Cinotti v Giuliani

[*1] Cinotti v Giuliani 2004 NY Slip Op 51228(U) Decided on September 13, 2004 Supreme Court, New York County Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 13, 2004
Supreme Court, New York County

ARTHUR CINOTTI, JOHN P. CLARK, GENE DUCA, ROBERT W. SPINOSA, ANTHONY J. ARFI, KEVIN J. CALABRESE, RALPH TORRES, and all those, plaintiffs whose names are set forth in schedule "A", which is annexed hereto, incorporated herein and made a part hereof, Plaintiffs,

against

RUDOLPH GIULIANI, Mayor of the City of New York, and as a member of the Board of Trustees of the Correc- tion Officers Variable Supplements Fund and the New York City Employees' Retirement System, ALAN HEVESI, as Comptroller of the City of New York and as a member of the Board of the Correction Officers Variable Supplements Fund and the NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM, THE BOARD OF TRUSTEES OF THE CORRECTION OFFICERS' VARIABLE SUPPLE- MENTS FUND, THE BOARD OF TRUSTEES OF THE CORRECTION CAPTAIN'S AND ABOVE VARIABLE SUPPLEMENTS FUND, THE BOARD OF TRUSTEES OF THE NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM, THE CORRECTION OFFICERS' VARIABLE SUPPLEMENTS FUND, THE CORRECTION CAPTAIN'S AND ABOVE VARIABLE SUPPLEMENTS FUND and THE CITY OF NEW YORK, Defendants.



124914/00

Robert D. Lippmann, J.

This action involves payments made from sources known as Variable Supplements Funds (VSFs), to certain retired members of the uniformed services of the City of New York.

Defendants (hereafter, collectively, the City) are municipal officials and entities responsible for the administration of the VSFs and the City of New York's pension system. Each of the approximately 380 plaintiffs is a former correction officer, and a member of defendant New York City Employees Retirement System (NYCERS). NYCERS is the retirement fund from which retirement payments are made to plaintiffs, and to all other employees of the City of New York, other than policemen, firemen, teachers, and employees of the Board of Education. The VSFs are funded by earnings of investments made from NYCERS funds, which earnings are transferred to the VSFs.

The City moves for summary judgment on the grounds that the complaint fails to state a cause of action; that the court does not have subject matter jurisdiction; and that the plaintiffs lack standing. Plaintiffs seek partial summary judgment on the issue of liability, and, pursuant to CPLR 3126, to strike the City's answer, or in the alternative, to compel discovery.

There are currently nine VSFs which distribute annual payments to service retirees of the Police Department, the Fire Department, the former Transit and Housing Police Forces, and most relevant here, the Department of Corrections.

The police and fire departments have been distributing VSF benefits to eligible beneficiaries for the part 30 years.

In 1999, the Administrative Code of the City of New York was amended, by adding sections 13-194 and 13-195, which established the Correction Officers' Variable Supplement Fund, and Correction Captain's and Above Variable Supplement Fund (hereafter, collectively, COVSF), the newest of the VSFs.

In June of 2000, the cited sections of the Administrative Code were amended to provide a fixed guaranteed supplemental benefit, in lieu of the variable supplemental benefit. This benefit, payable on December 15th, 2000 and on December 15th of each succeeding year, was set at $8,500, with increases in $500 annual increments until 2007, when the payments reach $12,000 per year. The benefit remains at that sum thereafter. Plaintiffs are statutorily ineligible to receive these payments.

These distributions are not pension benefits, although they are made in conjunction with a recipient's pension benefit. The Administrative Code, § 13-194 (2) (b) describes these payments as benefits, which "shall not be, and shall not be construed to constitute, a pension or retirement system or fund," although funded by assets of NYCERS.

The rationale for these descriptions and limitations has been set forth by a legal opinion dated April 6, 2000 from the Office of Counsel of the New York State Department of Taxation and Finance, as follows: The legislation for the various VSF's always contains a clause specifying that the VSF payments are not a pension. This clause gives the Legislature flexibility to amend the rights of the retirees under the various VSF's without running afoul of the injunction in the New York State Constitution against impairing the pensions of public employees (NY Const. art. V §7).

The gravamen of plaintiffs' argument is that, since the variable supplement benefit is funded by NYCERS contributions, the enabling legislation is violative of Section 401 (a) (2) (the exclusive [*2]benefit rule) of the Internal Revenue Code (IRC), which prohibits pension fund contributions to be utilized for non-pension payments. By extension, plaintiffs argue, the removal of funds from NYCERS for the payment of the variable supplemental benefits, which are not pension distributions, renders the NYCERS pension system a non-qualified trust.

The potential practical ramification of which plaintiffs complain is that if the NYCERS pension system loses its status as a qualified pension plan, the NYCERS pension payments which plaintiffs receive will become taxable.

By decision entered on the record on December 13, 2000, Hon. Eileen Bransten, J. S. C., of this court denied plaintiffs' initial application for an injunction, halting the first distribution from COVSF, which was scheduled to occur two days later. She found that plaintiffs herein had failed to demonstrate the prospect of irreparable harm, or a likelihood of success on the merits.

In the amended complaint which was subsequently served (hereafter, the complaint), and which is the subject of the motion practice presently before the court, plaintiffs allege that NYCERS' tax qualified status was destroyed, not by the creation of COVSF, but by the creation of the corresponding Transit Authority VSFs in 1987, 12 years earlier. In the complaint, plaintiffs seek to have the City permanently enjoined from funding any of the VSFs with NYCERS pension assets, or making any further payment of VSF benefits which are derived from NYCERS; an order directing defendants to obtain a determination letter from the Internal Revenue Service (IRS) that the creation of the COVSF from money derived from NYCERS will not jeopardize NYCERS' qualified status, and damages on behalf of each plaintiff for his alleged additional state and federal tax liability.

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Section 612 of the Tax Law of the State of New York defines adjusted gross income for New York State tax purposes as equivalent to federal adjusted gross income, excluding, inter alia, qualified pension plans. Plaintiffs hypothesize that the funding of the variable supplement benefits from NYCERS will result in the classification of their annual pensions as adjusted gross income for New York State tax purposes.

According to The City, current counsel for plaintiffs, who have also represented prior plaintiffs in other, similar actions, apparently instigated an investigation into the mechanism and funding of COVSF by the IRS, by making claims to that agency similar to those made to this court. Thereafter, in 1998, the Chief of Employee Plans and Exempt Organizations Division of the IRS wrote to the Corporation Counsel of the City of New York, stating: We have completed our review of the information you have supplied relative to the City of New York's variable Supplemental Funds.Our review had not disclosed any violations of the exclusive benefit rules.

Between 1988 - 1995, the City of New York received the sum of $176,986,000, representing a 15% transfer, from the six VSFs then in existence, in return for the City of New York's guarantee of VSF benefits, regardless of the VSFs equity investment performance.

In 1999, counsel for plaintiffs herein filed a claim with the IRS, seeking a declaration, inter alia, that funding VSF benefits from assets of NYCERS is violative of the exclusive benefit rule of the IRC and seeking a further declaration that transfer of the assets of VSF benefits to the City was also violative of the exclusive benefit rule of the IRC. The IRS commenced an investigation of this [*3]claim, and met with various New York City officials involved in administration of the VSFs and NYCERS. This litigation was relatively inactive during the pendency of the IRS investigation.

The IRS determined that the $176,986,000 which the City of New York had received between 1988 and 1995, from the six VSFs then in existence, was in fact a reversion in violation of IRC § 401 (a) (2), but that the City had cured the violation by making subsequent contributions to NYCERS. The IRS declined to disqualify NYCERS as a result of the reversions, and agreed to waive any sanction due.

The IRS also determined that the City's pension statutes did not contain necessary provisions specifically complying with sections 401 (a) (2) and 401 (a) (9).

It is the operating and funding mechanisms of the VSFs which are before this court, and not any issues involving reversion. The IRS agreed with the City that the operation and funding mechanism of the various VSFs were not violative of any provision of the IRC, and that NYCERS should not lose tax qualified status as a result of the operation of the VSFs.

An agreement in principle concerning all of the issues which arose during the IRS' inquiry into the VSFs was reached between the City of New York and the IRS, in the Spring of 2002. Among other things, the agreement required the City to draft legislation bringing the language of its pension statutes into code compliance.

The agreement coalesced into a document entitled "Closing Agreement of Final Determination Covering Specific Matters" (hereafter, the Closing Agreement) which was signed by the Corporation Counsel of the City of New York on January 7, 2003, and by the Director of Employee Plans, Tax Exempt and Governmental Entities Operating Division of the IRS on January 31, 2003. Numbered Paragraph 4 of the Closing Agreement states: The Commissioner will not treat the transfers from the New York City Police Department Pension Fund, the New York Fire Department Pension Fund, and the New York City Employees' Retirement System to their respective VSFs as a violation of section 401(a)(2) of the Code, and the Treasury Regulations promulgated thereunder.

The City argues that the Closing Agreement fully disposes of all of the challenges which plaintiffs raise in this action, and therefore, renders this lawsuit moot. Specifically, the City maintains that if NYCERS is not declared a non-qualified plan, its tax status vis-a-vis plaintiffs will be unaffected.

In the answer to the amended complaint, defendants allege that the complaint fails to state a cause of action; that this court does not have subject matter jurisdiction over the causes of action asserted in the amended complaint; that plaintiffs lack standing to raise the causes of action alleged; that the IRS has already examined the issue of whether the City's VSFs violate the "exclusive benefit" provisions of section 401 (a) (2) of the IRC, and that the agency has determined that they do not; and finally, that pursuant to section 7421 of the IRC, plaintiffs are not entitled to an order compelling the comptroller to seek a determination from the IRS regarding NYCERS' tax qualification.

The entire thesis of the plaintiffs is that they will be harmed by the funding of COVSF with NYCERS assets. However, in a letter dated February 18, 2004, counsel for plaintiffs has taken the [*4]position in a letter to the United States District Judge hearing a companion case involving the same plaintiffs, among others ( Borelli v Secretary of the Treasury, 03 CIV 10089 (SHS)), that, because the plaintiffs herein are retirees, they will suffer no adverse tax consequences if NYCERS is rendered non-qualified. This letter was apparently written in response to concerns raised by the District Judge concerning conflicts of interest of counsel, and full disclosure to the plaintiffs. The lack of adverse tax consequences is also the position taken by the City herein (see Respondent's Memorandum of Law, at 37-39), and is the basis for the City's argument that these plaintiffs lack standing.

State tax exemption of all NYCERS benefits is not dependent upon the federal tax status of NYCERS; rather, it is provided for in section 13-181 of the Administrative Code, and section 612 of the New York State Tax Law. In other words, inasmuch as plaintiffs can demonstrate no prospective injury even if NYCERS loses its tax-exempt status (Gagliardo v Dinkins, 89 NY2d 62 [1996]), they lack standing to maintain this suit. See similarly, Society of the Plastics Indus., Inc. v County of Suffolk, 77 NY2d 761 (1991). It is unclear to this court what effect, if any, disqualification of NYCERS would have upon the federal taxability of plaintiffs' pension benefits, but for reasons set forth below, this issue is irrelevant due to the IRS determination in the Closing Agreement.

Even if plaintiffs did have standing to maintain this action, there is, as a practical matter, no action left to maintain. The Closing Agreement between the City and the IRS (which is under attack by these and other plaintiffs in the related federal action) has, as plaintiffs therein have conceded, resulted in a determination that the tax-exempt status of NYCERS is under no cloud, due to any purported violations of the exclusive benefit rule. The City has drafted and submitted the legislation required by the Closing Agreement. Contrary to plaintiffs' position, the City is under no obligation to assure its passage a promise the City could not be expected to make. It is sufficient under the closing statement that the City provide the legislation, which has been approved by the IRS, and to keep the Commissioner apprised of its status in the Legislature.

To the extent that plaintiffs seek relief which goes beyond either protecting or destroying NYCERS depending upon one's perspective they are not entitled to it. In their first cause of action, plaintiffs seek an order compelling the City to obtain a determination letter from the IRS to the effect that the creation of COVSF from moneys from the NYCERS pension system will not jeopardize the qualified status of NYCERS. They argue that this remedy will offer plaintiffs greater protection than the Closing Agreement, in that a determination letter will estop the IRS from plaintiffs' speculative argument that the agency might change its position.

In other words, plaintiffs seek the remedy of mandamus, pursuant to CPLR 7803 (1), against the individual defendants, sued in their capacity as public officers. However, plaintiffs have not demonstrated that the Comptroller, or any other City official, has a nondiscretionary duty to provide such relief. Plaintiffs direct the attention of this court to no statutory authority which would direct or compel such an act. Matter of Burr v Voorhis, 229 NY 382 (1920).

But plaintiffs have also sued the individual defendants as trustees of the various VSFs and pension funds involved, and argue that the dual role of these individuals has given rise to a conflict of interest. They also argue that the body of case law concerning the remedy of mandamus is inapplicable to these individuals, sued in their capacities as trustees.

The actions of trustees of retirement system funds are subject to judicial review based upon allegations of fraud or bad faith. Mitzner v Jarcho, 44 NY2d 39 (1978). Consideration of the [*5]fiduciary duties of the trustees, and the tax consequences under the law of their actions, are reviewable by the court. Meckes v Cina, 75 AD2d 470 (4th Dept 1980), affd 54 NY2d 894 (1981). To this extent, this court disagrees with the City that this court lacks subject matter jurisdiction over this controversy. However, given the provisions of the Closing Agreement cited above, there is no breach of fiduciary duty, conflict of interest, or obligation to seek a determination letter from the IRS.

Plaintiffs cross-move for partial summary judgment on the issue of liability, based upon the IRS determination that the City violated the exclusive benefit rule in connection with the VSFs 15% payments to the City of New York between 1988-1995. Inasmuch as the IRS has already determined that there is no liability which would arise from the violation, which was cured, the cross motion is nothing more than an unsustainable collateral attack on the Closing Agreement.

Accordingly, it is

ORDERED that the defendants' motion for summary judgment is granted, and the complaint is dismissed with costs and disbursements as taxed by the Clerk of the Court upon the submission of an appropriate bills of costs; and it is further

ORDERED that the cross motion is denied in its entirety; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly.

Dated: September , 2004

E N T E R

ROBERT D. LIPPMANN, J.S.C.