APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 79-2700)
Before Aldisert, Rosenn and Garth, Circuit Judges.
This appeal requires us to decide if a demand by personal representatives of a decedent for access to corporate papers for the purpose of preparing a federal estate tax return constitutes a case or controversy arising under the "laws of the United States" in order to confer federal subject matter jurisdiction under 28 U.S.C. §§ 1340*fn1 and 1331(a).*fn2 Appellants Susan Mitschele Jensen and Harry A. Specht, Co-Executors of the Estate of Robert J. Mitschele, filed a complaint in the district court seeking access to financial records of the appellee corporations. Decedent Robert Mitschele and his brothers, appellees Ralph E. and Norman F. Mitschele, purportedly owned the stock of each of the corporations in three equal parts at the time of his death. Appellants' avowed purpose in seeking the access is to prepare accurate federal estate tax returns. The district court dismissed the action for want of subject matter jurisdiction. Jensen and Specht appeal. Because appellants rely on the same analysis and authority to support their claim of jurisdiction under both sections, a single discussion will answer both arguments.
At the heart of the controversy between these parties is an alleged "buy-out" agreement made by the decedent and his brothers approximately one month before his death. By that agreement, each brother bound himself and his estate to sell his stock to the others for $200,000.00 at his death. Appellants believe that the true value of the decedent's stock at his death was substantially greater than this figure, and that they may be entitled to set aside the buy-out agreement. Alternatively, they agree that the buy-out agreement caused a transfer to Robert Mitschele's brothers, at his death, of the difference between the true value of Robert's holdings and $200,000.00, and that the estate will be liable for tax on the amount of that transfer.
We believe that Judge Biunno correctly characterized this action in the proceedings below:
I don't see federal jurisdiction. The fact that the proper value of this stock, if he own(ed) stock, will have an influence on how much his estate taxes are, doesn't make this a federal case at this point, because the major point is that the executors, or co-executors, are interested in marshaling the assets of the estate, which is a state function through the Probate court or through the Chancery Division. Depending on what success or failure ensues with those efforts, they may pay more or less federal tax, which is really a consequence of the estate matter.
App. at 31a. Like Judge Biunno, we believe that appellants' true interest is in marshaling the assets of the estate. When appellants complete that function, federal estate tax consequences will follow. The larger the size of the estate, the greater will be the potential estate tax liability. That potential liability, however, does not create federal question jurisdiction in these proceedings. If it did, every executor could invoke federal jurisdiction in every attempt to recover or reclaim assets, or to enforce a contract, or to seek damages for a tort, merely by asserting that the proceeding will have an impact on federal estate tax liability. In a somewhat different context, Justice Cardozo wrote:
If we follow the ascent far enough, countless claims of right can be discovered to have their source or their operative limits in the provisions of a federal statute or in the Constitution itself with its circumambient restrictions upon legislative power. To set bounds to the pursuit, the courts have formulated the distinction between controversies that are basic and those that are collateral, between disputes that are necessary and those that are merely possible. We shall be lost in a maze if we put that compass by.
Gully v. First National Bank, 299 U.S. 109, 118, 57 S. Ct. 96, 100, 81 L. Ed. 70 (1936).
To follow the appellants' reasoning in this case far enough would be to create federal jurisdiction over countless claims having an impact on the parties' rights under federal law, especially federal tax law. When the federal consequence is merely "collateral" to the underlying claim of right, those claims simply do not arise under federal law. Although so labelling a matter cannot be allowed to obscure the need for the thoughtful analysis,*fn3 we are confident that in this case the federal consequences can be characterized accurately as collateral to the fundamental dispute.
Appellants assert that the district court has jurisdiction because access to the corporate records is necessary to enable them to comply with obligations imposed by federal law. They purport to find federal obligations in Internal Revenue Code 26 U.S.C. § 6001*fn4 and Treasury Reg. 26 C.F.R. § 20.6001-1.*fn5 Appellants read too much into these sections; to assist their efforts to marshall the assets of this estate, they would have us impose on all executors an obligation greater than Congress or the Internal Revenue Service has ever created. This we decline to do.
Section 6001 authorizes the Secretary of the Treasury to promulgate regulations such as § 20.6001-1, and to require the filing of returns, production of statements, and keeping of records. It does not oblige appellees to furnish the executors with the records in this case. The regulation does create an affirmative duty on appellants, as executors, "to furnish, upon request, copies of any documents in (their) possession . . . relating to the estate" and "copies of balance sheets or other financial statements obtainable by (them) relating to the value of stock . . . ." 26 C.F.R. § 20.6001-1(b) (emphasis added). It does not invest the appellants with a right of action to obtain any records or documents, nor does it compel them to produce records that are not "obtainable." Subsection (c) of the regulation confers the power to obtain records or documents from third parties on the district director of the IRS, but not on executors of estates.
Appellants' position, in sum, is that federal subject matter jurisdiction exists because their cause of action arises under federal law. Federal law gives them no right of action; therefore, they have no right to invoke federal jurisdiction. The dispute between these parties is a matter for the state courts, and we are informed that a state court action seeking the same relief is pending. Perceiving no ...