Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing (06/13/2005)

Questions presented: When there is a violation by the Internal Revenue Service of 26 U.S.C. "6335(a) by intentionally ignoring the prerequisite provision requiring personal service of notice of seizure before obtaining service by certified mail, can the defendant in a state quiet title action remove the action to federal court under 28 U.S.C. "144I(b) by claiming that the necessary interpretation of 26 U.S.C. "6335(a) constitutes a substantial federal question and creates original jurisdiction in the district court?

BY SARAH ZYLSTRA, MEDILL NEWS SERVICE

Beginning in 1988, Grable & Sons Metal Products, Inc. did not pay corporate income taxes. The machine shop, which fabricated automotive equipment, failed to do so for another five years.

Finally, in 1994, the Internal Revenue Service seized Grable's property in Eaton Rapids, Michigan, to pay the debt.

But instead of hand-delivering the notice of seizure to Grable, as IRS regulations require, they sent it certified mail. Grable received the notice and did not argue when the IRS took the property, or when the land was later sold to Darue.

Six years later, Grable sought relief in state court in Michigan, claiming the seizure and sale of the land were invalid because no one personally handed over the notice.

Darue moved the case to federal court, "because the Federal District Court had proper jurisdiction," wrote Michael Walton, attorney for Darue.

There are three ways to get a case heard before a federal court: a conflict between parties in two different states, a question regarding the United States Constitution, or a question regarding the federal laws of the United States. The Grable case turns on the wording of the IRS code, making it a federal question, Walton said.

Or does it? "A violation of a federal law doesn't necessarily make it a substantial federal interest," said Charles McFarland, attorney for Grable. "This arose in the state of Michigan between two private parties. No statute says two private parties can to go the federal court after the IRS is not involved any more."

When Grable asked to be moved back to the state court, claiming the federal court didn't have the authority to hear the case, Federal Judge David W. McKeague said no, ruling from the bench that the case was under federal jurisdiction.

Judge McKeague also disagreed with Grable on the IRS question, and told Darue the land was theirs.

"The [IRS] notice requirements are designed to protect the taxpayer by giving him an opportunity to be present at the tax sale and bid on the property," McKeague wrote in his opinion. Grable received notice of the seizure, had ample opportunity to be present at the tax sale, and did not even argue it suffered prejudice by the IRS's failure to personally deliver the notice, McKeague added. Therefore, the court was satisfied that the IRS regulation "was substantially complied with."

Grable appealed to the 6th Circuit Court of Appeals, arguing that the district court made two errors. First, although based on federal tax law, Grable said its case did not present a federal question and should be heard in a state court. Second, Grable renewed its claim that the IRS did not follow the rules in seizing the property, voiding the sale to Darue.

The three-judge panel unanimously affirmed, supporting Darue's ownership of the land. Judge Ann Aldrich easily answered the jurisdiction question in a page and a half. "The IRS must have transparent procedures for seizing and selling property so that people will be willing to purchase property at tax sales," she wrote. "Determining the scope of the IRS's authority to seize property to satisfy a tax debt undoubtably [sic] implicates a substantial federal interest."

McFarland said the appeals court seemed to be confused. "They focused on substantial government interest rather than substantial federal question," he said. "This is a federalism question of states rights versus federal rights."

McFarland said the federal courts could become overloaded if the Supreme Court fails to reverse. "It opens the door for anyone with a federal question involved to move over to federal court," he said, "and the Supreme Court isn't happy about that."

Walton thinks the door has been open for a long time.

"That's how we got here. If they rule this is not a matter of substantial federal question, they will close a door," Walton said. "It involves an interpretation of the internal revenue code and it seems to me that has to be the definition of a substantial issue of federal law."

McFarland disagrees. "There is a serious question as to whether the federal court has the ability to go in and take over a state action," he said. "Just because there is a violation of federal law doesn't mean that's a given."

As to why Grable & Sons didn't pay the taxes in the first place, President Les Grable answered, because the company "was not liable." He declined to elaborate.

On Jan. 7, 2005, the U.S. Supreme Court accepted review in the case and limited review to the first question in Grable & Sons' petititon.

On June 13, 2005, the Court unanimously affirmed, siding 9-0 against Grable and holding that the national interest in providing a federal forum for such tax litigation is sufficiently substantial to support the exercise of federal-question jurisdiction. Justice David Souter wrote the Court's opinion.