AMTAX Holdings 227, LLC v. CohnReznick LLP

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

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AMTAX HOLDINGS 227, LLC,

Plaintiff,

MEMORANDUM AND ORDER

- against – 23 Civ. 1124 (NRB)

COHNREZNICK LLP,

Defendant.

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NAOMI REICE BUCHWALD

UNITED STATES DISTRICT JUDGE

Plaintiff AMTAX Holdings 227, LLC (“AMTAX,” the “Limited

Partner,” or “plaintiff”) filed this lawsuit on February 9, 2023

asserting claims of breach of fiduciary duty, professional

negligence, unjust enrichment, and fraud against CohnReznick LLP

(“CohnReznick” or “defendant”). Presently before the Court is

defendant’s motion to dismiss the complaint pursuant to Federal

Rules of Civil Procedure 12(b)(1) and 12(b)(6). ECF No. 33. Also

pending before the Court is nonparty Tenants’ Development

Corporation’s (the “Nonprofit” or “TDC”) motion to intervene and

dismiss pursuant to Federal Rules of Civil Procedure 24, 12(b)(1),

and 12(b)(6). ECF No. 35. For the following reasons, defendant’s

motion is granted and the complaint is dismissed for lack of

subject matter jurisdiction. Consequently, the Court does not

need to reach the motion to intervene.

BACKGROUND1

Plaintiff’s claims stem from its investment in a limited

partnership that owned a low-income housing property located in

Boston, Massachusetts (the “Property”). The limited partnership

owned the Property pursuant to the Low-Income Housing Tax Credit

(“LIHTC”) program in order to take advantage of certain tax

benefits. Before addressing the specific facts of this case, it

is helpful at the outset to provide some background regarding the

LIHTC program.

A. The LIHTC Program

Congress created the LIHTC program pursuant to the Tax Reform

Act of 1986 as an incentive to private investors to finance the

development of affordable housing through the distribution of tax

credits. See generally Mark P. Keightley, CONG. RSCH. SERV.,

RS22389, An Introduction to the Low-Income Housing Tax Credit

(2023). Through the LIHTC program, the Internal Revenue Service

(“IRS”) allocates federal tax credits annually to state housing

agencies, which then award the tax credits to eligible developers

1 The facts considered and recited here are drawn from plaintiff’s complaint

and any attachments thereto, and are accepted as true for purposes of the

instant motion. See Doe v. City of New York, No. 19 Civ. 9338 (AT), 2021 WL

964818, at *1 (S.D.N.Y. Mar. 15, 2021). The Court also refers to documents

attached to defendant’s motion to dismiss and to plaintiff’s opposition. See

Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000) (stating 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”).

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to offset the costs of construction in exchange for reserving a

portion of the units for affordable housing. See id. at 3-4;

SunAmerica Hous. Fund 1050 v. Pathway of Pontiac, Inc., 33 F.4th

872, 874 (6th Cir. 2022).

In order to obtain financing for LIHTIC-qualifying housing

developments, developers -- many of which are nonprofit

organizations -- frequently allocate the tax credits attributable

to the development to outside private investors. Keightley, supra

2, at 5-6. Typically, the developers and investors structure the

sale through a limited partnership, with the nonprofit developers

serving as the general partner, owning a small percentage of the

property while managing the development on a day-to-day basis, and

the investor serving as the limited partner, owning the vast

majority of the development but playing an otherwise passive role.

Id.

To qualify for the tax credits, owners of eligible projects

must report on their compliance with the LIHTC leasing requirements

annually for fifteen years, which is called the “compliance

period.” Compl. ¶ 26. As long as a project adheres to certain

rent affordability restrictions for the compliance period, the

private investor may claim tax credits annually over a ten-year

period. Keightley, supra 2, at 1. Once the compliance period has

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ended, the annual tax credits are no longer available. See id.;

26 U.S.C. § 42(j)(1). At this point, investor limited partners

typically exit the limited partnership because “the benefits are

both gone and safeguarded, because the IRS will no longer seek

recapture of prior tax benefits, even if the properties fall out

of compliance with LIHTC income limits or other requirements.”

U.S. Dep’t of Hous. and Urb. Dev., What Happens to Low-Income

Housing Tax Credit Properties at Year 15 and Beyond? 29 (Aug.

2012),

https://www.huduser.gov/portal//publications/pdf/what_happens_li

htc_v2.pdf (“HUD Report”).

As a result, once the compliance period ends, there is

generally a risk that LIHTC developments transition away from

operating as affordable housing. For this reason, 26 U.S.C.

§ 42(i)(7) (“Section 42(i)(7)”) was enacted to encourage the

continued availability of affordable housing by providing a safe

harbor that protects investor limited partners from suffering

negative tax consequences when they sell the developments to

qualifying nonprofits at a below-market price.2 26 U.S.C. §§

2 Section 42(i)(7)(A) provides that “[n]o Federal income tax benefit shall fail

to be allowable to the taxpayer with respect to any qualified low-income

building merely by reason of a right of 1st refusal held by . . . a qualified

nonprofit organization (as defined in subsection (h)(5)(C)) . . . to purchase

the property after the close of the compliance period for a price which is not

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42(i)(7), (h)(5). Generally, the IRS treats below-market purchase

options as conditional transfers of ownership to the option-

holder, see Rev. Rul. 55-540, 1955-2 C.B. 39, § 4.01(e), which

precludes owners whose interests are subject to such a right from

claiming any tax benefits associated with the asset. However,

under Section 42(i)(7)’s safe harbor, this general rule is

inapplicable to qualifying sales. Specifically, Section 42(i)(7)

allows the limited partner to grant qualifying nonprofits, among

others, a right of first refusal that can be exercised at the end

of the compliance period. In order to qualify for the safe harbor,

the price at which the nonprofit can exercise its right of first

refusal must satisfy the minimum purchase price set forth under

Section 47(i)(7)(B).3

less than the minimum purchase price determined under subparagraph (B).” 26

U.S.C. § 42(i)(7).

3 The minimum purchase price allowable to qualify for the Section 42(i)(7) safe

harbor is:

[A]n amount equal to the sum of—

(i) the principal amount of outstanding indebtedness secured by the

building (other than indebtedness incurred within the 5-year period

ending on the date of the sale to the tenants), and

(ii) all Federal, State, and local taxes attributable to such sale.

Except in the case of Federal income taxes, there shall not be taken into

account under clause (ii) any additional tax attributable to the

application of clause (ii).

26 U.S.C. § 42(i)(7)(B).

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If the parties choose to take advantage of this optional safe

harbor, the parties must negotiate the specific terms and

conditions of that right of first refusal -- which can vary widely

-- in a contract. See Compl. ¶ 37; HUD Report at 30-32 (explaining

how and why the terms and conditions of a limited partner’s exit

process may vary depending on the context). Typically, the right

of first refusal is granted via the initial partnership agreement.

HUD Report at 31 n. 20. Once the right has been triggered in

accordance with the contract, the party holding the right of first

refusal can elect to purchase the LIHTC development for the agreed

upon purchase price. However, in order to qualify for the safe

harbor, that price cannot be less than the minimum purchase price

required by Section 47(i)(7)(B)). Id.

B. The Tenants’ Development II Partnership

In the early 2000s,4 a limited partnership, Tenants’

Development II, L.P. (the “Partnership”), was formed to redevelop

and own a 185-unit affordable housing development in Boston,

Massachusetts pursuant to the LIHTC program. Compl. ¶¶ 9, 20.

Tenants’ Development II Corporation (the “General Partner”), an

4 Plaintiff alleges that the partnership was formed in 2003, however, related

litigation indicates that the partnership was formed in 2002. See AMTAX

Holdings 227, LLC v. Tenants’ Dev. II Corp., 15 F.4th 551, 553 (1st Cir. 2021);

Tenants’ Dev. Corp. v. AMTAX Holdings 227, LLC, CA No. 2084 Civ. 01260-BLS1, at

4 (Mass. Super. Ct.).

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affiliate of TDC, the Nonprofit, serves as the general partner of

the Partnership and owns 0.009% of the Partnership’s interests.

Id. ¶¶ 14, 15. In exchange for a $12 million capital contribution,

AMTAX received a 99.99% ownership stake in the Partnership and the

right to tax credits generated by the Property.5 Id. ¶ 22.

According to the motion papers, Alden Torch Financial LLC (“Alden

Torch”), an investment management company, acquired AMTAX in 2011

and has managed AMTAX’s interest in the Partnership since that

time. ECF No. 33-10 (“Mot.”) at 4-5; ECF No. 36 at 6; Compl. ¶

11. Meanwhile, defendant CohnReznick has served as the

Partnership’s auditor and tax preparer for “approximately twenty

years.” Id. ¶ 1.

The Partnership and the Nonprofit had entered into a right of

refusal and purchase option agreement on June 20, 2003. Id. ¶ 20;

ECF No. 33-3 (“ROR Agreement”). Under this agreement, the

Partnership granted the Nonprofit the right to purchase the

property “in the event [the Partnership] proposes to sell,

transfer, assign, or ground lease all or substantially all [the

Partnership’s] interest” for:

5 The remaining 0.001% of the Partnership is owned by non-party Tax Credit

Holdings III, LLC (together with AMTAX, the “Limited Partners”), a special

limited partner that is managed by Alden Torch Financial LLC, the same

investment management company that owns AMTAX. Compl. ¶ 11, 13; Mot. at 4-5.

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lesser of:

(x) the price stated in the Disposition Notice, or

(y) the sum of the principal amount of outstanding

indebtedness secured by the Property (other than

indebtedness incurred within the 5-year period

ending on the date of any sale to the Sponsor) and

all federal, state and local taxes attributable to

such sale.

Id. §§ 2(a), (b)(ii).

On February 28, 2017, and again on April 3, 2018, the

Nonprofit sent letters to AMTAX offering to purchase its interest

in the Property ahead of the end of the compliance period on

December 31, 2018 pursuant to Section 7.4(J) of the parties’

limited partnership agreement. ECF Nos. 1-1, 1-2, 36-4. Each of

these letters included a calculation performed by CohnReznick

indicating the Nonprofit’s proposed purchase price of $7,737,812

and $4,172,194, respectively. ECF Nos. 1-1, 1-2. According to

the letters, these prices represented the “the anticipated tax

liability incurred in the event of a sale of the Project, plus the

amount of any tax liability attributable to the Exit Tax

Distribution6.” Id. However, the parties failed to negotiate an

6 “Exit Tax Distribution” is defined in the parties’ limited partnership

agreement as a “priority distribution . . . in an amount equal to its tax

liability incurred by the sale, plus the amount of any tax liability

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early exit of the Limited Partners after disputing the existence

and scope of the Nonprofit’s right of first refusal. ECF No. 33-

2 (Tenants’ Dev. Corp. v. AMTAX Holdings 227, LLC, CA No.

2084CV01260-BLS1 (Mass. Super. Ct. 2020) (the “Massachusetts

Action”), Doc No. 62 (the “Massachusetts Decision”)) at 6-8; see

also Compl. ¶¶ 69-71.

On January 17, 2020, the Partnership engaged CohnReznick to

calculate the price at which the Nonprofit could exercise its right

of first refusal. Compl. ¶ 81. On February 10, 2020, the

Partnership and the General Partner informed the Nonprofit of its

intention to sell the Property to a third party, triggering the

Nonprofit’s right of first refusal. Compl. ¶ 94; ECF 33-5 (the

“Disposition Notice”). Attached to the Disposition Notice was a

calculation performed by CohnReznick of the right of first refusal

price, totaling $17,108,380 (the “Purchase Price”), which included

zero “taxes attributable to the sale” of the Property, i.e. exit

taxes. Id.; Compl. ¶ 3. The next day, the Nonprofit notified the

Partnership that it planned to purchase the property for the amount

stated in the Disposition Notice. Compl. ¶ 96.

attributable to the Exit Tax Distribution taking into account any charitable

donation in connection with such sale,” to be paid “in the event of a sale to

a qualified non-profit entity pursuant to the LURA or tax credit reservation.”

ECF No. 36-4 § 6.1(B).

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AMTAX objected to the sale, claiming that its consent was

required in order to exercise the right of first refusal.7 Id. ¶

98; Mot. at 6. As explained below, litigation ensued. Today, the

sale of the Property to the Nonprofit has not been completed.

C. The Federal Court Litigation

On May 12, 2020, the Nonprofit and the General Partner filed

an action against AMTAX in the District of Massachusetts, asserting

diversity jurisdiction and seeking, among other things, a

declaratory judgment that the right of first refusal had been

validly triggered and exercised at the price calculated by

CohnReznick. Tenants’ Dev. Corp. v. AMTAX Holdings 227, LLC, No.

20 Civ. 10902 (LTS) (D. Mass. May 12, 2020), ECF No. 1 ¶¶ 112-13,

151. Shortly thereafter, AMTAX disclosed in a motion to dismiss

that one member of its owner, Alden Torch, was a Massachusetts

citizen, as were the Nonprofit and the General Partner, thereby

destroying diversity jurisdiction. Id., ECF No. 13.

Also on May 12, 2020, AMTAX filed a complaint, also in the

District of Massachusetts, against the Nonprofit and the General

Partner, seeking a declaration that the ROR Agreement did not

7 According to the Massachusetts Decision, in an attempt to prevent the Nonprofit

from exercising its right of first refusal, AMTAX recorded a “Notice of Consent

Rights” at the Suffolk Registry of Deeds, which stated that any transfers of

title require AMTAX’s consent. Massachusetts Decision at 7. As a result of

this notice, MassHousing “halted its final approval of the sale” to the

Nonprofit. Id. at 8.

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comply with Section 42(i)(7), that the Nonprofit’s exercise of the

right was invalid, and that the ROR agreement was therefore void.

AMTAX Holdings 227, LLC v. Tenants’ Dev. Corp., No. 20 Civ. 10911

(D. Mass. May 12, 2020), ECF No. 1 (the “Federal Massachusetts

Action”). In the alternative, AMTAX sought a declaration that the

purchase price had been calculated incorrectly and that it was

entitled to an exit tax distribution. AMTAX also brought various

state-law claims, including claims for fraud, breach of contract,

and breach of fiduciary duties. It argued that the district court

had subject matter jurisdiction because the allegations concerned

the meaning of the term “right of 1st refusal” in Section 42 and

required the court to resolve whether the ROR Agreement violated

Section 42.

On December 23, 2020, the district court dismissed both of

these actions for lack of subject matter jurisdiction. Tenants’

Dev. Corp. v. AMTAX Holdings 227, LLC, No. 20 Civ. 10902 (LTS),

No. 20 Civ. 10911 (LTS), 2020 WL 7646934, at *1 (D. Mass. Dec. 23,

2020), aff’d on other grounds sub nom. AMTAX Holdings 227, LLC v.

Tenants’ Dev. II Corp., 15 F.4th 551 (1st Cir. 2021). The United

States Court of Appeals for the First Circuit affirmed the district

court’s decision, concluding that “[r]efined to bare essence, this

[was] a dispute over a contract, the [ROR] Agreement,” not an

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important federal question concerning the interpretation of

Section 42(i)(7). AMTAX Holdings 227, LLC, 15 F.4th at 557.

First, the court held that Section 42 was not necessarily raised,

as nothing in the statute suggests that noncompliance would void

an existing right of first refusal agreement; instead,

noncompliance would merely result in the unavailability of the

safe harbor. Id. Specifically, the First Circuit found that:

Section 42(i)(7) provides only that “no Federal income

tax credit shall fail to be allowable” when a qualifying

right of first refusal is in effect. Nothing in the

statute either suggests or implies that it voids

noncompliant right of first refusal agreements. The

notion that section 42(i)(7) independently voids

noncompliant agreements rather than simply making a

party or a project ineligible for certain tax

benefits borders on the specious and seems too thin a

reed to support federal jurisdiction.

Id.

Second, the First Circuit found that AMTAX’s claims were not

substantial enough to support federal question jurisdiction.

While observing that the “common thread that runs through” state-

law claims that implicate substantial federal issues is the

presence of “some appreciable measure of risk to the federal

sovereign,” the court found that this case “involve[d] no such

jeopardy.” Id. at 558. AMTAX’s complaint did “not challenge –

nor even implicate – concrete federal activity (such as an attempt

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by the IRS to recapture the Partnership’s tax credits).” Id.

Moreover, the court noted that it was “questionable whether the

outcome of the litigation [would] have ramifications for other

cases,” as “right of first refusal agreements are sui generis,”

for which “[t]here is no standardized language . . ., nor is there

any indication that developers and investors customarily use a

one-size-fits-all prototype,” nor is there a basis to conclude

“that a large number of LIHTC transactions would be affected by

the federal-law issue here.” Id.

Finally, the First Circuit observed that “the federal

government already ‘delegates’ LIHTC-related compliance matters

‘to state agencies as a matter of course,’ . . . and it is not

clear how a state court could destabilize the program by ruling on

the meaning of section 42(i)(7).” Id. Based on these findings,

the First Circuit concluded that there was no basis for subject

matter jurisdiction, as “the theory advanced by [AMTAX] . . . does

not suggest broad significance to the federal government or other

parties and, thus, lacks substantiality.” Id.

D. The Massachusetts State Court Litigation

After the Nonprofit and General Partner discovered that Alden

Torch’s citizenship destroyed diversity jurisdiction in their

District of Massachusetts case, they brought a substantially

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similar suit in Massachusetts state court on July 17, 2020. See

Massachusetts Action. They sought, among other things, a

declaration that the Nonprofit could validly exercise its right of

first refusal without AMTAX’s consent and that the Purchase Price

was properly calculated. Id. In turn, AMTAX asserted several

counterclaims, including that the General Partner breached -- and

the Nonprofit aided and abetted the breach of -- its fiduciary

duties by, among other things, claiming that the Purchase Price

does not include an exit tax distribution to AMTAX. Massachusetts

Action, Doc. No. 17, ¶¶ 150(h), 153-159.

On June 30, 2023, after both parties cross-moved for summary

judgment, the Massachusetts Superior Court issued an opinion

finding in relevant part that (1) Nonprofit and General Partner

were entitled to a declaration that the sale of the property to

the Nonprofit did not require AMTAX’s consent; (2) AMTAX was

entitled to summary judgment on the remainder of the Nonprofit and

General Partner’s claims, concluding that the Partnership had

inappropriately calculated the purchase price; and (3) the

Nonprofit and General Partner were entitled to summary judgment on

all counterclaims brought by AMTAX except its claim seeking a

declaration that the Purchase Price had been calculated

appropriately. Massachusetts Decision at 20-24. As to whether

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exit taxes should have been included in the Purchase Price, the

Massachusetts Superior Court found no clear answer after analyzing

the language of the ROR Agreement, the statutory language, IRS

regulations and guidance, and caselaw. Instead, the court relied

on the HUD Report to conclude that exit taxes should have been

included, as the Massachusetts Supreme Judicial Court had done in

similar cases. Id. at 16-17. However, the court found that the

improper calculation of the Purchase Price could not support

AMTAX’S breach of fiduciary duty counterclaims because the

Partnership’s interpretation of the language in the ROR Agreement

and Section 42 “reflected a colorable interpretation of language

in the ROR Agreement and Section 42.” Id. at 23. Specifically,

the court reasoned:

As noted above, there is no case law or regulatory

guidance interpreting the phrase “taxes attributable to

such sale”, and the meaning of that phrase is not, at

first blush, entirely clear. A legitimate dispute such

as this, without more, does not amount to breach of the

duty of loyalty and good faith. Second, it is unclear

what harm [AMTAX] suffered given that they successfully

prevented the sale . . .

Id.

The Nonprofit and General Partner applied for direct

appellate review of the court’s decision granting summary judgment

on all but one of their claims, which the Massachusetts Supreme

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Judicial Court granted on February 20, 2024. The appeal is now

pending.

E. This Litigation

Finally, turning to the instant case, AMTAX alleges that

CohnReznick entered into a “secret agreement” with the

Partnership’s general partner, TD II, to calculate a purchase price

that excluded exit taxes and thereby failed to comply with Section

42(i)(7). Compl. ¶ 6. Specifically, AMTAX asserts four causes of

action against CohnReznick: (1) breach of fiduciary duty; (2)

professional negligence; (3) fraud; and (4) unjust enrichment.

Id. ¶¶ 112-145.

On May 23, 2023, this Court exercised its sua sponte authority

to stay the case pending the outcome of the summary judgment

motions in the Massachusetts Action. ECF Nos. 20, 24. After the

Nonprofit and General Partner filed an interlocutory appeal in the

Massachusetts state court litigation, the Court lifted its stay in

a July 27, 2023 conference and permitted the parties to bring their

proposed motions while the appeal was pending. ECF No. 28. On

August 11, 2023, the Court set a schedule for the parties to brief

the motion to dismiss. ECF No. 30.

On September 1, 2023, CohnReznick filed its motion to dismiss,

ECF No. 33, and accompanying memorandum of law, ECF No. 33-10,

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along with supporting declarations and exhibits, ECF Nos. 33-1 –

33-9. On September 14, 2023, the Nonprofit, a non-party, filed a

motion to intervene and dismiss, ECF No. 35, along with a

memorandum of law, ECF No. 36, and supporting exhibits, ECF Nos.

36-1 – 36-6. On October 6, 2023, AMTAX filed its memorandum of

law in opposition to defendant’s motion, ECF No. 42 (“Opp.”), and

on October 20, 2023, its memorandum of law in opposition to the

Nonprofit’s motion, ECF No. 43. On October 30, 2023, CohnReznick

filed its reply brief, ECF No. 44 (“Reply”), and on November 13,

2023, the Nonprofit filed its reply brief, ECF No. 45. On November

17, 2023, AMTAX sought leave to file a sur-reply memorandum of law

in opposition to both CohnReznick’s and the Nonprofit’s motions to

dismiss, which the Court granted on November 20, 2023. See ECF

No. 46-1 (“Sur-Reply”); see also ECF Nos. 46-48.

LEGAL STANDARD

CohnReznick and proposed intervenor move to dismiss this

action under Rule 12(b)(1) for lack of subject matter jurisdiction

and Rule 12(b)(6) for failure to state a claim. See Fed. R. Civ.

P. 12(b)(1), (6). “When presented with motions to dismiss pursuant

to both Rules 12(b)(1) and 12(b)(6), the Court must first analyze

the Rule 12(b)(1) motion to determine whether the Court has the

subject matter jurisdiction necessary to consider the merits of

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the action.” Khodeir v. Sayyed, No. 15 Civ. 8763 (DAB), 2016 WL

5817003, at *3 (S.D.N.Y. Sept. 28, 2016) (internal quotation marks

and citation omitted); see Town of West Hartford v. Operation

Rescue, 915 F.2d 92, 99 (2d Cir. 1990) (“The question of subject

matter jurisdiction must be confronted at the threshold of the

case.”).

“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 v. Captain’s Cove

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

(citation omitted). Additionally, the court may “refer to evidence

outside the pleadings.” Makarova v. United States, 201 F.3d 110,

113 (2d Cir. 2000); see also APWU v. Potter, 343 F.3d 619, 627 (2d

Cir. 2003) (“[W]here jurisdictional facts are placed in dispute,

the court has the power and obligation to decide issues of fact by

reference to evidence outside the pleadings, such as

affidavits.”); Kamen v. Am. Tel. & Tel. Co., 791 F.2d 1006, 1011

(2d Cir. 1986) (“when, as here, subject matter jurisdiction is

challenged under Rule 12(b)(1), evidentiary matter may be

presented by affidavit or otherwise”). The burden of proof is

placed on the plaintiff, who “must prove the existence of subject

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matter jurisdiction by a preponderance of the evidence.” Moser v.

Pollin, 294 F.3d 335, 339 (2d Cir. 2002).

A. Federal Question Jurisdiction and the Grable Doctrine

As “courts of limited jurisdiction,” federal courts possess

“only that power authorized by Constitution and statute.” Kokkonen

v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994).

Congress has granted federal courts jurisdiction over actions

“arising under the Constitution, laws, or treaties of the United

States.” 28 U.S.C. § 1331. “[D]eterminations about federal

jurisdiction require sensitive judgments about congressional

intent, judicial power, and the federal system.” Merrell Dow

Pharms. Inc. v. Thompson, 478 U.S. 804, 810 (1986). Moreover, the

Supreme Court has “forcefully reiterated” the “need for prudence

and restraint in the jurisdictional inquiry[.]” Id.

Typically, plaintiffs invoke federal-question jurisdiction by

pleading causes of action created by federal law. See Gunn v.

Minton, 568 U.S. 251, 257 (2013). However, even when a plaintiff

pleads only state-law causes of action, federal jurisdiction may

still exist in “a special and small category of cases,” Empire

Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 699 (2006),

namely, those that “implicate significant federal issues,” Grable

& Sons Metal Products, Inc. v. Darue Eng’g & Mfg., 545 U.S. 308,

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312 (2005) (“Grable”); see also NASDAQ OMX Grp., Inc. v. UBS Sec.,

LLC, 770 F.3d 1010, 1019 (2d Cir. 2014) (“[T]he Supreme Court has

been sparing in recognizing state law claims fitting this

criterion.”). It is well-settled that “the mere presence of a

federal issue in a state cause of action does not automatically

confer federal-question jurisdiction.” Merrell Dow Pharms., 478

U.S. at 813; see also Grable, 545 U.S. at 314 (the presence of a

federal issue does not operate “as a password opening federal

courts to any state action embracing a point of federal law.”).

The Supreme Court has established a four-part test used to

determine whether federal question jurisdiction exists. Grable,

545 U.S. at 314; Gunn, 568 U.S. at 258. “[F]ederal jurisdiction

over a state law claim will lie if a 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.” Gunn, 568 U.S. at

258. This is not a balancing test -- jurisdiction is only proper

“[w]here all four of these requirements are met.” Id. The

presence of these four factors indicates a “‘serious federal

interest in claiming the advantages thought to be inherent in a

federal forum,’ which can be vindicated without disrupting

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Congress’s intended division of labor between state and federal

courts.” Id. (quoting Grable, 545 U.S. at 313-314).

B. Application

In the instant case, AMTAX alleges that the Court has subject

matter jurisdiction pursuant to 28 U.S.C. § 1331 “because the

action raises necessary, disputed, and substantial issues relating

to Section 42(i)(7) of the [Internal Revenue Code] and its

interplay with other provisions of the [Internal Revenue Code] and

corresponding federal regulations that extend well beyond Section

42.” Compl. ¶ 16. AMTAX attempts to distinguish this case from

the Federal Massachusetts Action by arguing that the case in front

of the First Circuit “dealt primarily with the interpretation of

the partnership agreement,” Opp. at 8, while the instant case

requires the Court to interpret Section 42(i)(7), see Opp. at 2,

7-8; Sur-Reply at 2. AMTAX contends that the First Circuit

declined to reach the question of whether such claims would support

federal question jurisdiction. Sur-Reply at 2; AMTAX Holdings

227, LLC, 15 F.4th at 558-59 (observing that AMTAX’s complaint

“suggest[ed] that interpretation of section 42(i)(7) might be

necessitated by claims for breach of provisions of the Agreement

requiring TD II not to endanger tax benefits and to comply with

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section 42(i)(7),” but, because AMTAX never fleshed out that

theory, it was not properly before the court).

CohnReznick maintains that none of the four Grable factors

has been met and that the Court thus lacks subject matter

jurisdiction over AMTAX’s state law claims. It also argues that

the Federal Massachusetts Action is instructive in that the First

Circuit already found that disputes relating to the ROR Agreement

do not support federal question jurisdiction. According to

CohnReznick, the First Circuit’s reasoning applies equally here

because defendant “performed the [right of first refusal]

calculation in accordance with its review of the [ROR Agreement].”

Reply at 3 (emphasis in original).

This Court recognizes that the allegations and parties differ

slightly in the instant case from those at issue in the Federal

Massachusetts Action. However, as in the Federal Massachusetts

Action, AMTAX has not sustained its burden of proving by a

preponderance of the evidence that its claims depend on federal

tax law rather than the parties’ interpretation of a sui generis

contract. Thus, the First Circuit’s opinion is highly instructive

to this Court’s analysis. The Court will now consider each Grable

prong in turn.

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1. The Federal Issue is Not Necessarily Raised

The first prong of the Grable test considers whether a state

law claim necessarily raises a question of federal law. This

requirement is met where “the plaintiff’s right to relief

necessarily depends on resolution of a . . . question of federal

law.” Empire Healthchoice Assurance, 547 U.S. at 690 (internal

quotation marks omitted); see also New York ex rel. Jacobson v.

Wells Fargo Nat’l Bank, N.A., 824 F.3d 308, 315–16 (2d Cir. 2016)

(“Jacobson”) (“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)).

Federal jurisdiction only lies if “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.”

Tantaros v. Fox News Network, LLC, 12 F.4th 135, 141 (2d Cir.

2021). The inquiry “must be unaided by anything alleged in

anticipation or avoidance of defenses which it is thought the

defendant may interpose . . . even if the defense is anticipated

in the plaintiff’s complaint, and even if both parties admit that

the defense is the only question truly at issue in the case.” Id.

at 141-42 (internal quotation marks and citation omitted). “[A]

mere speculative possibility that a federal question may arise at

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some point in the proceeding” is insufficient to establish federal

jurisdiction. Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S.

480, 493 (1983).

Here, AMTAX argues that a federal issue is necessarily raised

because its claims require the interpretation of Section 42(i)(7)

and other related Internal Revenue Code (the “Code”) provisions.

Compl. ¶ 16. Specifically, plaintiff alleges that (1) its breach

of fiduciary duty claim depends on defendant’s calculation of the

purchase price in a manner that “was inconsistent with federal tax

law,” id. ¶ 118; (2) its professional negligence claim relates to

the same calculation that “threaten[ed] the tax benefits AMTAX

received over the life of the Partnership” by excluding exit taxes,

Opp. at 9, Compl. ¶ 126; (3) it “reasonably relied on” defendant’s

misrepresentation that it would provide independent advice to

protect its tax status, Compl. ¶ 139; and (4) defendant was

unjustly enriched by calculating the purchase price incorrectly in

order to “ingratiate itself to the low-income housing nonprofit

community,” id. ¶ 143; see also Opp. at 8-9. According to

plaintiff, “[e]ngrained in each of these allegations is the issue

of whether CohnReznick’s tax advice and calculations were

consistent with federal tax law,” which requires the

interpretation of the Code. Opp. at 9. CohnReznick, on the other

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hand, maintains that plaintiff has not necessarily raised a federal

issue because “a finding . . . that [CohnReznick] owed no duty to

AMTAX would result in the dismissal of AMTAX’s claims without

analysis of the Code.” Reply at 4; see also Mot. at 12-13.

This Court agrees with CohnReznick, though based on slightly

different reasoning. Despite AMTAX’s repeated attempts to

characterize the purchase price as having been calculated pursuant

to Section 42(i)(7), see, e.g. Compl. ¶¶ 41, 88, 118, 127, 128,

143, 145, it is clear from the documents attached to AMTAX’s

complaint that the price was, in fact, calculated based on the

language contained in the ROR Agreement, see ECF No. 1-3 at 2-3

(an email chain between CohnReznick and TDC personnel discussing

the calculation of the purchase price, in which TDC’s counsel

circulated the language of the ROR Agreement’s purchase price

provision while making no reference to Section 42(i)(7)); see also

ROR Agreement at 1-2. Thus, AMTAX’s argument that its claims rest

on the interpretation of Section 42(i)(7), rather than the ROR

Agreement, is too tenuous to support federal jurisdiction. See

Arbaugh v. Y&H Corp., 546 U.S. 500, 513 n.10 (2006) (“A claim

invoking federal-question jurisdiction . . . may be dismissed for

want of subject-matter jurisdiction if it is not colorable, i.e.,

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if it is ‘immaterial and made solely for the purpose of obtaining

jurisdiction’”).

Moreover, plaintiff’s attempt to compare this case to

Jacobson is unavailing. Opp. at 9. Jacobson arose from a qui tam

action in which defendant allegedly filed false tax returns in

order to claim federal income tax exemptions for pooled residential

mortgage trusts. 824 F. 3d at 317. Liability there was predicated

explicitly on the interpretation of certain definitions within the

Code and federal regulations, including “real estate mortgage

investment conduit,” “qualified mortgages,” and “defective

obligation.” Id. at 312, 317. Here, by contrast, plaintiff simply

does not assert -- nor could it given the e-mail chain attached to

its complaint, ECF No. 1-3 -- that CohnReznick calculated the price

based on the Section 42(i)(7) of the Code rather than the ROR

Agreement. Nor does plaintiff implicate the proper interpretation

of Section 42(i)(7) by alleging a breach of contract claim that

the ROR Agreement obligated the parties to comply with the statute

or to avoid endangering plaintiff’s tax benefits. See AMTAX

Holdings 227, LLC, 15 F.4th at 558-59. Rejecting AMTAX’s assertion

that its case “necessarily raises a federal issue,” the First

Circuit noted that “Section 42(i)(7) provides only that ‘no Federal

income tax credit shall fail to be allowable’ when a qualifying

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right of first refusal is in effect. Nothing in the statute either

suggests or implies that it voids noncompliant right of first

refusal agreements.” Id. at 557. Therefore, this case does not

“necessarily raise” the federal question of the correct

interpretation of Section 42(i)(7).

2. The Federal Issue is Actually Disputed

Although it is not necessary for the Court to consider the

remaining Grable factors, it will do so for the sake of

completeness. See Gunn, 568 U.S. at 258. A federal issue is

“actually disputed” where the question is “the central point of

dispute” between the parties. Id. at 259. Here, AMTAX argues

that the federal issue is actually disputed because its “theory of

liability involves a construction of Section 42(i)(7) and an

interpretation of the Code that CohnReznick disputes,” Opp. at 10,

while CohnReznick maintains that the central issue in dispute is

whether defendant owed any duty to plaintiff “given the lack of

privity between the parties,” Mot. at 13.

The Court does not doubt that the parties dispute the meaning

of Section 42(i)(7) and whether CohnReznick acted in accordance

with the statute. Regardless, the other three Grable requirements

have not been satisfied.

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3. The Federal Issue is Not Substantial

The third factor, that the federal issue be “substantial,”

requires the Court to determine whether the purported federal issue

is “importan[t] . . . to the federal system as a whole.” Gunn,

568 U.S. at 260. “[I]t is not enough that the federal issue be

significant to the particular parties in the immediate suit.” Id.

Thus, “courts have typically found a substantial federal issue

only in those exceptional cases that go beyond the application of

some federal legal standard to private litigants’ state law claims,

and instead implicate broad consequences to the federal system or

the nation as a whole.” Pritika v. Moore, 91 F. Supp. 3d 553, 558

(S.D.N.Y. 2015); see also Gunn, 568 U.S. at 263-64 (noting that

the “resolution of a patent issue in the context of a state legal

malpractice action can be vitally important to the particular

parties in that case,” but that more is needed to “demonstrat[e]

that the question is significant to the federal system as a

whole”). An issue is likely to be substantial if it “present[s]

a nearly pure issue of law . . . that could be settled once and

for all and thereafter would govern numerous . . . other cases.”

Empire Healthchoice Assurance, 547 U.S. at 700. By contrast, cases

that are “fact-bound and situation-specific . . . are not

sufficient to establish federal arising under jurisdiction.”

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Gunn, 568 U.S. at 263 (internal quotation marks and citation

omitted). “[S]ubstantiality must be determined based on a careful,

case-by-case judgment.” NASDAQ OMX Group, 770 F.3d at 1028.

According to AMTAX, the alleged federal interest here --

whether CohnReznick correctly calculated the purchase price in

accordance with Section 42(i)(7) -- is “plainly substantial”

because it “involves federal tax law” and “implicates not only the

collection of tax revenue by the Treasury, but also the proper

functioning of a federal program that is based, in significant

part, on tax incentives.” Opp. at 10-11. CohnReznick, on the

other hand, maintains that AMTAX’s claims do not implicate federal

activity, as the IRS is not a party to this action, Mot. at 13-

14, and plaintiff is not challenging “the Partnership’s right to

collect tax credits for which AMTAX has already enjoyed the

benefit,” Reply at 5.

AMTAX’s argument is unpersuasive, as its state-law claims

ultimately rest on the interpretation of the ROR Agreement’s

purchase price provision, not federal tax law. See supra 25-27.

As the First Circuit pointed out, “right of first refusal

agreements are sui generis.” AMTAX Holdings 227, LLC, 15 F. 4th

at 558. This point is bolstered by at least one of the publications

cited in AMTAX’s complaint, which explains the many ways in which

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participants in the LIHTC program may structure their right of

first refusal agreements with regard to both pricing and terms.

Compl. ¶ 37; see HUD Report at 29-31. Thus, this case is too

“fact-bound and situation-specific,” Empire Healthchoice

Assurance, 547 U.S. at 700–701, to “suggest broad significance to

the federal government or other parties,” AMTAX Holdings 227, LLC,

15 F.4th at 558.

AMTAX attempts to avoid this outcome by relying on Grable and

Jacobson for the general proposition that “claims requiring the

interpretation of the federal tax code raise a substantial federal

question.” Opp. at 8; see also id. at 10 (citing Grable, 545 U.S.

at 315, and Jacobson, 824 F.3d at 318). However, unlike in Grable,

plaintiff’s claims do not “center[] on the action of a federal

agency (IRS) and its compatibility with a federal statute,” but

rather on a straightforward contract interpretation question

triggered by a dispute between private litigants. Empire

Healthchoice Assurance, 547 U.S. at 700.

And, in Jacobson, the Second Circuit found that the federal

question was substantial because the issue “govern[ed] what is now

a trillion-dollar national [mortgage-backed securities] market”

and because the plaintiff’s claims “raise[d] a threshold question

of law relating to mortgage-backed securities generally.” 824

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F.3d at 318. Conversely, AMTAX has failed to “furnish[] any basis

for concluding that a large number of LIHTC transactions would be

affected by the federal-law issue here,” i.e., whether a right of

first refusal negotiated between parties involved in the LIHTC

program must include exit taxes when calculating the purchase

price. AMTAX Holdings 227, LLC, 15 F.4th at 558. In fact, the

HUD Report relied on by AMTAX observed that “exit taxes are not a

major issue in establishing Year 15 sales prices,” with “[o]nly

one syndicator . . . nam[ing] recovery of exit tax liability as a

goal they seek to achieve for the LP investors.” See HUD Report

at 31 (emphases added). Thus, even if AMTAX’s claims did

necessitate an interpretation of Section 42(i)(7), this Court is

not convinced that this case would “implicate broad consequences

to the federal system or the nation as a whole,” which are required

to establish federal question jurisdiction. Pritika, 91 F. Supp.

3d at 558; see also Mikulski v. Centerior Energy Corp., 501 F.3d

555, 570 (6th Cir. 2007) (citing Grable, 545 U.S. at 319, for the

proposition that “[w]hile 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. . . . The government is free to interpret and

-31-

apply the tax code as it sees fit, without the slightest regard

for this lawsuit.”).

Finally, plaintiff relies on Riseboro Cmty. Partnership v.

SunAmerica Housing Fund No. 682, 401 F. Supp. 3d 367 (E.D.N.Y.

2020) to argue that the “proper meaning of Section 42(i)(7) is a

substantial and disputed issue of federal tax law that should be

decided in federal court.” Opp. at 2, 11. However, Riseboro is

also readily distinguishable. There, the plaintiff alleged that,

in order to determine whether the term “right of 1st refusal” in

Section 42(i)(7) differed from its meaning under New York common

law, the applicable agreement “‘[could not] be interpreted purely

under New York common law, but must be interpreted to be consistent

with the statutory scheme of Section 42’”. Riseboro, 401 F. Supp.

3d at 373 (quoting Riseboro’s complaint) (emphasis added). Because

that assessment “would not be based on the specific language of

the [parties’ right of first refusal agreement] but rather on its

interpretation of Congress’ intent in drafting,” the court found

that this “purely legal question” was “substantial and [would] be

applicable to many other LIHTC agreements nationwide.” Id. at 374

(emphasis added). By contrast, AMTAX has failed to demonstrate

that its claims depend on the interpretation of the Tax Code rather

than the specific language of the ROR Agreement

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-- in fact, its own supporting documents suggest otherwise. ECF

No. 1-3 at 2-3. Accordingly, the Court agrees with the First

Circuit that “it is questionable whether the outcome of the

litigation will have ramifications for other cases.” AMTAX

Holdings 227, LLC, 15 F.4th at 558.

4. The Exercise of Federal Jurisdiction Would Disrupt

Congress’ Carefully Drawn Scheme

Finally, the Court turns to the fourth requirement under

Grable: whether the exercise of federal jurisdiction would disrupt

the federal-state balance. “[E]ven when the state action discloses

a contested and substantial federal question . . . the federal

issue will ultimately qualify for a federal forum only if federal

jurisdiction is consistent with congressional judgment about the

sound division of labor between state and federal courts governing

the application of § 1331.” Grable, 545 U.S. at 313-14.

“[D]eterminations about federal jurisdiction require sensitive

judgments about congressional intent, judicial power, and the

federal system.” Merrell Dow Pharm. Inc. v. Thompson, 478 U.S.

804, 810 (1986). In determining whether a federal issue can be

resolved in federal court without disrupting the federal-state

judicial balance, courts should consider (1) whether Congress has

expressed any preference for state versus federal jurisdiction

over the type of claim at issue; (2) any impact on the volume of

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federal court litigation if jurisdiction is accepted; (3) the

possibility of causing a significant shift of what were

traditionally state cases into federal cases; and (4) the

litigants’ interest in a federal forum. See Jacobson, 824 F.3d at

316.

AMTAX claims that a finding of federal jurisdiction here would

not “trigger a voluminous amount of cases or transform state court

litigation” because “it is the rare such action that hinges on the

proper interpretation of an admittedly unique [right of first

refusal agreement] under federal tax law.” Opp. at 11 (quoting

Riseboro, 401 F. Supp. 3d at 376 (internal citation and quotation

marks omitted)). According to plaintiff, CohnReznick’s arguments

to the contrary are improperly premised on cases concerning

accountant errors where the interpretation of federal tax law was

not in dispute, while failing to provide any persuasive support

for its position that state-law claims relating to accountant error

can support federal jurisdiction. Id.

In response, CohnReznick maintains that it is well-

established that state law malpractice claims cannot satisfy this

Grable element, as it would open the floodgates to the filing of

malpractice claims in federal court. Mot. at 15 (“Every plaintiff

who has a malpractice claim against an accountant that involves

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the tax Code (which accountants rely on with regularity) and every

plaintiff who has a malpractice claim against a lawyer that

requires interpretation of any federal statute could file such

claims in federal court.”). This Court agrees.

While “state court is not the traditional forum for

interpretation of the federal tax laws,” Jacobson, 824 F.3d at

318, the states “have ‘a special responsibility for maintaining

standards among members of the licensed professions,’” Gunn, 568

U.S. at 264; see also Nat’l Inst. of Fam. & Life Advocs. v. Becerra,

585 U.S. 755, 769 (2018) (citing NAACP v. Button, 371 U.S. 415,

438 (1963)) (“Longstanding torts for professional malpractice . .

. ‘fall within the traditional purview of state regulation of

professional conduct.’”); Klein v. Aicher, 19 Civ. 9172 (RA), 2020

WL 4194823, at *5-6 (S.D.N.Y. Jul. 21, 2020) (dismissing for lack

of subject matter jurisdiction because, among other reasons,

plaintiff’s state law claims that required some consideration of

a federal statute nonetheless raised “difficult issues” concerning

legal malpractice and requirements of privity under New York law).

Allowing federal jurisdiction over countless state-law tort claims

concerning accountants’ interpretation of the Code would clearly

disrupt the appropriate balance of federal and state judicial

responsibilities, as it is hardly “the rare . . . case [involving

-35-

accountant error] that raises a contested matter of federal [tax]

law.” Jacobson, 824 F.3d at 316 (citing Grable, 545 U.S. at 315);

see also Gunn, 568 U.S. at 263-64 (federal question jurisdiction

not triggered for malpractice claims relating to patent litigation

because the resolution of a “hypothetical patent issue”

insufficiently implicated a federal interest, particularly given

state courts’ role as the traditional forum for malpractice cases).

Moreover, as the First Circuit noted, Congress has delegated

the oversight of compliance with LIHTC program requirements to

state agencies, suggesting that states are entirely capable of

interpreting the provisions of the Code relating to the LIHTC

program. AMTAX Holdings 227, LLC, 15 F.4th at 558. Given this

delegation, we agree that it is unclear “how a state court could

destabilize the program by ruling on the meaning of section

42(i)(7).” Id.

CONCLUSION

For the reasons stated above, defendant’s motion to dismiss

for lack of subject matter jurisdiction is granted without

prejudice. See Katz v. Donna Karan Co., 872 F.3d 114, 121 (2d

Cir. 2017) (“[W]hen a case is dismissed for lack of federal subject

matter jurisdiction, Article III deprives federal courts of the

power to dismiss the case with prejudice.”) (internal quotation

-36-

marks and citation omitted). Having concluded that the Court lacks

subject matter jurisdiction in this case, we do not reach

defendant’s motion to dismiss for failure to state a claim or the

Nonprofit’s motion to intervene. The Clerk of the Court is

respectfully directed to terminate the motions pending at ECF Nos.

33 and 35 and dismiss the action.

SO ORDERED.

Dated: June 4, 2024

New York, New York

____________________________

NAOMI REICE BUCHWALD

UNITED STATES DISTRICT JUDGE

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