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

> District Court, N.D. New York · August 11, 2023

URL: https://www.frixlaw.com/law-library/cases/10316023

## Case

- **Court:** District Court, N.D. New York
- **Decided:** August 11, 2023
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10316023

## How later opinions describe it (automated extraction)

- 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”
- noting that the dispute in Grable “centered on the action of a federal agency (IRS) and its compatibility with a federal statute”
- 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)
- noting that courts may take judicial notice of “public documents or matters of public record” and “records of administrative bodies” (citations omitted)

## Opinion text

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10316023. Public record. Not legal advice.