Sigmon v. Southwest Airlines Co.

• Decision Date: 28 April 1997
• Docket Number: No. 96-10720,96-10720
• Citation: 110 F.3d 1200
• Parties: -2286, 65 USLW 2760, 97-1 USTC P 70,076 Ernesto D. SIGMON, individually and on behalf of all others similarly situated; William Gregory Hassler, individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. SOUTHWEST AIRLINES COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1200

110 F.3d 1200

79 A.F.T.R.2d 97-2286, 65 USLW 2760,

97-1 USTC P 70,076

Ernesto D. SIGMON, individually and on behalf of all others similarly situated; William Gregory Hassler individually and on behalf of all others similarly situated Plaintiffs-Appellants, v. SOUTHWEST AIRLINES COMPANY, Defendant-Appellee.

No. 96-10720.

United States Court of Appeals,Fifth Circuit.

April 28, 1997.

Rehearing Denied May 28, 1997.

Roger L. Mandel, Marc R. Stanley, Dallas, TX, for Plaintiffs-Appellants.

Robert Charles Walters, Russell Yager, Vinson & Elkins, Dallas, TX, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before DUHE, BENAVIDES and STEWART, Circuit Judges.

BENAVIDES, Circuit Judge:

This appeal requires us to determine whether airline passengers can bring suit against an airline to obtain refunds of amounts erroneously collected by the airline as federal excise taxes. We conclude that they cannot.

In late 1995, Ernesto Sigmon and William Hassler each purchased an airline ticket from Southwest Airlines Company ("Southwest") for travel in 1996. In addition to the ticket price, Southwest included a 10% charge on each ticket. Southwest added the 10% charge to all tickets sold on or before December 31, 1995, including tickets for travel in 1996. Southwest charged this amount in expectation that Congress would renew a longstanding excise tax on domestic airline tickets. ¹ See 26 U.S.C. § 4261.

Congress had repeatedly renewed the airline ticket excise tax provision at the eleventh hour. See Pub.L. No. 88-52, § 3(a)(3), 77 Stat. 72 (1963); Pub.L. No. 88-348, § 2(a)(3), 78 Stat. 237 (1964); Pub.L. No. 89-44, § 303(a), 79 Stat. 136, 148 (1965); Pub.L. No. 100-223, § 402(a)(1), 101 Stat. 1486, 1532 (1987); Pub.L. No. 101-508, § 11213(d)(1), 104 Stat. 1388-435 (1990). Southwest's expectation that the tax once again would be renewed was disappointed when President Clinton vetoed the bill containing the airline ticket excise tax. The tax expired on December 31, 1995. Although Congress reenacted the tax nearly nine months later, the tax was not given retroactive application. Pub.L. No. 104-188, § 1609(b), 110 Stat. 1755, 1841 (1996). ²

When the excise tax provision expired at the end of 1995, Southwest had already collected the tax on tickets sold during 1995 for travel during 1996. Ultimately, the taxes collected on these tickets, including those purchased by putative class representatives Sigmon and Hassler, ³ were not owed; the excise tax provision in effect in 1995 imposed the tax based on the date of travel rather than the date of purchase. ⁴ The total amount of erroneously collected excise taxes at issue is unclear; Southwest remitted approximately $18 million to the IRS in January of 1996 for all excise taxes collected during December of 1995.

Sigmon and Hassler allege that they requested refunds from Southwest and that Southwest denied their requests. They brought a class action suit in state court, alleging common-law causes of action for fraud, "for money had and received," and for conversion. Southwest removed the suit to federal district court. Sigmon and Hassler did not move to remand the case to state court. In addition to actual damages, they seek attorneys' fees and costs, exemplary damages, and pre- and post-judgment interest.

Shortly after removal, Southwest filed a motion to dismiss the plaintiffs' complaint. In response, plaintiffs moved for leave to amend their complaint; the district court granted the motion. The plaintiffs' amended complaint asserted an implied cause of action under 26 U.S.C. § 6415(c) and alleged that Southwest had failed to remit to the IRS the amounts collected as excise taxes. ⁵ After plaintiffs filed their amended complaint, Southwest moved to have its motion to dismiss be treated as a motion for summary judgment. The district court granted Southwest's motion and allowed the parties to submit summary judgment evidence.

On May 23, 1996, the district court granted summary judgment in favor of Southwest on three grounds: (1) the Internal Revenue Code, 26 U.S.C. § 7422, preempts the plaintiffs' claims; (2) the Airline Deregulation Act, 49 U.S.C. § 41713, preempts the plaintiffs' claims; and (3) 26 U.S.C. § 6415 does not create an implied cause of action in favor of the plaintiffs.

I.

On appeal, Sigmon and Hassler assert that the district court lacked subject-matter jurisdiction because they asserted only state common-law causes of action against Southwest Airlines in their state-court petition. Southwest Airlines removed to federal court on the ground that plaintiffs stated federal claims under 26 U.S.C. §§ 4261 and 6415. The plaintiffs' state-court petition cites 26 U.S.C. § 6415(c), which they now claim provides them with an implied federal cause of action. We need not decide whether the reference to Section 6415(c) in the state-court petition is sufficient to create a federal question, because plaintiffs' amended federal complaint clearly states an implied cause of action under 26 U.S.C. § 6415(c). This claim constitutes a federal question and thus gives the district court original jurisdiction under 28 U.S.C. § 1331.

Although subject-matter jurisdiction is generally assessed as of the time of removal, there is an exception if the plaintiff voluntarily amends his or her complaint after removal to add a federal cause of action, and the case is "tried on the merits without objection." See Kidd v. Southwest Airlines Co., 891 F.2d 540, 547 (5th Cir.1990). ⁶ In this case, the district court acquired jurisdiction, if it did not already exist, when the plaintiffs amended their federal complaint to include an implied cause of action under federal law. See id. at 546 ("[A]lthough [plaintiff's] initial complaint was not removable, [plaintiff's] decision to 'throw in the towel' and amend his complaint to state an 'unmistakeable federal cause of action' conferred original jurisdiction on the federal court.") (quoting Bernstein v. Lind-Waldock & Co., 738 F.2d 179, 185 (7th Cir.1984)).

The district court had discretion to exercise supplemental jurisdiction over plaintiffs' pendent state-law claims. 28 U.S.C. § 1367(a), (c)(3); see also Cinel v. Connick, 15 F.3d 1338, 1344 (5th Cir.), cert. denied, 513 U.S. 868, 115 S.Ct. 189, 130 L.Ed.2d 122 (1994). The district court's decision to retain jurisdiction in this case was far from an abuse of discretion, especially given that the court disposed of the plaintiffs' pendent state-law claims based on federal preemption. Cf. Statland v. American Airlines, Inc., 998 F.2d 539, 541 (7th Cir.) (after affirming the district court's conclusion that the Federal Aviation Act did not create an implied cause of action in favor of plaintiffs, the court of appeals exercised supplemental jurisdiction to dispose of plaintiffs' remaining state-law claims based on federal preemption), cert. denied, 510 U.S. 1012, 114 S.Ct. 603, 126 L.Ed.2d 568 (1993).

II.

The Internal Revenue Code governs tax refund suits. Under Section 7422(a) of the Code, a taxpayer ⁷ who seeks a refund of federal taxes must first make an administrative refund claim with the Secretary of the Treasury. "No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected ... until a claim for refund or credit has been duly filed with the Secretary...." 26 U.S.C. § 7422(a). Failing an administrative resolution, the taxpayer's remedy is to file suit against the government. 26 U.S.C. § 7422(f)(1)("A suit [for erroneously or illegally assessed or collected taxes] may be maintained only against the United States ....")(emphasis added); Kaucky v. Southwest Airlines Co., 109 F.3d 365, 370 (7th Cir.1997)("Money collected in error by a lawful agent, public or private, of the [IRS] can be recovered only from the government, because a claim or suit to collect such money is a claim or suit for a tax refund.").

Southwest acts as the government's agent in collecting airline ticket excise taxes. 26 U.S.C. § 4291; see also Kaucky, 109 F.3d at 351-52. Section 7422 protects from lawsuits private entities, like Southwest, that are required by statute to collect taxes for the government under threat of criminal penalty for failure to do so. DuPont Glore Forgan Inc. v. AT & T, 428 F.Supp. 1297, 1306 (S.D.N.Y.1977), aff'd, 578 F.2d 1366 (2d Cir.), cert. denied, 439 U.S. 970, 99 S.Ct. 465, 58 L.Ed.2d 431 (1978). ⁸

Although appellants seek the return of amounts collected by Southwest to pay anticipated excise taxes, they argue that the Internal Revenue Code's refund scheme does not apply. The amounts collected, they argue, were not "taxes" because the excise tax statute was not reenacted. It is literally true that the amounts collected ultimately were not taxes. For the reasons that follow, however, "we do not think the literal sense is the right sense." Kaucky, 109 F.3d at 351.

Appellants advance two hypotheticals in support of their position. Suppose, they posit, a law firm added a 10% surcharge to its fees and called it a "federal excise tax," when no such tax existed. Or what if an airline dreamed up a 5% "carry on luggage tax"? The government would have no interest in the collected funds because they are not really "taxes." The culpable tax collectors would not deserve the protection of Section 7422 because they were not really acting as agents for the government. Southwest, they argue, is no different from their hypothetical tax collectors.

Unlike the defendants in these hypotheticals, however, Southwest was not imposing a make-believe tax, nor did it dream up a surcharge and pocket the money for itself. Southwest was collecting an excise tax that has been part of the airline passenger ticket sales landscape for nearly four decades. Here, it was stipulated that Southwest "expect[ed] throughout the second half of 1995 that Congress...