Brennan v. Southwest Airlines Co.

• Decision Date: 28 January 1998
• Docket Number: No. 96-17053,96-17053
• Parties: -566, 98 Cal. Daily Op. Serv. 705, 98 Daily Journal D.A.R. 984 Margaret BRENNAN; Michael Manders; and Ann Dichov, on behalf of the general public and all others similarly situated, Plaintiffs-Appellants, v. SOUTHWEST AIRLINES COMPANY; Alaska Airlines, Inc.; and United Air Lines, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1405

134 F.3d 1405

81 A.F.T.R.2d 98-566, 98 Cal. Daily Op. Serv. 705,

98 Daily Journal D.A.R. 984

Margaret BRENNAN; Michael Manders; and Ann Dichov, on

behalf of the general public and all others

similarly situated, Plaintiffs-Appellants, v. SOUTHWEST AIRLINES COMPANY; Alaska Airlines, Inc.; and United Air Lines, Inc., Defendants-Appellees.

No. 96-17053.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 7, 1997.

Decided Jan. 28, 1998.

Gary J. Near, San Francisco, California; Steven M. Kipperman, Steven M. Kipperman Law Corporation, San Francisco, California, for plaintiffs-appellants.

Robert C. Walters, Russell Yager, Vinson & Elkins, L.L.P., Dallas, Texas; Christopher B. Hockett, McCutchen, Doyle, Brown & Enerson, L.L.P., San Francisco, California, for defendant-appellee Southwest Airlines Co.

Robert A. Goodin, Goodin, MacBride, Squeri, Schlotz & Ritchie, L.L.P., San Francisco, California; Parker C. Folse, III, Susman Godfrey, L.L.P., Seattle, Washington, for defendant-appellee Alaska Airlines, Inc.

Farley J. Neuman, Charles E. Perkins, Jenkins, Goodman & Neuman, San Francisco, California, for defendant-appellee United Air Lines, Inc.

Fred M. Blum, Jaffe, Trutanich, Scatena & Blum, San Francisco, California, for amicus curiae International Airline Passengers Association.

Appeal from the United States District Court for the Northern District of California; Vaughan R. Walker, District Judge, Presiding. D.C. No. CV-96-01841-VRW.

Before: GOODWIN and T.G. NELSON, Circuit Judges, and RHOADES, ^* District Judge.

RHOADES, District Judge:

I. Overview

The district court denied Plaintiffs' Motion to Remand to state court and granted Defendants' Motion for Judgment on the Pleadings. Plaintiffs appeal. For the reasons stated below, we affirm the district court in both respects.

II. Background

Section 4261 of the Internal Revenue Code ("IRC") required airline passengers to pay a ten percent excise tax on domestic air transportation commenced prior to 1996. The IRC required airlines to collect the tax from their customers and remit the proceeds twice monthly to the Internal Revenue Service ("IRS"). 26 U.S.C. § 4291; 26 C.F.R. 40.6302(c)-1(b)(1)(i). The IRC had imposed this tax since 1941. See Revenue Act of 1941, ch. 412, 55 Stat. 687, 721 (1941).

Airlines routinely sold tickets in 1995 for flights in 1996--flights to which the tax did not apply. Many airlines collected the tax on these tickets anyway because they expected Congress to extend the tax into 1996. ¹ The airlines expectations were proved wrong, however, when President Clinton vetoed the bill that would have extended the tax. ² Nevertheless, the airlines continued to collect the tax throughout the remainder of 1995 because they expected Congress to renew it shortly before 1996. Some airlines also collected the tax on tickets sold in early 1996 because they expected Congress to reenact the tax retroactively. However, Congress did not renew the tax until August 1996 and did not make it retroactive. Thus, thousands of airline passengers paid a "tax" that the IRC did not authorize.

The Defendant airlines remitted most of the money to the IRS, although they provided a handful of refunds directly to some passengers. In addition, Defendants may have placed some of the money into escrow accounts. Defendants apparently did not pocket any of the money for their own benefit.

On April 25, 1996 Plaintiffs filed this action in state court against Defendants Southwest Airlines Co., Alaska Airlines, Inc., and United Air Lines, Inc. Plaintiffs sued on behalf of themselves and two classes of persons: individuals who paid the tax in 1995 for air travel that commenced in 1996, and persons who paid the tax in 1996 for travel that commenced before Congress reenacted the tax. Plaintiffs alleged state-law causes of action for unlawful business practices and breach of contract. Plaintiffs also sought declaratory relief and an accounting.

The airlines removed the action to the United States District Court for the Northern District of California. Plaintiffs then filed a Motion to Remand, arguing that the district court lacked subject-matter jurisdiction over their state-law claims. Two days later, the airlines filed a Motion for Judgment on the Pleadings.

On September 6, 1996 the district court denied Plaintiffs' motion to Remand and granted the airlines' Motion for Judgment on the Pleadings. On October 4, 1996 Plaintiffs timely appealed to this Court, which has jurisdiction under 28 U.S.C. § 1291.

III. Discussion

The first issue is whether the district court properly denied Plaintiffs' Motion to Remand. The second issue is whether the district court correctly granted the airlines' Motion for Judgment on the Pleadings.

A. Whether The District Court Properly Denied Plaintiffs' Motion To Remand

Plaintiffs argue that the district court improperly denied their Motion to Remand because they pleaded only state-law causes of action. Therefore, Plaintiffs argue, the district court lacked subject-matter jurisdiction.

The airlines argue that despite the fact that Plaintiffs pleaded only state-law causes of action expressly, Plaintiffs' suit arises under federal law because, in substance, it constitutes a suit for a tax refund. Defendants therefore argue that the district court had subject-matter jurisdiction under 28 U.S.C. § 1331 and the "artful pleading" doctrine. ³

1. Standard of Review

We review de novo the denial of Plaintiffs' Motion to Remand. Sullivan v. First Affiliated Sec., Inc., 813 F.2d 1368, 1371 (9th Cir.1987), cert. denied, 484 U.S. 850, 108 S.Ct. 150, 98 L.Ed.2d 106 (1987).

2. Legal Standards Governing Removal

In general, district courts have federal-question jurisdiction only if a federal question appears on the face of a plaintiff's complaint. Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149, 152, 29 S.Ct. 42, 43, 53 L.Ed. 126 (1908); Sullivan, 813 F.2d at 1371. However, the artful pleading doctrine creates an exception to this general rule. Artful pleading exists where a plaintiff articulates an inherently federal claim in state-law terms. "A traditional example of the artful pleading doctrine is one in which the defendant has a federal preemption defense to a state claim and federal law provides a remedy." Sullivan, 813 F.2d at 1372.

It is well established that the IRC provides the exclusive remedy in tax refund suits and thus preempts state-law claims that seek tax refunds. See Sigmon v. Southwest Airlines Co., 110 F.3d 1200, 1204 (5th Cir.1997) (stating on similar facts that "[t]he exclusive remedy provided by the Internal Revenue Code ... preempts ... state-law claims against a private entity"), cert. denied, --- U.S. ----, 118 S.Ct. 370, 139 L.Ed.2d 268 (1997); Kent v. Northern Cal. Regional Office of Am. Friends Serv. Comm., 497 F.2d 1325, 1328 (9th Cir.1974) (noting that "the procedures for obtaining judicial review of tax liability were designed to be the exclusive methods for litigating federal tax liability"). Accordingly, we must determine whether Plaintiffs have filed a tax refund suit, as Defendants claim. If they have, then the district court had jurisdiction and properly denied Plaintiffs' Motion to Remand.

3. Whether Plaintiffs Have Filed A Tax Refund Suit

Plaintiffs argue that because no statute authorized an excise tax on air travel that commenced in 1996, the ten percent surcharge was not a tax. A fortiori, Plaintiffs argue, they have not sued for a tax refund.

This argument has superficial appeal but it nevertheless misses the mark. The question is not whether the airlines collected an internal revenue tax. The question is whether Plaintiffs have filed a tax refund suit within the meaning of the statute that governs tax refund suits. To answer this question, we must look to the text of the statute. See Continental Cablevision, Inc. v. Poll, 124 F.3d 1044, 1049 (9th Cir.1997) (noting that "the starting point for interpreting a statute is the language of the statute itself").

a. The Express Language Of 26 U.S.C. § 7422(a) Establishes That Plaintiffs Have Filed A Tax Refund Suit

26 U.S.C. § 7422(a) describes a tax refund suit as a "suit or proceeding ... in any court for the recovery of any revenue tax alleged to have been erroneously or illegally assessed or collected, ... or of any sum alleged to have been ... in any manner wrongfully collected...." 26 U.S.C. § 7422(a) (emphasis added). ⁴

This statute's unambiguous language dooms Plaintiffs' argument. See Poll, 124 F.3d at 1049 (stating that clear statutory "language must ordinarily be regarded as conclusive"). Section 7422 contrasts the narrow concept of an "internal revenue tax" with the broad concept of "any sum." See Flora v. United States, 362 U.S. 145, 149, 80 S.Ct. 630, 632-33, 4 L.Ed.2d 623 (1960) (noting that one should read the statute in the disjunctive). The statute makes clear, however, that a suit to recover either a "tax" or a "sum" constitutes a suit for a tax refund. See id. Thus, the statute means that if someone wrongfully collects money as a tax, then a suit to recover the sum constitutes a tax refund suit, even if the sum did not literally constitute an "internal revenue tax." Id. (holding that "the function of the phrase ['any sum'] is to permit suit for recovery of items which might not be designated as ... 'taxes' ... by Congress or the courts"). ⁵

Here, the airlines may not have collected an internal revenue tax, but they nevertheless collected a "sum" as a tax. ⁶ Therefore, Plaintiffs have filed a tax refund suit within the meaning of the IRC. ⁷

b. Policy Considerations Confirm That § 7422 Governs The Instant Case

The correctness of our holding becomes apparent when one considers the consequences of accepting Plaintiffs' argument instead. Accepting Plaintiffs' argument would permit a taxpayer to evade the strictures of § 7422 every time an IRS collection agent collected a tax without authority. This would render §...