Opposition Brief — Centerior Energy Energy Corp. Corp. v. Mikulski (No. 07-961)

Supreme Court brief2007

Ask Donna

What actually matters in this document.

Text

| FILED

4 1 APR 4 - 2008

OFFICE OF THE CLERK

No. 07-961 SUPREME COURT, U.S.

In The

Supreme Court of the Anited States

Centerior Energy Corporation, et al.,

Petitioners,

Jerome R. Mikulski and Elzetta C. Mikulski,

on behalf of themselves and all others

similarly situated,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Sixth Circuit

BRIEF FOR RESPONDENTS IN OPPOSITION

Thomas R. Theado Eric H. Zagrans

Gary, Naegele & Theado, Counsel of Record

LLC Dennis P. Barron

446 Broadway Avenue Zagrans Guffey LLP

Lorain, Ohio 44052 474 Overbrook Road

(440) 244-4809 Elyria, Ohio 44035

(440) 452-7100

Counsel for Respondents

April 4, 2008

Questions Presented

Whether the Sixth Circuit correctly applied to

the specific facts of this case the well-settled rule,

recently reaffirmed in Grable & Sons Metal

Products, Inc. v. Darue Engineering & Manufac-

turing, 545 U.S. 308 (2005), and Empire Health-

Choice Assurance, Inc. v. McVeigh, 547 U.S. 677

(2006), that federal jurisdiction does not exist

over a state-law claim requiring resolution of

an embedded federal question when the federal

-issue is not “substantial” and when federal juris-

diction would impermissibly disturb the “congres-

sionally approved balance of federal and state

judicial responsibilities,” Grable, 545 U.S. at 314;

see Empire, 547 U.S. at 701. ,

Whether 26 U.S.C. § 7422, which governs admin-

istrative claims for tax refunds from the Internal

Revenue Service, completely preempts tort and

contract claims between private parties, for

which injuries (calculated as equivalent to excess

tax liability) are recoverable as consequential or

compensatory damages.

Table of Contents

Questions Presented

Table of Authorities

Introduction

Statement of the Case

a. The nature of the case

b. The district court proceedings

c. The court of appeals panel proceedings

d. The en banc Sixth Circuit decision

Reasons for Denying the Petition

I. The Court of Appeals’ Decision Denying

Federal Jurisdiction Correctly Applied

Grable and Empire to the Facts of this

Case and Applies the Same Legal

Standard as Every Other Court of

A. The Sixth Circuit Correctly Apphed

this Court’s Precedents to the Cir-

cumstances of this Case

1. The Sixth Circuit faithfully ap-

plied this Court’s decisions

. Petitioners’ criticisms of the

court of appeals’ decision are

unwarranted

B. There Is No Conflict in the Circuits

II. The Sixth Circuit’s Understanding of

§ 7422 Was Correct and .Consistent

with the Decisions of Other Courts of

. The Court of Appeals Correctly

Applied Beneficial National Bank

to the Facts of this Case

. The Sixth Circuit’s Analysis Is

Consistent with Other Courts of

Table of Authorities

Page

Cases

Air Measurement Techs., Inc. v. Akin Gump

Strauss Hauer & Feld, LLP, 504 F.3d 1262

(Fed. Cir. 2007) 19. 21, 22

Avco Corp. v. Aero Lodge No. 735, 390 U.S. 557

BCS Fin. Corp. v. United States, 118 F.3d 522

(7th Cir. 1997) |

Beneficial Nat Bank v. Anderson, 539 U.S. 1

(2003)

Bennett v. Southwest Airlines Co., 484 F.3d

907 (7th Cir. 2007) 3

Bob Jones Univ. v. Simon, 416 U.S. 725 (1974)

Brennan -v. Southwest Airlines Co., 134 F.3d

1405, as amended, 140 F.3d 849 (9th Cir.

Broder v. Cablevision Sys. Corp., 418 F.3d 187

(2d Cir. 2005) 19, 20, 22

Caggiano v. Pfizer Inc., 384 F. Supp. 2d 689

(S.D.N.Y. 2005)

Callahan v. Countrywide Home Loans, Inc.,

No. 3:06cv105/RV/MD, 2006 U.S. Dist.

LEXIS 42860 (N.D. Fla. June 26, 2006)

Caterpillar Inc. v. Williams, 482 U.S. 386

Christianson v. Colt Indus. Operating Corp.,

486 U.S. 800 (1988)

Elmira Teachers’ Ass’n v. Elmira City Sch.

Dist., No. 05-CV-6513 CJS, 2006 U.S. Dist.

LEXIS 3893 (W.D.N.Y. Jan. 27, 2006)

Empire HealthChoice Assurance, Inc. v.

“McVeigh, 547 U.S. 677 (2006) 1, 8, 10, 11, 12,

13, 14, 15, 16, 17, 23

Fifth Third Bank v. Cope, 835 N.E.2d 779

Prue Gare OS ii isn sis ceceecic hese 13, 16

Grable & Sons Metal Prods., Inc. v. Darue

Eng’g & Mfg., 545 U.S. 308 (2005) 1 2:7, 6, 9.

10, 11, 12, 13, 14,

15, 16, 18, 19, 20, 22, 23

Gully v. First Natl Bank, 299 U.S. 109 (1936) 11

Holmes Group, Inc. v. Vornado Air Circulation

Sys., Inc., 535 U.S. 826 (2002)

Immunocept, LLC v. Fulbright & Jaworski,

LLP, 504 F.3d 1281 (Fed. Cir. 2007) 19, 21, 22

Kaucky v. Southwest Airlines Co., 109 F.3d

349 (7th Cir. 1997)

Lawrence v. Lorain Cty. Community College,

713 NtE.2a 478 (Ohio Ct. App. 1998)

Markman ov. Westview Instruments, Inc.,

517 U.S. 370 (1996)

Merrell Dow Pharms. Inc. v. Thompson,

478 U.S. 804 (1986)

Metropolitan Life Ins. Co. v. Taylor, 481 U.S.

58 (1987)

Nicodemus v. Union Pac. Corp., 440 F.3d 1227

(10th Cir. 2006) 19, 20, 22

Rose v. American Airlines, Inc., 331 F. Supp.

77 (N.D. Ill. 1971)

Sigmon v. Southwest Airlines Co., 110 F.3d

1200 (5th Cir. 1997)

Statutes and Regulations

Communications Act of 1934, § 623(d),

47 U.S.C. § 543(d)

Deficit Reduction Act of 1984, Pub. L. No.

98-369, 98 Stat. 494

§ 61(e), 98 Stat. 582

§ 61(e)(1)(A), 98 Stat. 582

Employee Retirement Income Security Act of

Reig ee eae BE OE IE iiss csicccdaccccesecenss 25

Federal Courts Improvement Act of 1982,

Pub. L. No. 97-164, 96 Stat. 25

Internal Revenue Code:

26 U.S.C. § 312(n)(1) , a, 7, 8, 9, 12,

13, 14, 15, 16, 18, 29

26 U.S.C. § 403(b)

26 U.S.C. § 4261 (1994)

26 U.S.C. § 4291 (1994)

26 U.S.C. § 6042(c)

26 U.S.C. § 7422.....................5, 6, 8, 24, 25, 27, 28

26 U.S.C. § 7422(a)

26 U.S.C. § 7422(f)(1)

Oe inc ckcis shina eecncss 2, 16, 23

26 U.S.C. § 7434(a)

vil

Labor-Management Relations Act, 1947, § 301,

29 U.S.C. § 185

National Bank Act, 12 U.S.C. § 21 et seg. ............... 24

National Flood Insurance Act of 1968, 42.

SE EE EE Oe Oe bike sinsncdbanbiceccnesisntunsssesegngacs 22

28 U.S.C. § 1331

28 U.S.C. § 1338(a)

28 U.S.C. § 1441(b)

28 U.S.C. § 1446(b)

35 U.S.C. § 102(b)

26 C.F.R. § 40.6302(c)-1(b)(1)(i) (1995)

Legislative Materials

Staff of J. Comm. on Taxation, 98th Cong.,

General Explanation of the Revenue Provi-

sions of the Deficit Reduction Act of 1984

(Comm. Print 1984)

Other Materials

Brief of Amici Curiae Jerome R. Mikulski et

ux. in Support of Petitioner, Grable & Sons

Metal Products, Inc. v. Darue Eng’g & Mfg.,

545 U.S. 308 (2005) (No. 04-603), 2005 WL

1333265

2 Dan B. Dobbs, Law of Remedies (2d ed. 1993)......

Introduction

A plaintiff is “the master of the complaint,” and

“the well-pleaded-complaint rule enables” it to

“eschew[] claims based on federal law” and thereby .

“to have the cause heard in state court.” Holmes

Group, Inc. v. Vornado Air Circulation Sys., Inc.,

535 U.S. 826, 831 (2002) (internal quotation marks

omitted). In this case, respondents asserted tort and

contract claims under Ohio common law against peti-

tioners alleging, among other things, that petitioners

violated an obscure provision of the federal tax code. —

In a careful and well-reasoned opinion, the Sixth

Circuit applied this Court’s holdings in Grable &

Sons Metal Products, Inc. v. Darue Engineering &

Manufacturing, 545 U.S. 308 (2005), and Empire

HealthChoice Assurance, Inc. v. McVeigh, 547 U.S.

677 (2006), and concluded, correctly, that the exer-

cise of federal jurisdiction would not be appropriate

in the circumstances of this case.

The petition presents no question warranting this

Court’s review. Petitioners first assert that the Sixth

Circuit misapplied Grable and created a conflict with

the Second, Tenth, and Federal Circuits, in holding

that federal jurisdiction could not be exercised over

respondents’ state-law claims. In fact, the Sixth

Circuit’s analysis accords with Grable and with the

analysis of every other court of appeals. Each of the

circuits, including the court below, carefully applied

Grable to the specific facts of the complaint before it.

Here, the Sixth Circuit concluded — based on the spe-

cific federal statutory provision at issue (as petition-

ers have conceded, an “obscure” provision of the fed-

eral tax code, Pet’rs C.A. Br. 24 (filed July 9, 2004))

and the particular state-law claims (garden-variety

claims of breach of contract and fraudulent misrepre-

sentation) — that exercising federal jurisdiction would

be inappropriate under Grable. Petitioners cite no

other case involving a similar statutory provision or

similar claims. The case-specific question — whether

the Sixth Circuit erred in concluding that the state-

law claims raised in respondents’ complaint do not

‘arise under federal law within the meaning of 28

U.S.C. § 1331 — does not warrant this Court’s review.

Petitioners next contend that the Sixth Circuit

split from the Fifth, Seventh, and Ninth Circuits in

holding that respondents’ claims are not completely

preempted as disguised federal tax-refund claims.

But the cases on which petitioners rely all involve

a federal statutory provision requiring airlines to

collect from airline passengers, and to remit to the

Internal Revenue Service (IRS), a 10-percent excise

tax on airline tickets. The airlines continued to

collect the excise tax even after it expired, and the

courts of appeals held that the plaintiffs must seek a

refund from the IRS. Here, in contrast, petitioners

did not act as IRS tax collection agents; rather, by

paying out tax-free return of capital to its share-

holders, but reporting those payments to be taxable

dividends, petitioners misrepresented tax-related in-

formation to shareholders and the IRS alike. Unlike

in the airline excise-tax cases, the tax here was prop-

erly assessed (albeit based on incorrect information)

and paid by respondents directly to the IRS. Peti-

tioners further ignore the fact that Congress’s subse-

quent enactment of 26 U.S.C. § 7434, which provides

a private, federal right of action for the exact type of

tax misreporting alleged here, eliminates the con-

tinuing importance of the question presented.

Statement of the Case

a. The nature of the case.

Respondents Jerome R. Mikulski! and Elzetta C.

Mikulski are California taxpayers who were share-

holders of Centerior Energy Corporation, its prede-

cessor companies, Cleveland Electric [Illuminating

Company and the Toledo Edison Company, and

its successor company, FirstEnergy Corporation

(collectively, “Centerior”), during the years relevant

to this case, from 1985 to 1997. As a publicly traded

company, Centerior is subject to myriad obligations

to its shareholders under shareholder agreements,

state law, and federal law. As relevant here, the

shareholder agreement and 26 U.S.C. § 6042(c) obli-

gate Centerior to report accurately to each share-

holder dividends paid and returns of capital made in

each tax year on a Form 1099-DIV. That obligation,

in turn, requires Centerior to calculate accurately its

“earnings and profits” (E&P), because a corporation’s

dividends cannot exceed the amount of E&P. Any

distributions in excess of E&P are treated as return

of capital. See Pet. App. 30a. The distinction be-

tween dividends and return of capital is significant:

whereas dividends were taxed as ordinary income

during the relevant years in this case (at a rate of up

to 50 percent), a return of capital is generally tax-

free. See id. at 76a.2-

1 Jerome R. Mikulski passed away last year, and his estate

has been substituted as plaintiff in the three cases pending

in the Court of Common Pleas for Cuyahoga County, Ohio. A

motion to substitute is pending in the Lucas County case.

2 There is an exception to this general rule. Capital may be

“returned” only up to the cost basis of the stock, i.e., the amount

initially paid by the shareholder. Once that cap is met, addi-

tional return of capital is taxed as a capital gain. For most

In 1984, Congress passed the Deficit Reduction

Act, which, among other things, changed the treat-

ment of interest incurred on construction projects in

calculating E&P. See Pub. L. No. 98-369, § 61(e), 98

Stat. 494, 582. The Act required corporations to

capitalize — that is, to treat as a depreciable asset —

interest incurred on construction-related debt. See

26 U.S.C. § 312(n)(1). That change affected the cal-

culation of E&P, because capitalizing interest, rather

than deducting it, results in higher E&P. Higher

E&P, in turn, increases the amount of funds avail-

able for dividend payments to shareholders and

reduces the amount of any distribution that is char-

acterized, instead, as (generally tax-free) return of

capital. The Act was effective “in taxable years

beginning after September 30, 1984,” § 61(e)(1)(A),

98 Stat. 582; thus, for petitioners, the Act took effect

January 1, 1985.

As of December 31, 1984, Centerior had incurred

$1.5 billion of debt on “construction in progress” —

nuclear power plants and other facilities on which

construction had begun, but had not been completed.

Even though that debt was attributable to construc-

tion occurring before the Act’s effective date, Cente-

rior capitalized, and did not deduct, the interest ex-

pense on this “construction in progress” debt in calcu-

lating E&P for 1985 and subsequent years.

b. The district court proceedings.

The Mikulskis are named plaintiffs in four class-

action lawsuits filed on behalf of Centerior share-

holders in the Courts of Common Pleas for Cuyahoga

and Lucas Counties, Ohio, alleging breach of contract

taxpayers, however, the tax rate on capital gains also was lower

than the tax rate on dividends during the years in question.

and fraudulent misrepresentation under Ohio law.

Specifically, the Mikulskis allege that Centerior

violated its shareholder agreements and § 6042(c)

by providing inaccurate Forms 1099-DIV to share-

holders. The Mikulskis further allege that Centerior

fraudulently misrepresented the amount of taxable

dividends paid to shareholders by including interest

incurred on pre-1985 construction-in-progress in

E&P, in violation of § 312(n)(1). The Mikulskis seek

damages equivalent to the amount of state and fed-

eral income taxes overpaid.

Eleven months after the first lawsuit was filed,

petitioners removed all four actions to federal

court under 28 U.S.C. § 1441(b), asserting that the

Mikulskis’ state-law claims arose under federal law

within the meaning of 28 U.S.C. § 1331. See Pet.

App. 75a. Petitioners argued that the 30-day dead-

line for removal in 28 U.S.C. § 1446(b) did not

bar removal of the first case because it was unclear

that the Mikulskis’ claims required interpretation of

the federal tax code until the Mikulskis specifically

relied on § 312(n)(1) in a supplemental interrogatory

response. The Mikulskis filed motions to remand,

arguing both that Centerior’s removai of the first

case was untimely and that the state-law claims did

not raise a federal question sufficiently substantial to

support federal jurisdiction under this Court’s cases.

The district .court denied the motions to remand

and, following consolidation of the proceedings, also

denied a motion for reconsideration. See id. at 84a.

Petitioners then moved for judgment on the plead-

ings on the ground that the Mikulskis’ state-law

claims were preempted by § 7422, which requires a

taxpayer seeking recovery of any “internal revenue

tax alleged to have been erroneously or illegally

assessed or collected” to file an administrative refund

claim with the IRS. 26 U.S.C. § 7422(a). The magis-

trate judge agreed, and the district court adopted the

magistrate judge’s report and recommendation. See

Pet. App. 77a-80a. Accordingly, the district court

granted judgment on the pleadings for petitioners.

See id. at 80a-81a.

c. The court of appeals panel proceedings.

On appeal, a panel of the Sixth Circuit reversed

the district court’s judgment and ordered the case

remanded to state court. See Pet. App. 49a-73a. The

court of appeals first rejected petitioners’ argument

that federal jurisdiction existed because respondents’

claims were completely preempted. by § 7422. It

explained that a state-law claim is not converted

into a federal tax-refund action under § 7422 simply

because “damages are measured in taxes.” Id. at

60a. The court further observed that the district.

court “seems to be the first court in the country to

find complete preemption in the Internal Revenue

Code” and warned that, “fijf the district court were

correct, it would federalize most state law claims

that remotely address tax issues, such as suing one’s

accountant or tax preparer.” Id. at 62a-63a.

The appellate panel also held that the substantial-

federal-question doctrine did not provide a basis for

federal jurisdiction under the specific facts of this

case. See id. at 68a-69a. The court explained that,

notwithstanding the relevance of federal tax law

to the case, “the true issues in this case are breach

of contract and fraudulent misrepresentation.” Id.

It reasoned that, although damages were to be

measured by the amount of federal and state taxes

overpaid by the Mikulskis, a court need only engage

in “insubstantial analysis or interpretation of federal

law” in deciding the merits of the case because “[t]he

true questions at issue in the case involve fraud and

misreporting to shareholders, both of which claims

are governed by state statutes.” Jd. at 69a. (The

Sixth Circuit did not address the Mikulskis’ alterna-

tive argument that petitioners’ removal of the first

suit was untimely.)

Judge Daughtrey concurred in part and dissented

in part. She agreed with the majority’s conclusion

that the Mikulskis’ claims were not preempted, see

id. at 69a-70a, but disagreed with the majority’s

remand to state court because, in her view, the inter-

pretation of § 312(n)(1) was “substantial,” see id. at

7la-72a. Judge Daughtrey recognized that, in con-

trast to Grable, where the outcome of the case turned

solely on the resolution of the federal question, the

meaning of § 312(n)(1) is not the only disputed issue

in this case. See id. at 70a (noting that tax overpay-

ment “may or may not represent the actual damage

from the injuries alleged”). Nevertheless, she con-

cluded that-the federal issue in this case is substan-

tial because petitioners’ compliance with § 312(n)(1)

is an “essential” element of the Mikulskis’ state-law

claims, see id. at 72a, and because “[t]he federal gov-

ernment’s interest in the construction of a statute

that controls how much tax security-holders must

pay is surely as great as its interest in being able to

collect delinquent taxes by seizing and selling prop-

erties,” id.

Judge Daughtrey also recognized that a decision

finding federal jurisdiction might “invite a flood” of

similar state-law claims into the federal court, but

suggested that statutes of limitations and IRS refund

procedures may “act as a reasonable limit” on the

increase in cases brought in federal courts. Id. at

72a-73a.

d. The en banc Sixth Circuit decision.

In April 2006, the Sixth Circuit granted petitioners’

request for rehearing en banc and vacated the panel

opinion. In August 2007, the en banc court of ap-

peals entered an opinion reversing the district court’s

judgment and ordering the case remanded to state

court. The court held unanimously that § 7422 does

not completely preempt the Mikulskis’ claims. See

Pet. App. 17a-20a, 41a. The court explained that

the Mikulskis’ claims could not be deemed a tax-

refund action because, “[ujnder the plaintiffs’ theory,

the IRS was an innocent third-party, who, lke the

plaintiffs themselves, merely relied on the 1099-DIVs

issued by Centerior, while Centerior was the active

(i.e., hable) tortfeasor.” Jd. at 19a.

The court of appeals also concluded that Grable

and Empire did not permit the exercise of federal

jurisdiction under the specific facts of this case. See

id. at 40a. Although the court acknowledged that the

effective-date provision of § 312(n)(1) is “disputed,”

id. at 28a, the court determined that, under the four-

factor test articulated in Empire, this particular fed-

eral issue is not “substantial,” see id. at 3la. The

court explained that, under Empire, the absence of a

federal agency or a question of an agency’s compli-

ance with federal law weighs against federal juris-

diction. See id. at 32a. The court further concluded

that the federal question in the case — the proper in-

terpretation of the effective-date provision of § 312(n)(1)

—is a relatively narrow, unimportant issue that the

IRS had never litigated. See id. at 33a. The court

also noted that resolution of the federal issue would

not resolve the case, as the Mikulskis still must

prove the remaining elements of fraudulent misrep-

resentation and breach of contract. See id. at 33a-

34a. And the court explained that the effective-date

provision of § 312(n)(1) would not likely control the

outcome of other cases because disputes over that

provision could only arise for interest incurred in or

around 1984, and such cases would be rare. See id.

at 34a-35a. Finally, the court cautioned that to exer-

cise federal jurisdiction in this case “would imper-

missibly disrupt the congressionally approved bal-

ance of federal and state judicial responsibilities,” 1d.

at 38a (citing Grable, 545 U.S.. at 315), and would

create a “real and significant” risk of opening the

federal courts to “any dispute over the meaning or

effect of virtually any provision in the entire federal

tax code,” id. at 39a.

Judge Daughtrey again dissented from the court’s

conclusion that the federal issue here is_ not

“substantial.” Judge Daughtrey stated that interpre-

tation of federal tax law is a “paramount” federal

interest and that this case is no exception because

“the effective date of a statutory provision .. . affects

directly how much tax security-holders must pay.”

Id. at 45a (internal quotation marks omitted). In

Judge Daughtrey’s view, the IRS’s failure to liti-

gate a claim under § 312(n)(1) “bears no necessary

correlation to the importance of the subject matter.”

Id. at 46a. Likewise, although Judge Daughtrey

acknowledged that, to prevail, the Mikulskis must

prove other (non-federal) elements of their bréach-of-

contract and fraudulent-misrepresentation claims,

she believed that factor was outweighed by the fact

that § 312(n)(1)’s effective-date provision is “essential”

to the Mikulskis’ claims. See id. at 46a-47a. Finally,

Judge Daughtrey reiterated her belief that the

number of cases involving state-law claims implicat-

ing a provision of the federal tax code actually shifted

into federal court would be limited by statutes of

limitations and IRS refund procedures. See id. at

48a.

Reasons for Denying the Petition

The Court of Appeals’ Decision Denying

Federal Jurisdiction Correctly Applied

Grable and Empire to the Facts of this Case

and Applies the Same Legal Standard as

Every Other Court of Appeals.

Petitioners’ principal submission is that the Sixth

Circuit misapplied Grable in concluding that respon-

dents’ state-law claims do not arise under federal

law. See Pet. 9-10. Certiorari is not warranted

to consider that case-specific question. The narrow

issue resolved below — whether a federal court should

assert jurisdiction over state-law claims of breach

of contract and fraudulent misrepresentation that

involve the interpretation of the effective-date provi-

sion of an obscure section of the federal tax code ——

has not been decided by any other court of appeals.

‘The legal standard to be applied in resolving such

questions is well-settled, and the courts of appeals

uniformly agree that whether an embedded federal

question supports federal jurisdiction depends on the

provision of federal law in question in the context

of the particular state-law claim. The Sixth Circuit

correctly applied this Court’s precedents to the cir-

cumstances of this case, and further review is not

warranted.

A. The Sixth Circuit Correctly Applied this

Court’s Precedents to the Circumstances

of this Case.

This Court explained in Grable that whether a fed-

eral court should exercise subject-matter jurisdiction

over a state-law claim with an embedded federal is-

sue requires, in Justice Cardozo’s words, a “‘common-

sense accommodation of judgment to [the] kaleido-

scopic situations” under which the issue may arise.

545 U.S. at 313 (quoting Gully v. First Natl Bank,

299 U.S. 109, 117-18 (1936)) (alteration in original).

And the Court confirmed in Empire that only a

“special and small category” of state-law claims will

be subject to federal jurisdiction based on the pres-

ence of an embedded federal question. 547 U.S. at

699. This case does not fall into “the slim category

Grable exemplifies,” id. at 701, as the Sixth Circuit

properly held. Petitioners’ contrary contentions are

unpersuasive.

1. The Sixth Circuit faithfully applied this

Court’s decisions.

As Grable directs, the court of appeals considered

whether the embedded federal issue was “substan-

tial” and one that “a federal forum may entertain

without disturbing any congressionally approved

balance of federal and state judicial responsibilities.”

545 U.S. at 314; see Pet. App. 3la-40a. In consider-

ing whether the federal issue in this case is “substan-

tial” under this Court’s cases, the Sixth Circuit cor-

rectly focused on four factors the Court emphasized

in Empire: (1) whether the case includes a federal

agency or the agency’s compliance with a federal

statute; (2) whether the federal question is impor-

tant; (3) whether resolution of the federal question

will dispose of the case; and (4) whether resolution of

the federal question will control numerous other

cases. See Pet. App. 26a-27a, 31a; Empire, 547 U.S.

at 700.

The court first correctly noted that, unlike Grable,

and like Empire, the present dispute does not involve

the actions of a federal agency. See Pet. App. 32a;

Empire, 547 U.S. at 700 (discussing Grable). Nor is

the federal issue involved here sufficiently important

to justify the exercise of federal jurisdiction over

respondents’ state-law claims. As the Sixth Circuit

explained, the only federal issue involves the effective

date of § 312(n)(1), which governs the treatment of

interest expense incurred near that date. See Pet.

App. 30a. There is no dispute over the meaning or

application of the substantive terms of that statutory

provision. As the Sixth Circuit also noted, the IRS

has never htigated a case involving § 312(n)(1). See

id. at 33a. Further, although Congress invited the

IRS to issue regulations interpreting § 312(n)(1),3 the

IRS has not yet seen the need to do so. Significantly,

despite the absence of regulatory guidance, no court

— state or federal — has found it necessary to interpret

§ 312(n)(1).

The court of appeals also recognized that respon-

dents’ claims for breach of contract and fraudulent

misrepresentation would not be disposed of by reso-

lution of the federal issue. See id. at 33a-34a.

Respondents must prove additional elements wholly

unrelated to the tax issue, including that petitioners

made affirmative misrepresentations with intent to

3 See Staff of J. Comm. on Taxation, 98th Cong., General

Explanation of the Revenue Provisions of the Deficit Reduction

Act of 1984, at 177 (Comm. Print 1984).

mislead. In Grable, by contrast, resolution of the

federal issue was “dispositive of the case.” Empire,

547 U.S. at 700.

In addition, the Sixth Circuit correctly reasoned

that the court’s interpretation of the effective-date

provision of § 312(n)(1) would not lkely contro] the

outcome of other cases because the effective date will

affect only the treatment of interest incurred on or

near the provision’s 1984 effective date. See Pet.

App. 34a-35a. Because more than 23 years have

elapsed since that statute was enacted, there is a

small (and ever-diminishing) likelihood that other

lawsuits wiil hinge on this precise issue of federal tax

law. As the Court made ‘clear in Empire, federal

jurisdiction is not. appropriate when, as here, the

state-law claim at issue “is fact-bound and situation-

specific” and resolution of the federal issue would not

“be controlling in numerous other cases.” 547 U.S. at

700-01.

4 To succeed on a fraudulent-misrepresentation claim under

Ohio law, a plaintiff must establish the following elements:

“(1) a representation, or where there is a duty to disclose,

concealment of a fact, (2) which is material to the transaction

at hand, (3) made falsely, with knowledge of its falsity, or with

such other disregard and recklessness as to whether it is true or

false that knowledge may be inferred, (4) with the intent of mis-

leading another into relying on it, (5) justifiable reliance upon

the representation or concealment, and (6)a resulting injury

proximately caused by the reliance.” Fifth Third Bank v. Cope,

835 N.E.2d 779, 787-88 (Ohio Ct. App.2005) (internal quotation .

marks omitted). To establish a claim for breach of contract

under Ohio law, a plaintiff must demonstrate: the existence of

an agreement; the non-breaching party fulfilled its obligations

under the agreement; the breaching party lacked legal justifi-

cation for failing to fulfill its obligations; and damages to the

non-breaching party. See Lawrence v. Lorain Cty. Community

College, 713 N.E.2d 478, 480 (Ohio Ct. App. 1998).

Finally, the Sixth Circuit also correctly concluded

that the exercise of federal jurisdiction in this case

would be inconsistent with the “congressional judg-

ment about the sound division of labor between state —

and federal courts” that “govern[{s] the application of

§ 1331.” Grable, 545 U.S. at 313-14. Asserting fed-

eral jurisdiction here would risk opening the federal

courts to “any dispute over the meaning or effect of

virtually any provision in the entire federal tax code.”

Pet. App. 39a. Because many traditional state-law

claims, such as fraud, misrepresentation, and mal-

practice, involve embedded issues of federal tax law,

a decision requiring any interpretation of federal tax

law to be handled by a federal court would greatly

“disturb[]” the congressional balance of state and

federal judicial responsibilities. Grable, 545 U.S. at

314.

In sum, although the meaning of § 312(n)(1)’s

effective-date provision is disputed, it is not a

substantial federal issue in the context of this case.

Furthermore, the exercise of federal jurisdiction in

this case would risk disturbing the federal-state divi-

sion of judicial responsibilities. Thus, the court of

appeals correctly concluded that removal jurisdiction

was improper in this case.

2. Petitioners’ criticisms of the court of

appeals’ decision are unwarranted.

Contrary to petitioners’ protests, there is no incon-

sistency between the decision below and Grable. As

in Empire, “[t]his case is poles apart from Grable.”

547 U.S. at 700.5 Petitioners acknowledge that no

> Petitioners misleadingly characterize respondents’ brief

amici curiae in support of the petitioner in Grable as a conces-

sion that “the two cases cannot fairly be distinguished.” Pet. 12.

federal agency action is implicated in the present

dispute, but dismiss that fact as “beside the point”

because it “was not even mentioned in this Court’s

opinion” in Grable. Pet. 15. But this Court empha-

sized that point in denying federal jurisdiction in

Empire, see 547 U.S. at 700 — a case that petitioners

mention only in a dismissive footnote, see Pet. 19 n.7

— and, thus, the absence of a federal agency similarly

weighs against federal jurisdiction here.

Petitioners argue that the government has a strong

“federal interest in properly determining the effective

date of tax provisions governing the amount of taxes

owed (as in this case)” because resolution of this

question “can have a significant impact on revenue

collection.” Pet. 12-13. But petitioners themselves

conceded in the Sixth Circuit that § 312(n)(1) is “a —

particularly obscure and indefinite statutory provi-

sion.” Pet’rs C.A. Br. 24. The IRS has never litigated

a case involving § 312(n)(1), see Pet. App. 33a, and no

court has found it necessary to interpret the provi-

sion. Moreover, as the Sixth Circuit recognized, only

a dispute regarding construction interest incurred in

or near the 1984 effective date of § 312(n)(1) would

be implicated by the holding in this case, and such a

dispute — which evidently has never arisen outside of

Respondents urged the Court in Grable to adopt a rule provid-

ing for federal jurisdiction only if a federal cause of action

existed under the embedded federal statute. See Brief of Amici

Curiae Jerome R. Mikulski et ux. in Support of Petitioner at

3, Grable & Sons Metal Prods., Inc. v. Darue Engg & Mfgz.,

545 U.S. 308 (2005) (No. 04-603), 2005 WL 1333265. Under

respondents’ proposed test, federal jurisdiction would have been

improper in both cases because neither statute created a private

right of action. See id. at 1-3. However, once this Court

rejected a bright-line rule, any similarities between Grable and

the present case dissipated given the starkly different state-law

claims and embedded federal issue.

this case — will be increasingly unlikely to occur in

the future. See id. at 34a-35a. In light of those ob-

jective facts, and contrary to petitioners’ contention,

there is nothing “subjective” or “speculative” about

the court of appeals’ determination that the federal

issue in this case is not substantial. See Pet. 14, 19.6

Petitioners assert that “construction of federal

law will control the outcome of the case.” Pet. 12.

That is incorrect. As explained above, to succeed on

the merits, respondents must prevail on much more

than their interpretation of § 312(n)(1)’s effective-

date provision. See Fifth Third Bank, 835 N.E.2d

at 787-88 (setting forth elements of fraudulent-

misrepresentation claim); Lawrence, 713 N.E.2d at

480 (setting forth elements of breach-of-contract

claim).? In Empire, this Court distinguished Grable

on the vasis that the reimbursement claim triggered

by settlement of a personal-injury action in Empire

was a far cry from the “nearly pure issue of

law” faced by the Court in Grable. 547 U.S. at 700

(nternal quotation marks omitted). As the Seventh

Circuit recognized in applying Empire and Grable,

6 For these same reasons, the Chamber of Commerce’s con-

cern that a state court decision on this discrete, unusual federal

tax issue will create an incentive problem for businesses is over-

blown. See Chamber of Commerce Br. 14-15. And, to the extent

the Chamber of Commerce suggests that policy concerns weigh

against permitting any litigation over tax misreporting, Con-

gress disagrees. In 26 U.S.C. § 7434, Congress provided a right

of action for the exact type of tax misreporting alleged here. See

infra p. 23.

7? The Tax Foundation also seems to misapprehend the ele-

ments of respondents’ claims, as its brief amicus curiae is prem-

ised on the idea that “the suit raises precisely the same issucs

that would have to be litigated in a tax refund claim” involving

the IRS. Tax Foundation Br. 8

federal jurisdiction is improper when (as here) the

case involves “a fact-specific application of rules that

come from both fodoral and stato law rathor than

a context-free inquiry into the meaning of a federal

law” and “[s]tate issues, such as the amount of dam-

ages, may well predominate.” Bennett v. Southwest

Airlines Co., 484 F.3d 907, 910 (7th Cir. 2007)

(Easterbrook, J.).

Petitioners also assert that federal jurisdiction

would not disrupt the federal-state balance of judicial

responsibilities “because Congress itself commanded

that suits seeking to recoup overpaid federal taxes

must be litigated in a federal forum.” Pet. 13. But,

as explained in greater detail in Part II, infra, this

case is far from a suit “seekiag to recoup overpaid

federal taxes.” Respondents’ position is that the

IRS correctly assessed tax liability using the (false)

information provided by petitioners on Forms 1099-

DIV. Respondents’ claim is that, but for petitioners’

misrepresentations on the Forms 1099-DIV — a garden-

variety state common-law claim — their tax liability

would have been lower. Thus, Congress’s decision to

allow claims for tax refunds from the federal govern-

ment to be litigated in federal court has no bearing

on the propriety of federal jurisdiction in this case.

Moreover, as this Court stated in Empire, “(t]he state

court in which the [tort] suit was lodged is competent

to apply federal law, to the extent it is relevant.” 547

U.S. at 701.

In addition, no basis exists for petitioners’ fear that

allowing the Ohio courts to adjudicate respondents’

claims will allow petitioners to be “whipsawed be-

tween state-court liability and federal directives.”

Pet. 17-18 (citation omitted). If petitioners belicve

that a judgment holding them liable for the mis-

conduct alleged here would conflict with federal law,

they are free to raise a preemption defense in the

sbhato paoccodizgs. “Dect 26 dc “Knoddlod Meee- tlned te ce X

may not be removed to federal court on the basis of

a federal defense, including the defense of pre-

emption.” Caterpillar Inc. v. Williams, 482 U.S. 386,

393 (1987).

Furthermore, the existence of such a conflict is

exceedingly unlikely, considering that no court -—

state or federal — has previously interpreted

§ 312(n)(1). If conflicting interpretations of entities’

reporting obligations under that provision were to

arise, however, the IRS could issue regulations or

interpretive memoranda to resolve the issue. And

this Court retains the ability to ensure the uniform

interpretation of federal law through its certiorari

jurisdiction. See Merrell Dow Pharms. Inc. v.

Thompson, 478 U.S. 804, 816 (1986) (emphasizing

that any “concern about the uniformity of interpreta-

tion [by state courts] is considerably mitigated by the

fact that, even if there is no original district court

jurisdiction for these kinds of action, this Court

retains power to review the decision of a federal issue

in a state cause of action”).

By arguing that “Grable establishes that federal

‘arising under’ jurisdiction is proper in .. . tax cases,”

Pet. 10, petitioners in effect urge this Court to inter-

pret Grable as categorically providing for federal ju-

risdiction over every state-law claim requiring inter-

pretation of any provision of federal tax law. But

that contention cannot be reconciled with Grable, in

which the Court emphasized the need for a case-by-

case assessment of the propriety of asserting federal

jurisdiction, lest an expansive interpretation of fed-

eral jurisdiction disturb the congressionally imposed

ai 19

division of labor between the state and federal courts

embodied in § 1331’s well-pleaded-complaint rule.

SE FI wll, Frat ETT Maw Se at

B. There Is No Conflict in the Circuits.

Petitioners contend that several courts of appeals

have rendered decisions that conflict with the deci-

sion below. That is incorrect. In each of the cases

petitioners cite, the court of appeals acknowledged

that Grable articulates the governing standard and

applied the doctrine described in that case to the

specific federal questions and state-law claims at ©

issue in the case before it. Legal and factual differ-

ences in each case led the circuit courts to conclude

varyingly that federal jurisdiction was, or was not,

appropriate in that particular instance. Critically,

none of the cases petitioners cite involved a claim

remotely similar to the one at issue here. Moreover,

none of the courts of appeals mentioned. the other

cases involved in the purported split or suggested

that any tension exists in the circuit decisions apply-

ing Grable. The “conflict” therefore is wholly imag

ined by petitioners. :

In Nicodemus, the United States had a direct

interest in the outcome of the proceedings. The

plaintiff’s various state-law claims hinged entirely

on the scope of the Union Pacific railroad’s right-of-

way, which was obtained pursuant to the federal

land-grant statutes. See 440 F.3d at 1234. The

property subject to the right-of-way will revert to

8 See Immunocept, LLC v. Fulbright & Jaworski, LLP, 504

F.3d 1281, 1284 (Fed. Cir. 2007); Air Measurement Techs., Inc.

v. Akin Gump Strauss Hauer & Feld, LLP, 504 F.3d 1262, 1267,

1271-72 (Fed. Cir. 2007); Nicodemus v. Union Pac. Corp., 440

F.3d 1227, 1231-32, 1235-36 (10th Cir. 2006); Broder v. Cable-

vision Sys. Corp., 418 F.3d 187, 194-95 (2d Cir. 2005).

the United States when Union Pacific ceases using

the property for railroad purposes. See id. at 1236.

The Tenth Circuit concluded that, under Grable, the

government’s property interest rendered the federal

issue in the case “substantial.” See id. The court

also determined that its decision would minimally

affect the state-federal judicial balance because it

will “be the rare state trespass and unjust enrich-

ment case that so uniquely turns on a critical matter -

of federal law.” Id. at 1237.

The state-law claims in Broder required a court to

analyze “the complex federal regulatory scheme ap-

plicable to cable television rates.” 418 F.3d at 195.

Section 623(d) of the Communications Act of 1934

requires a cable operator not subject to “effective

competition” to provide a “rate structure ... that is

uniform throughout the geographic area in which

cable service is provided over its cable system.” 47

U.S.C. § 543(d). The court would thus be required

to determine, among other things, the plaintiff’s

“geographic area” and whether that geographic area

was subject to “effective competition” — both of which

would be governed by federal law. Under those

circumstances, the Second Circuit perceived “‘a

serious federal interest in claiming the advantages

thought to be inherent in a federal forum.’” 418 F.3d

at 195 (quoting Grable, 545 U.S. at 313). The court

also reasoned that exercising federal jurisdiction

posed no risk to the state-federal judicial balance

because it would be “rare” for a plaintiff bringing a

breach-of-contract or deceptive-trade-practices claim

under New York law “to assert a private right of

action for violation of a federal law otherwise lacking

one.” Id. at 196.

Finally, Air Measurement and Immunocept (com-

panion cases decided on the same day) are inapposite

because the Federal Circuit’s analysis focused on

Christianson v. Colt Industries Operating Corp., 486

U.S. 800 (1988) — a case that turned on the meaning

of the statute providing for exclusive federal jurisdic-

tion of all matters “relating to patents,” 28 U.S.C.

§ 13838(a). Both of those cases involved legal mal-

practice claims against counsel who had allegedly in-

jured the plaintiffs through negligent preparation of

patent applications. Both cases required the trial

court to engage in a patent claim construction analy-

sis, see Markman v. Westview Instruments, Inc., 517

U.S. 370 (1996), as a necessary element of the under-

lying malpractice claim. See Immunocept, 504 F.3d

at 1285; Air Measurement, 504 F.3d at 1268-69. The

Federal Circuit carefully applied Christianson, “in

view of the federalism concerns of Grable,” to the

facts of each case.. Immunocept, 504 F.3d at 1284; see

Air Measurement, 504 F.3d at 1267-68. The court

concluded that any patent issue embedded in a state-

law claim is categorically “a substantial question

of federal patent law,” Christianson, 486 U.S. at

809, that supports federal jurisdiction, relying on

Congress’s grant of exclusive federal jurisdiction in

§ 1338(a) and its establishment of the Federal Circuit

to promote uniformity in the patent law, see Federal

Courts Improvement Act of 1982, Pub. L. No. 97-164,

9 See Immunocept, 504 F.3d at 1283 (patent claim language

used by counsel provided inadequate protection, causing

Johnson & Johnson to terminate negotiations to commercialize

the invention); Air Measurement, 504 F.3d at 1266 (inventors

were forced to settle infringement suits below fair market value

because attorney delay and omissions enabled defendants to

argue on-sale bar to patentability, see 35 U.S.C. § 102(b), and

inequitable conduct).

96 Stat. 25. See Immunocept, 504 F.3d at 1285-86;

Air Measurement, 504 F.3d at 1269. The Federal

Circuit explained that its ruling was consistent with

Grable because “Congress considered the federal-

state division of labor and struck a balance in favor

of this court’s entertaining patent infringement.” Air

Measurement, 504 F.3d at 1272.

Nothing in those cases supports petitioners’ suppo-

sition that the Second, Tenth, or Federal Circuit

would have reached a different result had they ad-

dressed the claim in this case. Indeed, the opposite

appears true: federal district courts applying those

precedents have denied federal jurisdiction over

claims similar to those in this case. See, e.g., Elmira

Teachers’ Ass’n v. Elmira City Sch. Dist., No. 05-CV-

6513 CJS, 2006 U.S. Dist. LEXIS 38938, at *15-*18

(W.D.N.Y. Jan. 27, 2006) (applying Broder and grant-

ing motion to remand to state court where state-law

‘breach-of-contract and negligence actions alleged

violation of 26 U.S.C. § 403(b), and where damages

would be measured by tax consequences for that

violation); Callahan v. Countrywide Home Loans,

Inc., No. 3:06cv105/RV/MD, 2006 U.S. Dist. LEXIS

42860, at *7-*9 (N.D. Fla. June 26, 2006) (applying

Nicodemus and concluding no federal-question juris-

diction existed over plaintiff’s claim that insurer was

negligent in failing to comply with the National

Flood Insurance Act of 1968, 42 U.S.C. § 4011 et

seq., and explaining that “[ajllowing federal question

jurisdiction over all state law negligence claims that

incorporate a federal duty could potentially flood the

federal docket wi h cases based on a violation of a

federal statute”); Caggiano v. Pfizer Inc., 384 F.

Supp. 2d 689, 691 (S.D.N.Y. 2005) (applying Broder

and granting motion to remand to state court claims

alleging violation of various federal statutes and

regulations, and explaining that “[t]he duties alleged

to have been breached here are not creatures of fed-

eral law. ..; rather, federal standards merely inform

the content of classically state-law duties such as

avoiding negligence and fraud”).

Moreover, and in any event, Grable and Empire are

quite recent decisions of this Court, and the courts

of appeals have only begun to apply their holdings.

Indeed, two of the cases cited by petitioners in the

purported circuit split pre-date Empire. To the

extent that any inconsistencies exist in the case law,

they are inchoate and would benefit from further

percolation before undergoing review by this Court.

That is especially so in light of Congress’s subse-

quent enactment of 26 U.S.C. § 7434, which provides

a federal right of action for the exact type of tax mis-

reporting alleged here and thus eliminates the con-

tinuing importance of the question presented. Under

§ 7434(a), “fijf any person willfully files a fraudulent

information return with respect to payments pur-

ported to be made to any other person, such other

person may bring a civil action for damages against

the person so filing such return.” Respondents’ alle-

gation — that petitioners fraudulently misreported

the amount of dividends on Forms 1099-DIV — falls

squarely within that statutory language. Thus, in

the unlikely event that a state-law claim like respon-

dents’ were to arise again, the question would be

whether § 7434 completely preempts the claim. The

issue presented in this petition therefore lacks any

continuing importance, rendering certiorari inappro-

priate for that reason as well.

Il. The Sixth Circuit’s Understanding of

§ 7422 Was Correct and Consistent with

the Decisions of Other Courts of Appeals.

_ Petitioners also claim that certiorari should be

granted to review whether 26 U.S.C. § 7422 com-

pletely preempts state-law tort and contract claims

between private parties for which tax-related injuries

are recoverable as consequential and compensatory

damages. See Pet. 24-26. But further review of that

question is likewise unwarranted. This Court has

explained that complete preemption is quite rare,

found only in circumstances not present here. And

the cases petitioners assert conflict with the decision

below all involve the same type of claim — one that is

fundamentally different from the claim at issue here.

The Court of Appeals Correctly Applied

~~“ Beneficial National Bank to the Facts of

this Case. 3

Unlike an ordinary preemption defense, which can

be pleaded in state court proceedings, the doctrine of

complete preemption is jurisdictional and provides

an exception to the well-pleaded-complaint rule. In

Beneficial National Bank v. Anderson, 539 U.S. 1

(2003), this Court explained that a federal statute

“completely pre-empts” a state-law claim, and there-

by creates a basis for removal jurisdiction, only when

“the federal statute[] at issue provide[s] the exclusive

cause of action for the claim asserted and also set([s]

forth procedures and remedies governing that cause

of action.” Id. at 8. In that case, the Court held that

the National Bank Act completely preempts state-

law usury claims against national banks. It relied on

“this Court’s longstanding and consistent construc-

tion of the National Bank Act as providing an exclu-

sive federal cause of action for usury against national

banks,” as well as the Court’s cases recognizing “the

special nature of federally chartered banks.” Jd. at

10.

In addition to Beneficial National Bank, this

Court has found complete preemption only twice,

in cases involving claims arising under the Labor-

Management Relations Act, 1947 (LMRA), 29 U.S.C.

§ 185, and the Employee Retirement Income Security

Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. In

those cases, the Court relied, respectively, on “the

unusually ‘powerful’ pre-emptive force of § 301 [of the

LMRA],” Beneficial Natl Bank, 539 U.S. at 7 (citing

Avco Corp. v. Aero Lodge No. 735, 390 U.S. 557

(1968)), and the “unambiguous|[]” legislative history

of ERISA, see id. at 7-8 (citing Metropolitan Life Ins.

Co. v. Taylor, 481 U.S. 58 (1987)).

Applying Beneficial National Bank, the Sixth

Circuit held unanimously that § 7422 does not

completely preempt the Mikulskis’ claims. See Pet.

App. 16a-20a.’ Section 7422 provides that, as a pre-

requisite to bringing a lawsuit, an aggrieved tax-

payer seeking “recovery of any internal revenue tax

alleged to have been erroneously or illegally assessed

or collected” must file an administrative claim for

a refund. 26 U.S.C. § 7422(a). After the claimant

exhausts that administrative remedy, suits “may

be maintained only against the United States.” Id.

§ 7422(f)(1).

Section 7422 does not provide the “exclusive cause

of action” (Beneficial Nat'l Bank, 539 U.S. at 9) for

respondents’ claims because they do not allege that

a tax has been “erroneously or illegally assessed or

collected” (26 U.S.C. § 7422(a)). To the contrary,

respondents’ position is that the IRS correctly calcu-

lated the amount of tax due using the (false) infor-

mation provided by petitioners on Forms 1099-DIV.

As the court of appeals explained, “{u]nder the plain-

tiffs’ theory, the IRS was an innocent third-party,

who, like the plaintiffs themselves, merely relied on

the 1099-DIVs issued by Centerior, while Centerior”

~— which knowingly provided false information in the

forms — “was the active (i.e., liable) tortfeasor.” Pet.

App. 19a.

Moreover, even if respondents could have filed re-

fund claims with the IRS; that administrative proce-

dure is not equipped to handle a categorical determi-

nation affecting thousands of individual sharehold-

ers’ tax returns spanning multiple tax years. Refund

claims are specific to the particular taxpayer and tax

year at issue, and will not resolve the same issue for

different taxpayers or for a subséquent (or previous)

tax year. See, e.g., BCS Fin. Corp. v. United States,

118 F.3d 522, 524-25 (7th Cir. 1997).(“[T]o claim: a

refund for 1981 is not to claim a refund for 1984,

even if the logic underlying the 1981 claim would

suggest to a person knowledgeable about tax law

and the affairs of the taxpayer that the taxpayer

would also have a claim for 1984.”); Rose v. American

Airlines, Inc., 331 F. Supp. 77, 79 (N.D. Ill. 1971)

(explaining that each individual who paid tax must

file separate refund claim with IRS and rejecting

plaintiff’s attempt to file administrative claim for

“class” refund).

Thus, under the [RS administrative refund proce-

dure, each shareholder would have to file a return-

specific claim for each tax year in which his Form

1099-DIV was inaccurate — leading to potentially

hundreds of thousands of claims, given the number of

sharcholders and number of tax years in which peti-

tioners’ accounting practices are at issue. Congress

could not have intended the IRS ‘administrative

refund system to be the exclusive recourse for the

type of claims raised by respondents: as-this Court

has stated, “there would be serious question about

the reasonableness of a system that forced a [tax-

payer] to bring a series of backward-looking refund

suits in order to establish repeatedly the legality of

[a] claim.” Bob Jones Univ. v. Simon, 416 U.S. 725,

748 n.22 (1974).

B. The Sixth Circuit’s Analysis Is Consistent

with Other Courts of Appeals.

The cases on which petitioners rely all arise from

a series of class-action suits brought in the mid-

1990s involving airlines’ collection of a 10-percent

federal excise tax on domestic air transportation. See

Brennan v. Southwest Airlines Co., 134 F.3d 1405, as

amended, 140 F.3d 849 (9th Cir. 1998); Sigmon uv.

Southwest Airlines Co., 110 F.3d 1200 (5th Cir.

1997); Kaucky v. Southwest Airlines Co., 109 F.3d

349 (7th Cir. 1997). Federal law required all airline

passengers to pay a 10-percent excise tax on domes-

tic air travel commenced on or before December 31,

1995. See 26 U.S.C. § 4261:(1994). The airlines were

required to collect the tax from customers and remit

it twice monthly to the IRS. See id. § 4291; 26 C.F.R.

§ 40.6302(c)-1(b)(1)G) (1995). Although the tax ex-

pired on December 31, 1995, the airlines collected

the tax from all passengers who purchased tickets in

1995, even.if a passenger was not scheduled to travel

until 1996. Passengers who paid the tax in 1995 on

tickets for travel in 1996 initiated several class-

action suits against the airlines to recover the wrong-

fully assessed tax.

The courts of appeals uniformly held that § 7422

completely preempted plaintiffs’ claims. Because the

plaintiffs in those cases sought “recovery of ... [a]

tax alleged to have been erroneously” collected, they

were required to comply with § 7422, and the fact

that the tax was collected on behalf of the IRS by

a third party did not affect that conclusion. See

Brennan, 134 F.3d at 1413; Sigmon, 110 F.3d at

1204; Kaucky, 109 F.3d at 351-52.

Petitioners here were not “the Internal Revenue

Service’s ‘collection agent,” as were the defendants

in Brennan, Sigmon, and Kaucky. E.g., Kaucky, 109

F.3d at 351. The federal: government did not im-

pose on petitioners a duty to collect taxes, nor did

petitioners collect taxes from respondents. On the

contrary, petitioners agreed in contracts with their

shareholders to report dividend information in con-

formity with federal law. Petitioners breached their

state common-law and contractual duties to report

accurate dividend information and thereby increased

the amount of taxes that respondents paid tothe IRS.

Respondents are thus not attempting to “whipsaw[]”

a government agent, id. at 353, but rather seek

recovery from a corporation that misrepresented

information to its shareholders and the IRS.

Moreover, the plaintiffs in the airline tax cases

sought to recover the actual tax paid. Here, in con-

trast, respondents do not seek recovery of the actual

tax paid to the IRS because, as explained above, they

do not contend that the tax was improperly assessed.

Rather, respondents assert that they paid excessive

taxes — both state and federal — because petitioners

made fraudulent misrepresentations and breached

their obligation under the shareholder agreements to

determine and report dividends accurately. A person

who’has suffered loss from fraud or misrepresenta-

tion may recover not only general damages, but also

damages from any “added tax burdens.” 2 Dan B.

Dobbs, Law of Remedies § 9.2(3), at 557 (2d ed. 1993).

Simply treating an increased tax burden as an

element of damages recoverable under state law does

not convert quintessentially state-law claims into a

claim for a federal tax refund.?!°

Conclusion

The petition for a writ of certiorari should be

denied.

10 Finally, and in all events, remand of one of the four cases

that was consolidated in this appeal is required because peti-

tioners’ notice of removal in that case was untimely. Section

1446(b) requires a defendant to file a notice of removal within

30 days of receiving the complaint, unless “the case stated by

the initial pleading is not removable,” in which case “a notice

of removal may be filed within thirty days after the receipt by

the defendant ... of a ... paper from which it may first be

ascertained that the case is” removable. 28 U.S.C. § 1446(b)

(emphases added). Petitioners filed their notice of removal in

the first case 11 months after service of the complaint, and they

contend that removal was timely because respondents first

named § 312(n)(1) as the precise federal tax provision under

which petitioners incorrectly calculated E&P in a supplemental

interrogatory response. But, if this proceeding was removable

at all, the basis of removal was apparent in respondents’

complaint, which is replete with references to the Internal

Revenue Code and terms specifically defined therein. See, e.g.,

Compl. 4] 24, 29-32, quoted at Pet. App. 12a-14u4. Petitioners’

failure to comply with the statutory time limit for removal pro-

vides an independent basis for sustaining the court of appeals’

judgment as to the first case.

Respectfully submitted,