL

6295387 (RIPUC Nov. 27, 2017).4 On appeal to the Rhode Island Supreme Court, National Grid

and RIPUC “conceded that any purported uncertainty in the IRS guidance could be resolved if

National Grid filed an administrative claim for a refund with the IRS.” (Dkt. No. 1, ¶ 89).

3 The parties attempted to settle the dispute by obtaining a private letter ruling (“PLR”) from the IRS, but “the IRS

declined to issue a PLR on the ground that it would soon issue guidance on the subject.” (Id. ¶ 85). The IRS thereafter

issued Notice 2016-36. (Id.).

4 No Lexis cite available.

However, “despite repeated requests,” National Grid has refused to do so. (Id.; see also id. ¶ 11

(“National Grid could simply not pay this tax, without risking any penalty—or it could pay it and

seek a refund. Unlike any other rational taxpayer, it has done neither.”)). The Rhode Island

Supreme Court affirmed RIPUC’s ruling on June 1, 2020. (Id. ¶ 90); see ACP Land, LLC v. R.I.

Pub. Utils. Comm’n, 228 A.3d 328 (R.I. 2020). The court held that National Grid is “entirely

reasonable in believing that it continues to owe the interconnection tax at issue in this case to the

IRS and in, therefore, passing that tax on to petitioners,” but noted its “fervent hope that the IRS

will provide clear and concise guidance to the[] parties in the near future.” ACP Land, 228 A.3d

at 338.

C. IRS 2022–2023 Priority Guidance Plan

On November 4, 2022, the Department of the Treasury released the 2022–2023 Priority

Guidance Plan for the Office of Tax Policy and Internal Revenue Service. Dep’t of Treasury,

Office of Tax Policy & Internal Revenue Service 2022–2023 Priority Guidance Plan (Nov. 4,

2022), available at https://www.irs.gov/pub/irs-utl/2022-2023-pgp-initial.pdf. The Priority

Guidance Plan contains “guidance projects that are priorities for allocating Treasury Department

and Service resources during the 12-month period from July 1, 2022 through June 30, 2023.” Id.

at 1. The listed projects “will be the focus” of efforts during the plan year, but “the plan does not

provide any deadline for completing the projects.” Id. at 1–2. Among the projects in the Priority

Guidance Plan is to issue “[g]uidance under § 118 to clarify the safe harbor under Rev. Proc.

2016-36 regarding distribution lines.” Id. at 9. To date, the IRS has not issued guidance

clarifying the safe harbor in Notice 2016-36. See IRS, IRS Online Bulletins,

https://www.irs.gov/irb (last accessed August 10, 2023).

III. STANDARD OF REVIEW

“A court faced with a motion to dismiss pursuant to both Rules 12(b)(1) and 12(b)(6)

must decide the jurisdictional question first because a disposition of a Rule 12(b)(6) motion is a

decision on the merits and, therefore, an exercise of jurisdiction.” Mann v. N.Y. State Ct. of

Appeals, No. 21-cv-49, 2021 WL 5040236, at *3, 2021 U.S. Dist. LEXIS 209018, at *8

(N.D.N.Y. Oct. 29, 2021) (citation omitted). “In resolving a motion to dismiss under Rule

12(b)(1), the district court must take all uncontroverted facts in the complaint (or petition) as

true, and draw all reasonable inferences in favor of the party asserting jurisdiction.” Tandon, 752

F.3d at 243 (citation omitted). The Court may also “refer to evidence outside the pleadings” and

“take judicial notice of documents in the public record.” Krajisnik Soccer Club, Inc. v. Krajisnik

Football Club, Inc., No. 20-cv-1140, 2021 WL 2142924, at *2, 2021 U.S. Dist. LEXIS 99456, at

*5 (N.D.N.Y. May 26, 2021) (citations omitted).

IV. ANALYSIS

Plaintiffs’ complaint alleges four causes of action for: (1) a declaratory judgment

pursuant to 28 U.S.C. § 2201(a) (Count I), (2) breach of the covenant of good faith and fair

dealing (Count II), (3) restitution and unjust enrichment (Count III), and (4) unjust and

unreasonable charges in violation of New York Public Service Law § 65 (Count IV). (Dkt. No. 1,

¶¶ 96–122). In addition to declaratory relief, Plaintiffs seek an order enjoining Defendants from

“charging a tax gross-up adder on renewable energy projects” and monetary damages. (Id. at 33).

Defendants move to dismiss the complaint in its entirety. (See generally Dkt. No. 23-1).

A. Declaratory Judgment Act

Plaintiffs seek a declaration under the Declaratory Judgment Act (“DJA”) that “payments

for interconnection to National Grid’s distribution system by independent generators of

renewable energy who meet the criteria of the IRS safe harbor are not taxable as income to

National Grid.” (Dkt. No. 1, at 33; see id. ¶¶ 96–101 (Count I)). Defendants argue that Count I

should be dismissed because (1) the DJA contains an exception for federal taxes which deprives

the Court of authority to grant the requested relief, (2) the Anti-Injunction Act (“AIA”) bars

claims restraining the assessment or collection of taxes, (3) there is no case or controversy under

the DJA, and (4) even if the Court concludes that it is not barred from considering Count I, the

Court should exercise its discretion and decline to adjudicate it. (Dkt. No. 23-1, at 14–22).

Plaintiffs respond that the Court has subject-matter jurisdiction over and can adjudicate Count I

because, under the exception in South Carolina v. Regan, 465 U.S. 367 (1984), Plaintiffs have

“no alternative legal avenue to contest the taxes being passed through to them” and that there is a

case or controversy. (Dkt. No. 33, at 16–20).

The DJA provides:

In a case of actual controversy within its jurisdiction, except with

respect to Federal taxes other than actions brought under section

7428 of the Internal Revenue Code of 1986, . . . any court of the

United States, upon the filing of an appropriate pleading, may

declare the rights and other legal relations of any interested party

seeking such declaration, whether or not further relief is or could be

sought.

28 U.S.C. § 2201(a). As an initial matter, the Court must assure itself that it has subject-matter

jurisdiction over this action. See Bhaktibhai-Patel v. Garland, 32 F.4th 180, 187 (2d Cir. 2022)

(“[F]ederal courts have an independent obligation to ensure that they do not exceed the scope of

their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties

either overlook or elect not to press.” (citation omitted)). It is well-settled that the DJA “does not

by itself confer subject matter jurisdiction on the federal courts.” Correspondent Servs. Corp. v.

First Equities Corp. of Fla., 442 F.3d 767, 769 (2d Cir. 2006); see 28 U.S.C. § 2201(a) (limiting

a court’s authority to “declare the rights and other legal relations of any interested party” to

“case[s] of actual controversy within its jurisdiction” (emphasis added)). There therefore “must

be an independent basis of jurisdiction before a district court may issue a declaratory judgment.”

Correspondent Servs. Corp., 442 F.3d at 769 (citing Niagara Mohawk Power Corp. v.

Tonawanda Band of Seneca Indians, 94 F.3d 747, 752 (2d Cir. 1996)); see also DME Constr.

Assocs., Inc. v. United States, No. 15-cv-4322, 2016 WL 2992131, at *3, 2016 U.S. Dist. LEXIS

67390, at *7 (E.D.N.Y. May 23, 2016) (noting that the DJA “provides a specific remedy for

plaintiffs who are alleging a claim based on a substantive source of rights, but does not itself

confer any substantive rights” (citations omitted)); In re Joint E. & S. Dist. Asbestos Litig., 14

F.3d 726, 731 (2d Cir. 1993) (noting that the DJA does not “provide an independent cause of

action” and that its “operation is procedural only—to provide a form of relief previously

unavailable” (citation omitted)).

“To decide whether federal jurisdiction exists to entertain a claim for declaratory relief,

courts . . . ‘conceptually realign the declaratory judgment parties and claims and analyze them as

they would appear in a coercive suit.’” Leopard Marine & Trading, Ltd. v. Easy Street Ltd., 896

F.3d 174, 182 (2d Cir. 2018) (quoting Garanti Finansal Kiralama A.S. v. Aqua Marine &

Trading Inc., 697 F.3d 59, 67 (2d Cir. 2012)); see Garanti Finansal, 697 F.3d at 67 (“[I]f, but for

the availability of the declaratory judgment procedure, the federal claim would arise only as a

defense to a state created action, jurisdiction is lacking.” (citation omitted)); see also Mobil Oil

Corp. v. City of Long Beach, 772 F.2d 534, 539 (9th Cir. 1985) (framing the jurisdictional

question as “whether, absent the availability of declaratory relief, the instant case could

nonetheless have been brought in federal court”), receded from on other grounds, Continental

Cas. Co. v. Robsac Indus., 947 F.2d 1367 (9th Cir. 1991).

Here, Plaintiffs seek a declaration that certain payments made to National Grid pursuant

to a contract are not includible in National Grid’s taxable income. Conceptually realigning the

parties as they would appear in a coercive suit results in a scenario where Plaintiffs fail to pay the

tax gross-up charge5 and Defendants bring a breach of contract action to recover the charges.

The federal tax issue would arise only as a defense to the breach of contract claim which, under

the well-pleaded complaint rule, is insufficient to invoke the federal question jurisdiction of a

federal court. In Skelly Oil Co. v. Phillips Petroleum Co., the parties entered into a contract

which was conditional on a third party’s obtaining a “certificate of public convenience and

necessity.” 339 U.S. 667, 669 (1950). Skelly Oil terminated the contract on the ground that a

permit obtained by the third party was not such a certificate. Id. at 669–70. Phillips, the

declaratory judgment plaintiff, sought a declaration that the parties’ contract was binding

because, under the relevant federal statute, the permit was in fact a “certificate of public

convenience and necessity.” Id. at 670–71. The Supreme Court held that there was no federal

question jurisdiction because, had the suit been presented as a traditional coercive suit for breach

of contract, “[w]hatever federal claim Phillips may be able to urge would in any event be

injected into the case only in anticipation of a defense to be asserted by petitioners.” Id. at 672;

see also Garanti Finansal, 697 F.3d at 66–67 (discussing Skelly Oil). Similarly, here, if either

5 Although Plaintiffs allege that they have already paid certain tax gross-up charges and argue that declaratory relief

is available to address past harms, (Dkt. No. 33, at 19–20 & n.8), the Court agrees with Defendants that declaratory

relief is forward looking and is not appropriate to address past harms where there is no likelihood of ongoing or future

injury, see, e.g., Dorce v. City of New York, 2 F.4th 82, 95 (2d Cir. 2021) (noting that plaintiffs seeking injunctive or

declaratory relief “cannot rely on past injury to satisfy the injury requirement but must show a likelihood that [they]

will be injured in the future” (citation omitted)); Tang Cap. Partners, LP. v. BRC Inc., No. 22-cv-3476, --- F. Supp.

3d ---, 2023 WL 2396635, at *20, 2023 U.S. Dist. LEXIS 39096, at *61–62 (S.D.N.Y. Mar. 8, 2023) (“Declaratory

judgments may provide relief from uncertainty when they are directed towards prospective relief, but declaratory

judgments resolving disputes over past acts are inappropriate.” (citations omitted)). Here, the complaint does allege

ongoing harm and seek prospective, forward-looking relief. (See Dkt. No. 1, ¶ 93 (“National Grid continues to charge

Plaintiffs for the tax gross-up on the cost of the transmission upgrades and annual operations and maintenance charges

for those upgrades.”); id. at 33 (requesting a declaration that payments meeting certain specified criteria “are not

taxable as income to National Grid”)).

party sued the other for damages under or specific performance of the contracts at issue, the

federal tax issue would arise only as a defense to those claims.

Accordingly, Count I brought under the DJA does not invoke the Court’s federal question

jurisdiction. The Court next considers whether it has “arising under” jurisdiction over any of

Plaintiff’s state-law claims.

B. Jurisdiction Over State-Law Claims

Plaintiffs argue that the Court has federal question jurisdiction over their state-law claims

because those claims “turn on a substantial issue of federal law,” namely “whether the safe

harbor applies to interconnection payments when that interconnection is to distribution lines

rather than transmission lines.” (Dkt. No. 33, at 20–21).

The federal district courts have “original jurisdiction of all civil actions arising under the

Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. But “[e]ven where a claim

finds its origins in state rather than federal law,” “‘arising under’ jurisdiction still lies in ‘a

special and small category of cases’ in which the federal issue is: ‘(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.’” Solomon v. St. Joseph Hosp., 62 F.4th 54, 63

(2d Cir. 2023) (quoting Gunn v. Minton, 568 U.S. 251, 258 (2013)); see generally Grable & Sons

Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005). Jurisdiction lies in such cases

because the satisfaction of these four elements “indicat[es] a serious federal interest in claiming

the advantages thought to be inherent in a federal forum.” Grable, 545 U.S. at 313. The parties

appear to agree that the federal tax issue raised by Plaintiffs’ state-law claims is “actually

disputed” but contest the remaining three elements for “arising under” jurisdiction.

1. Necessarily Raised

A federal issue is “necessarily raised” by a state-law claim when “a right or immunity

created by the Constitution or laws of the United States is an element, and an essential one, of the

plaintiff’s cause of action.” Solomon, 62 F.4th at 64 (quoting Tantaros v. Fox News Network,

LLC, 12 F.4th 135, 141 (2d Cir. 2021)); see also New York ex rel. Jacobson v. Wells Fargo Nat’l

Bank, N.A., 824 F.3d 308, 315–16 (2d Cir. 2016) (“A state-law claim ‘necessarily’ raises federal

questions where the claim is affirmatively ‘premised’ on a violation of federal law.” (citing

Grable, 545 U.S. at 314)). Here, the Court concludes that all three state-law claims, as pleaded,

necessarily raise the federal tax issue of whether payments for interconnections to National

Grid’s distribution system otherwise meeting the criteria of the IRS safe harbor are taxable as

income to National Grid because a determination that such payments are not taxable as income

to National Grid is necessary to Plaintiffs’ success on those claims. See Jacobson, 824 F.3d at

317 (finding that a federal law issue was necessarily raised where “the complaint predicated

liability on the assertion that IRS Form 1066 filings were false because—and only because—the

Wells Fargo trusts did not qualify for the REMIC status they obtained under federal law” and the

plaintiff therefore had to “prove at least that the trusts did not qualify under federal law”); Qatar

v. First Abu Dhabi Bank PJSC, 432 F. Supp. 3d 401, 414 (S.D.N.Y. 2020) (noting that state-law

claims in cases meeting the Grable test “predicated liability on the application of federal law”).

Plaintiffs allege that National Grid breached the implied covenant of good faith and fair

dealing by “charg[ing] Plaintiffs for tax gross-ups despite the fact that their interconnection

payments were not taxable to National Grid as income” and “ignoring clear IRS guidance” on

the issue. (Dkt. No. 1, ¶¶ 107–08). Similarly, although the complaint sets forth multiple possible

theories for Plaintiffs’ entitlement to restitution, (id. ¶¶ 111–18), any claim that National Grid

was unjustly enriched and that Plaintiffs are entitled to restitution would require Plaintiffs to

establish that the interconnection payments at issue were not taxable as income to National Grid.

Finally, Plaintiffs allege that Defendants violated New York Public Service Law § 65 because

the tax gross-ups “are more than allowed by law and are therefore unjust and unreasonable,” (id.

¶ 121), thus requiring Plaintiffs to establish that the interconnection payments at issue are not

taxable as income to National Grid. Notably, Plaintiffs do not advance any theory of liability on

these state-law claims which does not depend on a determination that the interconnection

payments are not taxable as income. Cf. State ex rel. Am. Advisory Servs., LLC v. Egon Zehnder

Int’l, Inc., 592 F. Supp. 3d 183, 205 (S.D.N.Y. 2022) (“Where a federal issue is present as only

one of multiple theories that could support a particular claim, this is insufficient to create federal

jurisdiction.” (ellipses and citation omitted)).

Defendants argue that the state-law claims do not necessarily raise the federal tax issue

because the claims hinge on “whether Defendants acted reasonably” and do “not necessarily

require a determination of whether the safe harbor applies.” (Dkt. No. 34, at 10; see also Dkt.

No. 42, at 7). Defendants point to ACP Land, in which the Supreme Court of Rhode Island

affirmed RIPUC’s determination that National Grid was “reasonable in believing that it owes a

tax to the IRS on the interties between the petitioners’ solar and wind systems and [National

Grid’s] distribution system—and in, consequently, passing that tax on to petitioners.” 228 A.3d

at 333. However, there is no indication that RIPUC adjudicated any breach of contract or unjust

enrichment claim. See id. at 333–34 (“emphasiz[ing] that [the court was] not presented with a

question as to whether or not [National Grid] owes the interconnection tax to the IRS, but only

whether [National Grid] is reasonable in believing that it owes the tax”). As discussed above,

Plaintiffs’ success on its state-law claims, as those claims are pleaded, would require a

determination in Plaintiffs’ favor on the federal tax issue, which is therefore necessarily raised.

2. Substantial

For a federal issue to be “substantial,” it is “not enough that the federal issue be

significant to the particular parties in the immediate suit.” Gunn, 568 U.S. at 260. Rather, the

“substantiality inquiry under Grable looks instead to the importance of the issue to the federal

system as a whole.” Id. The Second Circuit has identified “characteristics that in some cases

have signaled against substantiality” as including “the retrospective nature of a claim, the

propriety of resolving the federal dispute in a state forum, and the absence of a federal remedy.”

NASDAQ OMX Grp., Inc. v. UBS Sec., LLC, 770 F.3d 1010, 1028 (2d Cir. 2014).

“[S]ubstantiality must be determined based on a careful, case-by-case judgment.” Id. (citing

Grable, 545 U.S. at 317–18). Here, Plaintiffs argue that the federal tax issue “underlying” their

state-law claims is substantial because “[t]he Court’s resolution would directly affect hundreds of

absent class members and have a precedential impact on an important issue nationwide.” (Dkt.

No. 33, at 21; see Dkt. No. 1, ¶¶ 27, 31). Defendants respond that the federal issue is not

substantial because the IRS is not a party to this case and would not be bound by any judgment.

(Dkt. No. 34, at 9–10; Dkt. No. 42, at 7).6

The Court concludes that the federal tax issue raised by Plaintiffs’ state-law claims is not

substantial. Mikulski v. Centerior Energy Corp., 501 F.3d 555 (6th Cir. 2007), is instructive.

There, the plaintiffs sued a company in which they were shareholders for fraudulent

misrepresentation and breach of contract. Id. at 557–58. The plaintiffs’ theory of liability on

these state-law claims was that the defendant company had violated a provision of the tax code,

6 To the extent Defendants argue that a federal issue can never be substantial in the absence of a government party,

the Court disagrees. As Plaintiffs point out, in Grable itself, the Supreme Court found the disputed tax issue of whether

the petitioner “was given notice within the meaning of the federal statute” to be substantial even though the dispute

before the Court was between private parties and the government was not a party. See 545 U.S. at 315. Indeed, federal

courts have found “arising under” jurisdiction over state-law claims between private parties. See, e.g., Jacobson, 824

F.3d at 317–18; Egon Zehnder, 592 F. Supp. 3d at 208–10.

26 U.S.C. § 312(n)(1), by improperly capitalizing certain construction expenses. Id. at 558, 569.

The plaintiffs argued that the defendant’s improper capitalization resulted in the over reporting

of dividends, which resulted in increased tax liability for the shareholders. See id. The Sixth

Circuit, although having “little difficulty” in concluding that the parties actually disputed the

interpretation of the tax statute, held that the federal interest was not substantial. Id. at 570–73.

The case did not involve a federal agency or a “question of whether a government agency has

complied with a statute or regulation.” Id. at 570; see Empire Healthchoice Assur., Inc. v.

McVeigh, 547 U.S. 677, 700 (2006) (noting that the dispute in Grable “centered on the action of

a federal agency (IRS) and its compatibility with a federal statute”). Further, although the federal

government “may have an interest in the uniform application of regulations that relate to the

collection of taxes, it has only a limited interest in private tort or contract litigation over the

private duties involved in that collection.” Mikulski, 501 F.3d at 570. Here, as in Mikulski, the

government’s ability to collect taxes from National Grid or any other taxpayer “is not affected by

the resolution of the dispute” between the parties. Id. (“The government is free to interpret and

apply the tax code as it sees fit, without the slightest regard for this lawsuit.”). Any decision in

this case would not conclusively resolve the issue for the IRS or for future private litigants and

thus would have little impact on the federal system.

The cases on which Plaintiffs rely are distinguishable. In Jacobson, the disputed federal

issue was whether certain trusts qualified for the Real Estate Mortgage Investment Conduit

(“REMIC”) status they had acquired under federal law which exempts such trusts from federal

income taxation. See 824 F.3d at 310–12, 317. In finding the issue substantial, the Second Circuit

noted that the “statute, the implementing regulations, and the additional regulatory guidance”

governing REMICs “are necessarily complex” and “govern what is now a trillion-dollar national

market in mortgage-backed securities.” Id. at 317–18. The plaintiff’s claims “raise[d] a threshold

question of law relating to mortgage-backed securities generally,” and therefore “minimizing

uncertainty over the tax treatment of mortgage-backed securities” justified resort to a federal

forum. Id. at 318; see also id. at 312 (recounting that the complaint alleged that the Wells Fargo

trusts’ unpaid tax obligations were estimated to total $1.5 billion). And in Ego Zehnder, the

federal issue was substantial because the “allocation of income among affiliates of a

multinational corporation raises among the most serious and sensitive questions of international

taxation.” 592 F. Supp. 3d at 209. The issue “implicate[d] two of the most central issues for any

sovereign entity—its ability to raise revenue to conduct the affairs of state and the sovereign

entity’s foreign relations with other sovereigns.” Id. The present case, by contrast, does not

involve a trillion-dollar nationwide market or such important issues as the government’s ability

to raise revenue or conduct relations with other sovereigns. Rather, Plaintiffs’ state-law claims

present ordinary questions relating to contractual relationships between private parties.

Accordingly, the Court concludes that the disputed federal tax issue is not substantial and

therefore does not reach the question of whether the state-law claims would be “capable of

resolution in federal court without disrupting the federal-state balance approved by Congress.”

Gunn, 568 U.S. at 258. Because the Grable test for “arising under” jurisdiction is not satisfied,

the Court lacks subject-matter jurisdiction over this action and must dismiss the complaint

without prejudice.7

7 The Court notes that Plaintiffs sought leave to add substantive claims against Defendant ServCo if “the common law

claims require contractual privity.” (Dkt. No. 33, at 24). Plaintiffs, however, have not sought leave to amend with

respect to the jurisdictional deficiencies, and there is no indication in this record that any amendment could cure the

lack of subject matter jurisdiction. The Court has therefore not granted leave to amend. See Porat v. Lincoln Towers

Community Ass’n, 464 F.3d 274, 276 (2d Cir. 2006) (finding no abuse of discretion in entering judgment without leave

to amend when the plaintiff “did not advise the district court how the complaint’s defects would be cured”).

V. CONCLUSION

For these reasons, it is hereby

ORDERED that Defendants National Grid USA Services Co., Inc. and Niagara Mohawk

Power Corporation’s motion to dismiss (Dkt. No. 23) is GRANTED; and it is further

ORDERED that the complaint (Dkt. No. 1) is DISMISSED without prejudice for lack

of subject-matter jurisdiction.

IT IS SO ORDERED.

Dated: August 11, 2023

Syracuse, New York

ran ba Cooannea

Brenda K. Sannes

Chief U.S. District Judge

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