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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2007

## 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,
v.

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.

i
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

il

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

1V

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)

Vv

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

vi
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-

2

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.

3

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

4

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.

D

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

6

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

7

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

8

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

9

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

10

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.

11

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

12

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).

13

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).

14

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.

15

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.

16

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

17

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-

18

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).

20

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.

21

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).

22

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

23

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.

24

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

25

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-

26

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

27

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

ao

28

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

29

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,

Thomas R. Theado Eric H. Zagrans
Gary, Naegele & Theado, Counsel of Record .
| LL 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0540%3A2. Public record. Not legal advice.