Petition for Writ of Certiorari — Sigmon v. Southwest Airlines Co.

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Supreme Court, U.S.

FILES

97.37 4 AUG 26 1997

No, OFFICE OF THE CLERK

IN THE

SUPREME CouURT OF THE UNITED STATES

OcToBER TERM, 1997

ERNESTO D. SIGMUND AND WILLIAM GREGORY HASSLER,

INDIVIDUALLY AND ON BEHALF OF ALL OTHERS

SIMILARLY SITUATED,

Petitioners,

Vv.

SOUTHWEST AIRLINES Co.,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

Roger L. Mandel, Counsel of Record

Marc R. Stanley

STANLEY, MANDEL & IOLA, L.L.P.

3100 Monticello Avenue, Suite 750

Dallas, Texas 75205

(214) 443-4300

(214) 443-0358 (Fax)

Counsel for Petitioner

QUESTIONS PRESENTED

Whether Section 7422 of the Internal Revenue

Code shelters from suit businesses which

fraudently collect funds from their customers

under the guise of a non-existent tax.

Alternatively, whether consumers who have had

certain excise taxes improperly collected from

them by a business acting as a private collecting

agent for the Internal Revenue Service have an

implied cause of action under 26 U.S.C. § 6415 to

recover from the private collecting agents.

TABLE OF CONTENTS

PAGE

TIONS 5... oc ce sc cauncoen eee i

US kids on traci ii

Ran OE I os oo oss sen even eae eeenee ili

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Opinions and Orders Below ...................... 1

IR 55 dan naan seed eee eee 1

Statutes and Regulations Involved ................ 1

a GE BR CD nn boas cnnnncnckeseheaees 1

Reasons for Granting the Writ .................... 8

The Fifth Circuit Committed an Error of

Law in Not Unequivocally Holding Enochs

applicable to 26 US. 6 PGES on nc ncesuceccneeces 10

Il.

The Fifth Circuit Incorrectly Applied

Enochs, Resulting in its Erroneous Holding

that Southwest Had a Colorable Basis for

Collecting a Non-Existent ExciseTax 14

Ill.

Alternatively, the Fifth Circuit Erred in

Holding That 26 U.S.C. § 6415(c) Does Not

Provide Sigmon and Hassler a Federal

Cause of Action Against Southwest, if

i Tee eo oR Lo. 19

ee rr 29

Er re er infra

TABLE OF AUTHORITIES

CASES: PAGE

Brennan v. Southwest Airlines, Case No.

I cc wncvcuucucdccucecccce 8

Cannon v. The University of Chicago, 444

U.S. 677, 99 S. Ct. 1946, 60 L.Ed.2d 560

no 7,25, 27-28

Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080,

45 L.Ed.2d 26 (1975) ...... cece cc ceee cece ee. 7, 24, 28

DuPont Glore Forgan, Inc. v. American

Tel. & Tel. Co. (AT&T), 428 F. Supp.

1297 (S.D.N.Y. 1977), affd, 578 F.2d

1367 (2nd Cir.), cert denied, 439 U.S. 970

ES En 21

Enochs v. Williams Packing & Navigation

Co., 370 U.S. 1, 82 S. Ct. 1125, 8 L.Ed. 2d

ENE re 6, 9-15

Kaucky v. Southwest Airlines Co., 109

ee ed 8, 12, 14-16

Miller v. Standard Nut Margarine Co. of

Florida, 284 U.S. 498, 52 S.Ct. 260, 76

ee . 14-16

Sierra Club v. Train, 557 F.2d 485 (5th

i 26

1, 6-7,

Sigmon v. Southwest Airlines Co., 10-11, 13, 16,

110 F.3d 1200 (5th Cir. 1997) ......... 21, 23-24, 26, 28

Thompson v. Thompson, 484 U.S. 174, 108

S.Ct. 513, 98 L.Ed.2d 512 (1988) ................ 25-26

iV.

STATUTES:

Internal Revenue Act of 1918 § 1310(a)

Internal Revenue Act of 1939 § 1715(d)

26 U.S.C.A. § 4261(a) (West Supp. 1996) ..

26 U.S.C.A. § 4261(b) (West Supp. 1996)

26 U.S.C.A. § 4261(g) (West Supp. 1997)

26 U.S.C.A. § 4261(g) (West Pamphlet

May, 1997)

26 U.S.C.A. § 4263(c) (West 1989) .......

26 U.S.C.A. § 4263(d) (West 1989) .......

26 U.S.C.A. § 6415(a) (West 1989) .......

26 U.S.C.A. § 6415(b) (West 1989) .......

26 US.C.A. § 6415(c) (West 1989) .......

26 U.S.C.A. § 6415(d) (West 1989) .......

26 U.S.C.A. § 7421(a) (West 1989) .......

26 U.S.C.A. § 7422(a) (West Supp. 1997)

26 U.S.C.A. § 7422(f)(1) (West Supp.

WOR isc

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9, 12, ,

21-23, 27-28

9, 12, 19,

21-23, 27-28

4,6-7,9,

19-24, 26-30

9, 12, 19,

21-23, 27-28

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6-14, 17-

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6-14, 17-

ove Say ae

REGULATIONS: PAGE

26 C.F.R. §§ 29.0-1 to 49.04 (1976) ................. 21

26 C.F.R. § 49.4261 to 49.4264(f) (1976) ............ 21

Be OD ik nko 053 ook oes bcs eke ness 22

26 C.F.R. § 49.4261-4(a) (1976) ..............000002. 21

26 C.F.R. § 49.4264(c)-1(a)(1) (1976) ............... 17

26 CPR. © SULGEIMH G76) gn cc cece sec snccciae 21

Treasury Regulation 42, arts. 51 and

| I Pn eae are are en RE eer 22

Treasury Regulation 42 §§ 130.77

NE Sr 56 5 do os eo ch ene 22

Treasury Regulation 43, § 1310(a) (1921) ........... 22

Vi.

INDEX TO APPENDICES

Appendix A -- Opinions and Orders of the United

States Court of Appeals for the Fifth Circuit

Appendix B -- Opinions and Orders of the United

States District Court, Northern District of Texas,

Dallas Division

Appendix C -- Order Denying Petitioner’s Motion for

Rehearing before the Fifth Circuit

Appendix D -- United States Codes, Rules and

Regulations

Appendix E - Other Materials Petitioner Believes

Essential to Understanding the Petition

PETITION FOR WRIT OF CERTIORARI

Petitioners, Ernesto D. Sigmon and William

Gregory Hassler, individually, and on behalf of all

others similarly situated, respectfully petition for a

Writ of Certiorari to review the judgment of the United

States Court of Appeals for the Fifth Circuit (“Fifth

Circuit”) in this case.

OPINIONS AND ORDERS BELOW

The April 28, 1997 opinion of the Fifth Circuit

(App. A-1 to A-16) is recorded at 110 F.3d 1200. The

order and judgment of the District Court granting sum-

mary judgment to Respondent, Southwest Airlines Co.

(“Southwest”), is found in the Appendix at B-1 to B-3.

JURISDICTION

The Fifth Circuit entered its judgment (App.

A-17) on June 5, 1997, after previously denying a

timely petition for rehearing on May 28, 1997 (App.

C-1). This Court’s jurisdiction rests on 28 U.S.C.

§ 1254(1).

STATUTES AND REGULATIONS INVOLVED

Because of their length, the text of pertinent

statutes and regulations are set forth in the Appendix

to this Petition.

STATEMENT OF THE CASE

A. Factual Background

Due to the Fifth Circuit’s decision, hundreds of

thousands of Southwest's customers and, by extension,

millions of customers of several airlines find them-

selves in a “Catch 22” of classic proportions. Having

paid Southwest and the other airlines what all parties

agree was a fictional and rion-existent tax, they now

find it impossible to recover their money from either

the airlines or the IRS, each of which claims the other is

responsible for making such refunds.

Throughout the period from July 1995 through

January 1996, Southwest knew that the ten percent

(10%) excise tax imposed by 26 U.S.C. § 4261(a) on

tickets sold for travel on or before December 31, 1995,

had not been extended by Congress to apply to tickets

sold for travel on or after January 1, 1996, and that no

statute in force at any time in 1995 required it to collect

an excise tax on tickets it sold in 1995 for travel on or

after January 1, 1996. Nevertheless, based on its belief

throughout the second half of 1995 that Congress and

the President might extend the application of 26 U.S.C.

§ 4261(a) to tickets sold for travel on or after January 1,

1996, Southwest collected a 10% surcharge from

customers who purchased tickets in 1995 for travel on

or after January 1, 1996.

By December, 1995, it should have become pat-

ently obvious to the airline industry, including South-

west, that the 10% excise tax imposed by § 4261(a)

would not soon be extended to tickets sold for travel in

1996. Specifically, on December 6, 1995, President

Clinton vetoed budget legislation that would have

extended the application of § 4261(a) to 1996 travel.

Furthermore, during December, 1995, the media

reported that the budget impasse made it highly

unlikely that Congress and the President would extend

§ 4261(a) to 1996 travel anytime in the near future.

On December 6, 1995, by which time Southwest

certainly should have known that § 4261(a) would not

be applied to 1996 travel in the foreseeable future,

Sigmon purchased a round-trip airline ticket for

$138.00 from Birmingham, Alabama, to Houston,

Texas, from Southwest and paid for same in full by

credit card. The ticket was for travel on December 29,

1995 (Birmingham to Houston) and January 5, 1996

(Houston to Birmingham). The purchase price includ-

ed $12.54 which Southwest represented to Sigmon it

was required to pay the federal government as “taxes,”

including $6.27 in “tax” on the January 5, 1996 Houston

to Birmingham leg. The ticket itself, received via the

mail by Sigmon for his trip, stated that Southwest was

collecting $12.54 in “U.S. taxes” in addition to the

$125.46 price of the airfare.

Sometime in late November, 1995, or early

December, 1995, Hassler purchased a round-trip on a

“ticketless” basis from Southwest for travel from

Houston Hobby Airport to Harlingen International

Airport and paid for same in full by credit card. The

ticket was for travel on December 30, 1995 (Houston

Hobby to Harlingen), and January 1, 1996 (Harlingen

to Houston Hobby). The purchase price included a

ten-percent “excise tax” on both legs of the trip that

Southwest represented it was required to pay to the

federal government.

Southwest learned of this action on January 5,

1996, and it received a copy of Plaintiffs’ Original Class

Action Petition on January 11, 1996. On January 10 and

25, 1996, despite knowing that Congress had not ex-

tended U.S.C. § 4261(a) and despite knowing that it

had been sued for refund of amounts collected in 1995

as “excise taxes” on 1996 travel, Southwest paid ap-

proximately $18,000,000 to the IRS, thereby escaping

any liability that it allegedly had to the IRS on account

of amounts collected in December, 1995, as a ten

percent “excise tax” on tickets for travel on or after

January 1, 1996.

Furthermore, on or about January 11, 1996, the

IRS wrote the various airlines (App. at E-17 to E-19)

requesting them to refund amounts improperly col-

lected in 1995 as “excise taxes” on 1996 travel directly

to their customers pursuant to 26 U.S.C. § 6415(c) and

then to recoup same by taking credits on future excise

tax payments to the IRS. At the same time, IRS spokes-

men were quoted in the press as saying taxpayers

should obtain refunds from the airlines. Despite know-

ing the IRS’ opinion, on January 25, 1996, Southwest

still paid over to the IRS a significant amount of money

improperly collected in December, 1995, as an “excise

tax” on travel in 1996, and it refused to make refunds

pursuant to § 6415(c).

On February 9, 1996, the IRS issued an

Announcement (App. at E-14 to E-15) that required

consumers to submit Form 8849, Claim for Refund of

Excise Taxes, to the IRS along with an original

passenger receipt in order to obtain a refund. The two-

page Form 8849 (App. at E-20 to E-21) does not,

however, provide a specific place to make a claim for

refund of § 4261(a) excise taxes. Furthermore, the four-

page Instructions for Form 8849 (App. at E-22 to E-24)

do not even reference refunds of this tax. A consumer

would have to figure out by himself or herself to use

Section Nine of the Form (the “other claims” section) to

recover the amount fraudulently collected from him or

her by Southwest, as illustrated by the sample Form

8849 (App. at E-25) showing how the IRS requires the

form to be completed.

Because most people will not brave IRS bureau-

cracy to obtain refunds of less than $75.00, and due to

oF OWRD apap tee,

AORN NRT oe ot

the difficulty in figuring out what IRS form to use and

how to fill out that IRS form, relatively few of the

millions of airlines customers (approximately 80,000)

who are estimated to be owed in excess of $1 billion

had attempted to obtain refunds directly from the IRS

as of July 1, 1996. And due to the difficulty of filling

out Form 8849 and the stringent requirement of supply-

ing an original receipt, which most people do not

retain, the IRS had rejected approximately 40% or

32,000 of the 80,000 refund claims it had received as of

July 1, 1996.

Furthermore, after July 1, 1996, refund requests

to the IRS slowed to a trickle. In May, 1997, IRS spokes-

men said that in the first 14 months after the tax lapsed

at the beginning of 1996, it had paid only 49,807

refunds averaging $55.19, less than $3 million, and far,

far less than the $1 billion or more in non-existent taxes

collected.

B. Proceedings in the Trial Court

Sigmon and Hassler filed Plaintiffs’ Original

Class Action Petition in the 298th Judicial District Court

of Dallas County, Texas, on January 5, 1996. On

February 8, 1996, Southwest removed this case to

federal court. On February 15, 1996, Southwest moved

to dismiss Sigmon’s and Hassler’s suit under FRCP

12(b)(1) and 12(b)(6).

On April 5, 1996, Sigmon and Hassler filed their

response to the motion to dismiss. On that same day,

they moved for leave to file Plaintiffs’ First Amended

Class Action Complaint. On April 8, 1996, the trial

court granted Sigmon and Hassler leave to file

Plaintiffs’ First Amended Class Action Complaint, and

they filed it that same day.

In their Amended Complaint, Sigmon and

Hassler pled state-law causes of action for fraud,

negligence, conversion and money had and received.

They alternatively pled a federal cause of action

pursuant to 26 U.S.C. § 6415(c).

On April 25, 1996, the trial court entered its

Amended Order converting Southwest’s motion to

dismiss to a motion for summary judgment. On May

23, 1996, the Court held oral argument on the motion.

That same day, the Court entered its Order and

Judgment granting Southwest’s motion for summary

judgment and dismissing Sigmon’s and Hassler’s

causes of action. Sigmon and Hassler timely filed their

Notice of Appeal to the Fifth Circuit on June 10, 1996.

C. The Opinion of the Fifth Circuit

The Fifth Circuit entered its opinion affirming

the summary judgment in favor of Southwest on April

28, 1997. Sigmon v. Southwest Airlines Co. 110 F.3d 1200

(Sth Cir. 1997). In the opinion, the Fifth Circuit refused

to concede that this Court’s opinion in Enochs v.

Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct

1125, 8 L.Ed.2d 292 (1962), creates a limited exception

to 26 U.S.C. § 7422(a) and (f)(1). 110 F.3d at 1204. It

then assumed, arguendo, that Enochs applied and held

that Southwest acted with colorable authority when it

collected the non-existent tax. Id. The Fifth Circuit so

ruled without any analysis of how this Court had

actually applied the Enochs “no colorable basis” excep-

tion and without any consideration of the relevant

provisions of the Internal Revenue Code or of the

relevant IRS regulations.

The Fifth Circuit also held that 26 U.S.C.

§ 6415(c) does not create a private cause of action under

the criteria set forth by this Court in Cort v. Ash, 422

U.S. 66, 78-79, 95 S.Ct 2080, 2088, 45 L.Ed.2d 26 (1975).

Specifically, the Fifth Circuit held that nothing indi-

cated that Congress intended § 6415(c) to create an

exception to § 7422(a) and (f)(1) that would allow

excise taxpayers to seek relief in the courts against

private collectors. 110 F.3d at 1206. Amazingly, it so

held on the basis of a presumption against implying

causes of action that is absolutely incompatible with

this Court’s decisions, especially Cannon v. The Univer-

sity of Chicago, 444 U.S. 677, 99 S.Ct 1946, 60 L.Ed. 2d

560 (1979).

The Fifth Circuit concluded its opinion by

noting that although it may “inconvenience” con-

sumers, they can seek refunds of the purported excise

taxes directly from the IRS. 110 F.3d at 1206. This state-

ment by the Fifth Circuit ignored the extensive

evidence detailed above that the IRS made it practically

impossible for the vast majority of consumers to obtain

refunds in order to encourage the airlines to handle the

refunds for them.

Thus, customers of Southwest and other airlines

find themselves in the extraordinary “Catch 22” refer-

red to above. As a practical matter, because of the low

amounts of their refund claims, the difficulty in

figuring out and filling out the proper IRS form, and

the requirement of supplying original receipts which

they did not keep, millions of airline customers practi-

cally have no ability to recover over $1 billion from the

IRS. Because of the Fifth Circuit’s decision, they cannot

recover from Southwest or any other airlines.

If it is true that the law abhors a wrong without

a remedy, then the law abhors the Fifth Circuit's

opinion, although Joseph Heller would certainly

appreciate it.

REASONS FOR GRANTING THE PETITION

In this case, following the lead of the Seventh

Circuit, the Fifth Circuit decided two important federal

questions in ways that directly conflict with relevant

decisions of this Court.’ The first important question of

federal law is whether persons from whom money has

been collected by a business as a “tax” despite the busi-

ness not having even a colorable basis for collecting

such a “tax” must brave IRS bureaucracy and file a re-

fund claim with the IRS pursuant to 26 U.S.C. § 7422(a)

and then file suit against the IRS pursuant to 26 U.S.C.

§ 7422(f)(1) or whether such persons can merely make a

claim to and then sue the business under state law in

state court.

This is an important question of federal law for

two reasons. First, it affects millions of air passengers

and other excise taxpayers who are likely in the future

to be, and who likely already have been, frequently

fleeced out of non-existent “taxes” when excise tax

statutes expire. For example, the 10% excise tax im-

posed by § 4261(a) was extended to apply to travel

taking place from August 1, 1996, through January 1,

1997, when the tax once again lapsed. 26 U.S.C.A. §

4261(g) (West Supp. 1997). The tax was renewed again

on March 7, 1997. 26 U.S.C.A. § 4261(g) (West Pamph-

let May, 1997). It is entirely probable that Southwest

' See Kaucky v. Southwest Airlines Co., 109 F.3d 349 (7th

Cir. 1997). A Petition for Writ of Certiorari has been

filed with this Court in that case. A case involving the

same issues is also pending before the Ninth Circuit.

See Brennan v. Southwest Airlines Co., et al., No. 96-17053.

and other airlines collected “excise taxes” in late 1996

on tickets for travel in January and February of 1997,

even though travel during those months in 1997 was

not subject to any excise tax.

The second reason this question of federal law is

so important is that the Fifth Circuit’s decision invites

substantial abuse by businesses. Because the Fifth Cir-

cuit refused to apply Enochs to § 7422, any business can

fraudulently collect funds under the guise of a tax and

pocket the money secure in the knowledge that if

caught by the customers it fleeced, it can escape suit

simply by stating that it collected a “tax,” albeit erron-

eously, and pointing to § 7422(a) and (f)(1). Indeed, the

Fifth Circuit’s opinion invites a whole new species of

fraud.

The second important question of federal law

presented in this case is the question of whether a cause

of action should be implied into 26 U.S.C. § 6415(c).

This question is important because it will determine

whether, in the future, when thousands or even mil-

lions of persons seek very small excise tax refunds, the

IRS will be burdened with handling those thousands or

millions of refund requests and excise taxpayers will be

burdened with braving IRS bureaucracy to obtain those

very small refunds or whether private collectors who

erred in the first place must bear the burden of re-

funding the erroneously collected excise taxes and col-

lectively and efficiently recouping same from the IRS as

intended by Congress when it passed 26 U.S.C. § 6415.

THE FIFTH CIRCUIT COMMITTED

AN ERROR OF LAW IN NOT

UNEQUIVOCALLY HOLDING

ENOCHS APPLICABLE TO 26 U.S.C. § 7422

In its opinion, the Fifth Circuit stated that it

would not decide whether the “no colorable basis”

exception created by this Court in Enochs applies to 26

U.S.C. § 7422, because it found that Southwest Airlines

acted with colorable authority when it collected the

amounts in issue as “excise taxes.” 110 F.3d at 1204.

The Fifth Circuit erred in not unequivocally holding

the “no colorable basis” exception of Enochs applicable

to § 7422, because the rationale of Enochs applies with

full force to § 7422 and because even the Fifth Circuit

acknowledges that § 7422 cannot apply every time a

business collects money from its customers under the

guise of a “federal tax.”

Sigmon and Hassler posed two hypotheticals to

the Fifth Circuit in support of their position. In the first

hypothetical, a law firm added a 10% surcharge to its

fees and called it a “federal excise tax,” when no such

tax existed. In the second, an airline collected a fictit-

ious 5% “carry-on luggage tax.” Sigmon and Hassler

argued that in those hypotheticals, because those funds

were not conceivably “taxes,” the government would

have no interest in the collected funds justifying a

requirement that a refund claim be made to the IRS,

and the culpable tax collectors would not deserve the

protection of § 7422, because they were not conceivably

acting as mere agents for the government.

Significantly, the Fifth Circuit, in its discussion

of these hypotheticals, apparently acknowledged the

Ae OTE

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correctness of Sigmon’s and Hassler’s argument that

not every person who claims to have collected amounts

as “taxes” is entitled to the protection of § 7422. Id. at

1203-4. Given this, the issue becomes under what

standard courts should judge the applicability of

§ 7422. Enochs provides this standard.

In that case, this Court announced an exception

to 26 U.S.C. § 7421(a), holding that statute inappli-

cable where “...it is apparent, on the basis of the inform-

ation available to the government at the time of suit, that,

under the most liberal view of the law and the facts, the

United States cannot establish its claim.” 82 S.Ct at 1129.

That statute prohibits suits to restrain the assessment or

collection of a federal tax.

This Court’s rationale in Enochs for allowing

taxpayers to enjoin the IRS from collecting certain taxes

where the central purpose of § 7421(a) cannot be

achieved (because the IRS could not prevail under any

circumstances) applies equally to this case where the

purposes of § 7422(a) and (f)(1) cannot be achieved by

dismissing Sigmon’s and Hassler’s suit against South-

west. Neither the IRS nor Southwest could conceivably

prove that Southwest properly collected the “excise

taxes” in issue. Thus, this Court need not protect any

interest of the IRS in the funds collected by Southwest

by funneling Sigmon’s and Hassler’s claims into the

refund procedures provided by the Internal Revenue

Code.

Similarly, this Court need not protect Southwest

from having to defend actions it engaged in as a “mere

agent” of the IRS, because Southwest did not conceiv-

ably act as an agent for the IRS in collecting the fictit-

ious “excise taxes.” Rather, Southwest voluntarily mis-

represented the existence of and collected the fictitious

tax, making it entirely just for Sigmon and Hassler to

recover directly from Southwest and for Southwest to

seek recovery, at its own peril, from the IRS.

Of course, Southwest undisputedly has the right

under 26 U.S.C. § 6415(a) and (b) to recover from the

IRS, via refunds or credits on future excise tax returns,

all “excise taxes” it refunds as a result of this case;

nevertheless, it stubbornly refuses to refund such

amounts. 26 U.S.C.A. § 6415(a) and (b) (West 1989).

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

349, heavily relied upon by the Fifth Circuit, the

Seventh Circuit implicitly applied the “no colorable

basis” exception of Enochs to § 7422 of the Internal

Revenue Code. Specifically, it held that where a con

man, posing as an IRS agent, collects and pockets

“taxes” from gullible citizens, § 7422 does not apply,

and the con man’s victims have their usual state law

remedies against the con man, because the con man did

not have even a colorable basis to collect the funds in

issue as “taxes.” Id. at 352. Thus, the Seventh Circuit

applied to § 7422 the “no colorable basis” exception to

§ 7421(a) of the Internal Revenue Code recognized by

this Court in Enochs.

Significantly, the Seventh Circuit applied the

Enochs standard exactly as articulated by Sigmon and

Hassler in this case -- whether Kaucky’s suit against

Southwest is a tax refund suit against Southwest

preempted by § 7422 depends on whether Southwest

had a colorable basis for collecting the amounts in issue

as excise taxes despite the absence of a statute imposing

such an excise tax.

In its opinion, the Fifth Circuit did not disagree

with any of the reasoning offered by Sigmon and

Hassler as to why the “no colorable basis” exception of

Enochs applies with equal force to § 7422. Rather, the

Fifth Circuit merely stated in a footnote that applying

such exception to § 7422 would allegedly open

“Pandora’s Box” in the form of many additional

taxpayers bypassing the normal administrative tax

refund process and filing state law claims. 110 F.3d at

1204, fn. 9. There is, however, no factual basis for the

Fifth Circuit’s statement.

Presumably, taxpayers would be just as, or even

more, eager to prevent collection of taxes by the IRS or

private collecting agents in the first place as they would

be to obtain refunds (and, potentially, other damages)

from purported private collecting agents in state court

after taxes have already been collected from them.

Crucially, there is no evidence that a flood of taxpayers

filed injunction suits against the IRS or private

collecting agents trying to prevent collection of taxes

under the “no colorable basis” exception after this

Court’s decision in Enochs in 1962. Accordingly, there

is no reason to believe the application of the “no

colorable basis” exception to § 7422 would result in

numerous state court lawsuits.

The reason is simple. Enochs provides an ex-

tremely narrow exception. In very few cases will a tax-

payer be able to allege, in good faith and subject to

court sanctions, that a tax was collected by a private

collecting agent with no colorable basis for doing so.

Fear of court sanction should prevent a flood of friv-

Olous suits by taxpayers claiming that taxes were

collected from them with no colorable basis for doing

so. Indeed, this Court could emphasize the narrowness

of the exception in its opinion.

The bottom line is that the risk of taxpayers and

their lawyers filing frivolous suits is far outweighed by

the perversion of the Internal Revenue Code that

results if a con man is allowed td invoke the protection

of § 7422 against a suit seeking recovery of amounts

collected under the guise of a non-existent, fictitious

tax. The Seventh Circuit implicitly so held in Kaucky,

and so should this Court. Given the potential for repet-

ition of this problem and the potential for fraud from a

contrary ruling, this Court should explicitly recognize

the only logical conclusion - that the “no colorable

basis” exception it recognized in Enochs applies to

§ 7422.

Il.

THE FIFTH CIRCUIT INCORRECTLY

APPLIED ENOCHS, RESULTING IN

ITS ERRONEOUS HOLDING THAT

SOUTHWEST HAD A COLORABLE BASIS FOR

COLLECTING A NON-EXISTENT EXCISE TAX

While the Fifth and Seventh Circuits did not

clearly articulate their methodology for determining

that Southwest allegedly had a colorable basis for

collecting the amounts in issue as excise taxes, both of

their approaches can be summarized as creating the

following two-prong test: (1) If the private party is an

authorized collecting agent for the IRS as to some

federal tax, and (2) if the private party claims the funds

in issue were collected pursuant to some then-existing

or potential future tax statute, the private party had a

colorable basis for collecting the “tax.” Sigmon, 110

F.3d at 1204; Kaucky, 109 F.3d at 352-3. This reasoning

is completely incompatible with this Court’s decisions

in Enochs and Miller v. Standard Nut Margarine Co. of

Florida, however.

In Enochs, this Court relied upon its prior decis-

ion in Miller v. Standard Nut Margarine Co. of Florida, 284

U.S. 498, 52 S.Ct 260, 76 L.Ed. 422 (1932), in holding

that a taxpayer can enjoin the IRS (or its collecting

agent) from collecting a tax which could not possibly

be valid. 82 S.Ct at 1128. In Miller, this Court allowed

a taxpayer to enjoin the IRS from collecting a tax im-

posed by the Oleomargarine Act of 1886 on the taxpay-

er’s vegetable oil product on the ground that there was

no colorable basis for the IRS to claim that the

taxpayer’s vegetable oil product fell within the

definition of oleomargarine contained in_ the

Oleomargarine Act. 52 S.Ct at 263. See also Enochs, 82

S.Ct at 1128.

Under the standard used by the Fifth Circuit in

Sigmon and the Seventh Circuit in Kaucky, this Court

would have been compelled to hold in Miller that the

IRS had a colorable basis for collecting the oleo-

margarine tax. The IRS met the first prong of their test

because it was obviously duly authorized to collect

some taxes from the taxpayer. It met the second prong

of the test because it contended that it would be

collecting the amounts in issue as taxes pursuant to the

Oleomargarine Act of 1886, a valid, existing tax statute.

Nevertheless, because there was not even a

colorable basis for the IRS to claim that the taxpayer’s

product fell within the valid tax statute in issue, this

Court held that the IRS did not have a colorable basis

for collecting the tax in issue. Thus, the Fifth and

Seventh Circuits’ application of the “no colorable basis”

exception to Southwest’s conduct in a manner com-

pletely inconsistent with Enochs and Miller cannot

possibly be proper.

Applying the standard for determining whether

there is a colorable basis for collecting a tax actually

used by this Court in Miller to the facts of this case

compels a conclusion diametrically opposed to that of

the Fifth and Seventh Circuits. As both courts freely

admitted, in 1995, neither § 4261 nor any other statute

imposed a tax on 1996 air travel. Sigmon, 110 F.3d at

1203; Kaucky, 109 F.3d at 350. Thus, because there was

not even an arguable basis that § 4261 or any other

statute imposed an excise tax on 1996 travel, Southwest

could not have had a colorable basis for collecting the

amounts in issue as excise taxes in 1995.

An example makes even more clear the complete

fallacy of the Fifth and Seventh Circuits’ approach to

colorable basis. The luxury tax on automobiles im-

poses an eight percent (8%) tax on the price of new cars

in excess of $34,000. If an unscrupulous auto dealer

decided to start collecting the tax on the full price of

each car (including on $15,000 cars), the Fifth and

Seventh Circuits would presumably hold that the auto

dealer had a colorable basis for collecting the fictitious

tax on the first $34,000 of a new car’s price because the

auto dealer would be an authorized private collecting

agent for the IRS, and because there would be a tax

statute pursuant to which the auto dealer claimed to

collect the amounts in issue.

This Court’s decision in Miller requires a dif-

ferent result. The auto dealer would not have a color-

able basis for collecting the amounts in issue as taxes,

because there is no possible way it or the IRS could

ever prevail that it properly collected taxes on the

portion of a new car’s sale price that is less than

$34,000. Under these circumstances, the IRS would

have no conceivable claim to the funds justifying a

refund claim be made to it, and the auto dealer would

not deserve the protection of § 7422, because it didn’t

conceivably act as a mere agent for the IRS.

In short, in order for there to be a colorable basis

for collecting a tax, a private collector or the IRS must

do more than point to a statute under which it claims to

have collected the taxes. It must also have a colorable

basis — a possibly reasonable basis -- for claiming that

the statute in issue could impose the purported tax on

the affected taxpayers. Southwest clearly fails this test

in this case.

The fact that Southwest may have anticipated

that Congress and the President would enact such a

Statute at some point in the future cannot supply

Southwest with a colorable basis for collecting a tax on

1996 travel. If it does, all bills in Congress which

would impose a new tax would provide a reasonable

basis for advance collection by the IRS and private

collectors. That, quite obviously, cannot be the law.

In addition, the Fifth and Seventh Circuits’

holding that Southwest's speculation that § 4261 would

be renewed gave it a colorable basis for collecting the

amounts in issue fails to recognize that Congress and

the IRS previously addressed this exact situation in the

context of excise taxes and rejected those courts’ analy-

sis. They did so by enacting a statute and regulations

that provided that an excise tax on transportation

which was not subject to the tax at the time the fare was

collected could only be collected after the transport-

ation subsequently became subject to an excise tax, and

not at the time the fare was collected. See 26 U.S.C.A. §

4263(c) and (d) (West 1989); 26 C.F.R. § 49-4264(c)

-1(a)(1) (1976).

In other words, Congress and the IRS specific-

ally legislated that because travel in 1996 was not

subject to an excise tax at the time the tickets in issue

were sold by Southwest in 1995, Southwest was not

obligated to, and had no right to, collect an excise tax

on such travel, unless and until the travel became

subject to an excise tax via Congress’ and the

President’s renewal of § 4261. Given that Southwest

acted directly contrary to a federal statute and

regulations when it collected a non-existent “excise

tax” in 1995 on tickets for travel in 1996, Southwest’s

speculation that the excise tax might be extended to

1996 travel cannot, as a matter of law, constitute a

colorable basis for collecting the non-existent tax.

Congress even more emphatically demonstrated

its intent and belief that amounts collected in 1995 as

“taxes” on 1996 travel by Southwest and other airlines

did not constitute taxes subject to § 7422 and the other

provisions of the Internal Revenue Code by one of its

most recent amendments to § 4261. See 26 U.S.C.A.

§ 4261(g) (West Pamphlet May, 1997). Specifically, in

§ 4261(g)(1)(A), Congress made travel taking place

after the expiration of the tax subject to the tax if it is

paid for prior to the expiration, and it further provided

in § 4261(g)(2) that the tax paid under that provision

would be treated as an overpayment subject to refund

In other words, Congress amended the statute and

added additional language to create the exact situation

that the Fifth and Seventh Circuits ruled already exist-

ed under the previous version of the statute that did

not contain such language.

Why would Congress do that? Congress clearly

understood, pursuant to its prior intent as expressed in

§ 4263(c) and (d), that when the airlines had collected

amounts in 1995 as “taxes” on 1996 travel, they had not

collected a tax at all and that such funds were not sub-

ject to § 7422 of the Internal Revenue Code. To prevent

that problem from reoccurring, Congress amended

§ 4261(g). Such action by Congress would not have

been necessary had the Fifth and Seventh Circuits’

holdings conceivably been correct.

III.

ALTERNATIVELY, THE FIFTH CIRCUIT

ERRED IN HOLDING THAT 26 U.S.C. § 6415(c)

DOES NOT PROVIDE SIGMON AND

HASSLER A FEDERAL CAUSE OF ACTION

AGAINST SOUTHWEST, IF NECESSARY

If this Court holds that Southwest had a

colorable claim that it was obligated by law in 1995 to

collect excise taxes on the 1996 travel of Sigmon and

Hassler, then (and only then) Sigmon and Hassler will

have a claim in the nature of a tax refund suit. In that

case, Sigmon and Hassler will have standing to bring

such a tax refund suit directly against Southwest pur-

suant to Section 6415(c) of the Internal Revenue Code.

Subsection (a) of § 6415 allows an airline, like

Southwest, which collected the excise tax imposed by

§ 4261(a) to obtain from the IRS a credit for or a refund

of any overpayment of such excise tax, if the airline

establishes that it repaid the amount of such tax to its

customer or that it obtained the consent of its customer

to obtain such credit or refund. 26 U.S.C.A. § 6415(a)

(West 1989). Subsection (b) gives an airline the right to

take a credit for a refund of an overpayment on a

subsequent tax return instead of filing a claim for

refund with the IRS. 26 U.S.C.A. § 6415(b) (West 1989).

Subsection (c) reads as follows:

person required under § 4251, 4261, or 4271

to collect any tax shall make an overcollection

of such tax, such person shall, upon proper

application, refund such overcollection to the

person entitled thereto.

26 U.S.C.A. § 6415(c) (West 1989) (emphasis added).

The mechanism created by § 6415 is elegantly

simple. Pursuant to Subsection (c), the air traveler

from whom the excise tax on airline travel under §

4261(a) was overcollected may make proper appli-

cation to the airline which collected the excise tax, and

such airline shall refund such overcollection. Pursuant

to Subsections (a) and (b), the airline then has the right

to either apply for and receive a refund of the amount

of the tax from the IRS or to merely take a credit for

such amount on a subsequent excise tax return.

The intent and purpose of Congress in enacting

§ 6415(c) has been explained as follows:

The purpose of Section 6415 as a whole is

apparently to provide mechanisms for lessen-

ing the burden of administering a tax which is

imposed on a large number of taxpayers

paying a relatively small amount of tax on

each taxable transaction. It eliminates the ne-

cessity of individual taxpayers filing refund

claims for each overpayment of an excise tax

by allowing refunds to be made to the collect-

ing agent for all its customers, and it lessens

the number of refund claims required by

allowing the collecting agent in certain cases

to take a credit upon a subsequent return

instead of filing a refund claim.

DuPont Glore Forgan, Inc. v. American Tel. & Tel. Co.

(AT&T), 428 F. Supp. 1297, 1302 (S.D.N.Y. 1977), aff,

978 F.2d 1367 (2nd Cir.), cert. denied, 439 U.S. 970 (1978).

The Fifth Circuit initially held that § 6415(c)

might not apply to this sort of refund based upon a

1921 IRS regulation. 110 F.3d at 1205. Specifically, the

Fifth Circuit thought that § 6415(c) might apply only to

amounts overcollected as a result of some clerical or

mechanical error and not to taxes illegally or

erroneously collected. Id.

Section 6415(c) does not, however, on its face,

restrict itself to overcollections due to mechanical or

clerical errors. 26 U.S.C.A. § 6415(c) (West 1989). Sec-

tion 6415(a), which allows an airline that overcollected

an excise tax and refunded same to a customer to re-

cover such an amount from the IRS by credit or refund,

similarly contains no restriction based upon the reason

for the refund to the customer. U.S.C.A. § 6415(a)

(West 1989).

The currently applicable IRS regulations similar-

ly do not purport to limit § 6415 to refunds made by

airlines to customers due to mechanical or clerical

errors. 26 C.F.R. § 301.6415-1 (1976); 26 C.F.R. §§ 29.0-1

to 49.04 and 49.4261 to 49.4264(f) (1976). Pursuant to 26

C.F.R. § 49.04 (1976), it appears these regulations super-

sede any prior regulations.

Furthermore, without objection by the IRS,

Southwest routinely takes credits for refunds on sub-

sequent months’ tax returns regardless of the reason

and without explanation. Indeed, the IRS wrote the air-

lines and told them to apply § 6415(c) in this exact

situation. (App. at E-17 to E-19).

To the extent older IRS regulations still apply,

they do not purport to restrict the application of the

predecessor statute to § 6415 to refunds made by air-

lines only on account of mechanical or clerical errors.

Rather, those regulations simply provide that airlines

can recover by credit only refunds they made to

customers on account of mechanical and clerical errors,

while they can recover refunds made to customers of

taxes collected erroneously or illegally by refund.’

While IRS regulations from 1921 applicable to a 1918

predecessor statute did seem to limit the scope of the

1918 predecessor to § 6415 as argued by the Fifth Cir-

cuit, that version of the statute and those regulations

were clearly superseded by the 1939 statute and the

1932 and 1942 regulations which do not so limit §6415.°

Significantly, whether Southwest would recover

refunds made to members of the Class via credit or

refund is irrelevant. Either way, the efficiency § 6415(c)

seeks to achieve will be achieved. If credits are taken

by Southwest, the burden on the IRS is obviously

drastically reduced, as is the burden placed upon

thousands and thousands of Class members. Similarly,

if Southwest makes mass refund claims to the IRS

> In the Appendix at D-8 to D-11 are the Internal

Revenue Act of 1939 § 1715, Treasury Regulation 42,

arts. 51 and 52 (1932) and Treasury Regulation 42 §§

130.77 and 130.78 (1942). Pursuant to 26 C.F.R. § 42.0-4

(1967), to the extent they are not superseded, the 1942

regulations still control. (App. at D-12 to D-13.)

* In the Appendix at D-12 are the Internal Revenue Act

of 1918 § 1310(a) and Treasury Regulation 43, § 1310(a)

(1921). See 26 C.F.R. § 42.0-4 (1967), in the Appendix at

D-12 to D-13, for the superseding effect of the 1942

regulations.

which include refunds to hundreds or thousands of

Class members, the number of claims processed by the

IRS will be dramatically decreased, as will the burden

on all the members of the Class.

The Fifth Circuit next amazingly claimed that

there is no rational basis for allowing certain excise tax-

payers the right to demand refunds from and then sue

private collectors while not granting the same right to

all other taxpayers. 110 F.3d at 1205. This incredible

assertion by the Fifth Circuit blatantly ignores Con-

gress’ purpose in enacting § 6415(c) and the fact that §

6415(c) quite clearly represents a conscious decision on

the part of Congress to create an exception to the nor-

mal rule found in § 7422 for certain excise taxpayers.

The reason why Congress chose to allow suits

against private collectors of certain excise taxes, but not

against all private collectors of federal taxes, is actually

quite obvious. As opposed to income and other taxes

which typically are quite substantial, the amounts of

such excise taxes are always quite small, $6.27 in the

case of Sigmon. Congress realized that processing

thousands or even millions of such small claims would

place a substantial and unwarranted administrative

burden upon the IRS and upon such excise taxpayers.

Not desiring to place such a burden on the IRS and

those excise taxpayers, Congress logically chose with

§ 6415(c) to allow persons who overpaid small amounts

of excise taxes to compel the private collectors of such

taxes to refund them and then to allow such collectors,

in turn, to collectively and efficiently obtain refunds or

credits from the IRS pursuant to the other subsections

of § 6415.

Finally, the Fifth Circuit held that § 6415(c) does

not meet the second and third of the following four

criteria established by this Court in Cort v. Ash for

determining whether a cause of action may be implied

for breach of a federal statute: (i) whether the statute

creates a federal right or “especial benefit” for a class of

which plaintiffs are members; (ii) whether there is any

indication of legislative intent, explicit or implicit, to

create a private cause of action; (iii) whether implying a

private cause of action would be consistent with the

purpose of the legislative scheme; and (iv) whether the

cause of action urged by the plaintiff is one

traditionally relegated to state law. 95 S.Ct at 2088.

As noted, the Fifth Circuit did not deny that

§ 6415(c) meets the first and fourth Cort v. Ash criteria.

Section 6415(c) clearly meets the first criteria because it

clearly creates a federal right in favor of a class of

persons (persons from whom certain excise taxes were

overcollected by private collectors), and Sigmon and

Hassler are clearly members of that class. Section

6415(c) clearly meets the fourth element as well, be-

cause if this Court finds that this suit is in the nature of

a suit for refund of improperly collected taxes, it will

have found that this is not an area traditionally

relegated to state law.

The Fifth Circuit did, however, deny that

§ 6415(c) meets the second Cort v. Ash criteria that there

be some indication of legislative intent to create a

private cause of action. 110 F.3d at 1205-6. The Fifth

Circuit did so based upon a presumption that Congress

did not intend to create a private right of action, and it

held that Sigmon and Hassler bore the heavy burden of

demonstrating that Congress affirmatively contem-

plated private enforcement when it passed the relevant

statute. Id. at 1205.

This presumption made by the Fifth Circuit and

the heavy burden it placed upon Sigmon and Hassler

to overcome it directly conflict with the decisions of

this Court. Initially, the Fifth Circuit’s presumption

clearly arises out of a hostility to implying causes of

action into federal statutes. This hostility is completely

at odds with the statement of this Court that:

...when that remedy [a private suit] is neces-

sary or at least helpful to the accomplishment

of the statutory purpose, the Court is de-

cidedly receptive to its implication under the

statute.

Cannon v. The University of Chicago, 99 S.Ct 1961.

Furthermore, the heavy burden placed upon

Sigmon and Hassler by the Fifth Circuit to prove that

Congress affirmatively contemplated private enforce-

ment when it passed the relevant statute irrevocably

conflicts with this Court’s holding in Thompson v.

Thompson, 484 U.S. 174, 108 S.Ct 513, 516, 98 L.Ed.2d

512 (1988), that the necessary focus on Congressional

intent does not require evidence that members of the

Congress, in enacting the statute, actually had in mind

the creation of a private cause of action. As the implied

cause of action doctrine suggests, and as this Court has

recognized, the legislative history of a statute that does

not expressly create or deny a private remedy will

typically be equally silent or ambiguous on the ques-

tion. Cannon v. The University of Chicago, 99 S.Ct at 1956.

Accordingly, this Court has held that the

Congressional intent to provide a private remedy will

usually be implied from the language of the statute

and/or its structure and/or in the circumstances of its

enactment. Thompson v. Thompson, 108 S.Ct at 516. In

further direct contravention of this Court’s holding in

Thompson that Congressional intent should be implied

from the statute’s language, the Fifth Circuit held that

the language of § 6415(c), specifically its use of the

mandatory term “shall,” is not evidence of Con-

gressional intent to create a private remedy. 110 F.3d

at 1206. It held this because the term “shall” is not

always mandatory. Id.

In so holding, the Fifth Circuit inexplicably

ignored its very own and quite appropriate rules of

statutory construction. That court, correctly, previous-

ly held that a court ~ust construe a statute’s language

so as to give effect to the intent of Congress. Sierra Club

v. Train, 557 F.2d 485, 489 (5th Cir. 1977). It also cor-

rectly held that a court must accept the wording of the

statute as the most persuasive evidence of that Con-

gressional intent. Id. Accordingly, the Fifth Circuit |

correctly held that a court must interpret “shall” as

mandatory, unless one party makes a convincing

argument to the contrary. Id.

In this case, not only did Southwest and the Fifth :

Circuit fail to make a convincing argument that “shall”

is not mandatory in § 6415(c), they failed to make any

argument as to why that term is not mandatory.

Accordingly, the usual statutory presumption should

guide this Court’s interpretation of “shall,” and it

should hold that Congress used “shall” in § 6415(c) to

make refunds by private collectors mandatory.

Te nate errr Lae ne a os

Furthermore, even if this Court engages in an

analysis of whether assigning a mandatory or permis-

sive meaning to “shall” in § 6415(c) is more consistent

with the statute’s intent, it should conclude that a man- ;

datory interpretation best fulfills the manifest intent of

Congress in enacting the statute. Quite obviously, this

Court will best implement Congress’ intent to lessen

the burden on the IRS and excise taxpayers of refund-

ing numerous, very small overcollections of excise

taxes by making it mandatory that collecting agents

refund improperly collected excise taxes to their

customers, upon proper application.

If private collecting agents have a choice, and if

they uniformly elect not to make such refunds, they

would entirely defeat Congress’ purpose and intent in

enacting § 6415(c). It requires a stretch of the imagin-

ation indeed to believe that Congress intended private

tax collectors like Southwest to have the discretion to

defeat its purpose in enacting 26 U.S.C. § 6415.

In addition to its use of the mandatory term

“shall,” Congress indicated its intent to create a private

remedy by specifically identifying a class of persons to

receive a benefit. Indeed, this Court has noted that,

with the exception of one case in which the relevant

statute reflected a specific policy against judicial inter-

ference, it has never refused to imply a cause of action

where the language of the statute explicitly conferred a

benefit directly on a class of persons that included the

plaintiff in the case. Cannon v. The University of Chicago,

99 S.Ct at 1954, n. 13.

Accordingly, this Court has held that where it is

clear that federal law has granted a class of persons

certain rights, no other evidence is necessary to show a

Congressional intent to create a private cause of action,

although an explicit purpose not to provide cause of

action would be controlling. Id. at 1956. Because the

Fifth Circuit did not deny that § 6415(c) conferred a

benefit directly on a class of persons that included

Sigmon and Hassler, its ruling that Sigmon and Hassler

failed to prove Congressional intent to grant a private

remedy irrevocably conflicts with this Court’s decision

in Cannon v. The University of Chicago.

The Fifth Circuit also denied that § 6415(c) met

the third Cort v. Ash criteria and held that implying a

private cause of action under § 6415(c) would not be

consistent with the purpose of the legislative scheme.

110 F.3d at 1206. Specifically, the Fifth Circuit held that

implying a private cause of action into § 6415(c) would

somehow conflict with the scheme of the Internal

Revenue Code, which generally funnels all tax refund

claims and suits through § 7422. This incredible state-

ment by the Fifth Circuit simply ignores the purpose

for which Congress enacted § 6415(c) and almost

denies its very existence.

At an absolute minimum, § 6415(c) provides an

exception, on an optional basis, to § 7422(a). Instead of

filing a refund claim with the IRS pursuant to § 7422(a)

in the first instance, a customer of Southwest may seek

a refund of overcollected excise tax from Southwest,

which Southwest may pay and then recoup from the

IRS by credit or refund. The question for this Court

then becomes whether Congress intended this excep-

tion to § 7422(a) found in § 6415(c) to be mandatory. If

so, § 6415(c) must also constitute an exception to

§ 7422(f)(1) and allow suits directly against private

collectors or there would be no remedy for the

violation of the rights conferred in § 6415(c).

That Congress intended the rights granted to

Sigmon, Hassler and the Class in § 6415(c) to be man-

datory is manifest. First, as discussed previously, it

used the mandatory term “shall.” Second, in order to

insure that Congress’ purpose in enacting § 6415 is

realized, § 6415 must be interpreted as mandatory. If it

is not mandatory, Southwest is given the option of

depriving taxpayers like Sigmon and Hassler and the

IRS of the benefits of § 6415(c), thereby shifting from

itself to taxpayers and the IRS the administrative costs

of refunding amounts it illegally collected.

In other words, § 6415(c) is an integral part of

Congress’ scheme which must be given meaning and

implemented consistent with Congressional intent by

this Court. The absence of any other way to achieve

the goals of § 6415(c) in the face of statutory dis-

obedience, such as Southwest’s disobedience in this

case, strongly demonstrates a Congressional intent to

create a private remedy.

At a fundamental level, this Court must decide

whether to accept the Fifth Circuit refusing to imply a

cause of action into § 6415(c), thereby emasculating that

statute and giving discretion to Southwest and other

airlines to render it ineffective, based upon a Fifth

Circuit-created presumption against implying federal

causes of action which irrevocably conflicts with the

decisions of this Court. This Court should make it very

clear to the Fifth Circuit that Congress should not be

presumed to have passed teethless, unenforceable

statutes and, accordingly, that it must imply causes of

action where necessary to effectuate Congressional

intent.

IV.

CONCLUSION

Only this Court has the power to deliver Sigmon

and Hassler and millions of airline passengers from the

gigantic “Catch 22” created by the Fifth Circuit. It

should do so in order to resolve two very important

questions of federal law that will inevitably arise many

times in the future and which will affect thousands, if

not millions, of airline passengers and other excise

taxpayers and the IRS in the future.

Sigmon and Hassler urge this Court to: (1) con-

sider this case, (2) hold that Sigmon and Hassler do not

assert a suit for a tax refund subject to the Internal

Revenue Code, but rather state law causes of action, (3)

reverse the summary judgment in favor of Southwest,

and (4) remand this case back to the district court with

instructions for it to remand the case back to state

court.

Alternatively, if the Court finds that Sigmon and

Hassler have asserted a suit in the nature of a tax

refund suit, Sigmon and Hassler urge this Court to: (1)

hold that they have asserted a cause of action pursuant

to § 6415(c), (2) reverse the summary judgment in favor

of Southwest, and (3) remand to the district court for

further proceedings.

Respectfully submitted,

Popa L2-Lh

Roger L. Mandel, Counsel of Record

Marc R. Stanley

Stanley, Mandel & Iola, L.L.P.

3100 Monticello Avenue, Suite 750

Dallas, Texas 75205

(214) 443-4300 (Phone)

(214) 443-0358 (Fax)

Attorneys for Petitioners

A-1

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

CIVIL NO. 396-CV0393-H

ERNESTO D. SIGMON and WILLIAM

GREGORY HASSLER, individually and

on behalf of all others similarly situated,

Plaintiffs-Appellants,

SOUTHWEST AIRLINES CO.,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Texas, Dallas.

(Decided April 28, 1997)

Before Duhé, Benavides and Stewart, Circuit Judges.

BENAVIDES, Circuit Judge:

This appeal requires us to determine whether

airline passengers can bring suit against an airline to

obtain refunds of amounts erroneously collected by the

airline as federal excise taxes. We conclude that they

cannot.

In late 1995, Ernesto Sigmon and William

Hassler each purchased an airline ticket from

Southwest Airlines Company ("Southwest") for travel

in 1996. In addition to the ticket price, Southwest

included a 10% charge on each ticket. Southwest added

A-2

the 10% charge to all tickets sold on or before

December 31, 1995, including tickets for travel in 1996.

Southwest charged this amount in expectation that

Congress would renew a longstanding excise tax on

domestic airline tickets.’ See 26 U.S.C. § 4261.

Congress had repeatedly renewed the airline

ticket excise tax provision at the eleventh hour. See

Pub.L. No. 88-52, § 3(a)(3), 77 Stat. 72 (1963); Pub. L.

No. 88-348, § 2(a)(3), 78 Stat. 237 (1964); Pub. L. No.

89-44, §303(a), 79 Stat. 136, 148 (1965); Pub. L. No.

100-223, § 402(a)(1), 101 Stat. 1486, 1532 (1987); Pub. L.

' The parties entered into the following stipulation:

Throughout the period from July 1995 through January

1996, Southwest Airlines knew that the ten percent

(10%) excise tax Southwest Airlines was required by 26

U.S.C. § 4261 to collect on tickets sold by Southwest

Airlines for travel on or before December 31, 1995, had

not been extended by Congress to apply to tickets sold

for travel on or after January 1, 1996, and that no

statute in force at any time in 1995 required an excise

tax to be collected on tickets sold by Southwest Airlines

for travel on or after January 1, 1996. Nevertheless,

based on Southwest Airlines’ expectation throughout

the second half of 1995 that Congress and the President

would extend the application of 26 U.S.C. § 4261 or

otherwise enact a statute requiring the collection of a

ten percent (10%) excise tax on tickets sold by

Southwest Airlines for travel on or after January 1,

1996, Southwest Airlines collected from customers who

purchased tickets in 1995 for travel on or after January

1, 1996, an amount equal to the ten percent (10%) excise

tax that Southwest Airlines was required by 26 U.S.C.

§ 4261 to collect on tickets sold by Southwest Airlines

for travel on or before December 31, 1995.

A-3

No. 101-508, § 11213(d)(1), 104 Stat. 1388-435 (1990).

Southwest's expectation that the tax once again would

be renewed was disappointed when President Clinton

vetoed the bill containing the airline ticket excise tax.

The tax expired on December 31, 1995. Although

Congress reenacted the tax nearly nine months later,

the tax was not given retroactive application. Pub. L.

No. 104-188, § 1609(b), 110 Stat. 1755, 1841(1996).’

When the excise tax provision expired at the end

of 1995, Southwest had already collected the tax on

tickets sold during 1995 for travel during 1996.

Ultimately, the taxes collected on these tickets,

including those purchased by putative class repre-

sentatives Sigmon and Hassler,? were not owed; the

excise tax provision in effect in 1995 imposed the tax

based on the date of travel rather than the date of

purchase.* The total amount of erroneously collected

excise taxes at issue is unclear; Southwest remitted

approximately $18 million to the IRS in January of 1996

for all excise taxes collected during December of 1995.

Sigmon and Hassler allege that they requested

refunds from Southwest and that Southwest denied

their requests. They brought a class action suit in state

* The tax expired again on December 31, 1996, and was

reenacted on February 28, 1997. Pub. L. No. 105-2,

§ 2(b)(1), 111 Stat. 4 (1997).

* The case was dismissed before any class was certified.

* When Congress reenacted the tax in February of 1997,

it solved the dilemma faced by Southwest and other

airlines in 1995 as a result of the previous lapse.

Congress added Section 4261(g)(1)(B), which applies

the excise tax to tickets purchased before the expiration

of the tax for transportation beginning after the expira-

tion date. Pub. L. No. 105-2, § 2(b)(1), 111 Stat. 4 (1997).

A-4

court, alleging common-law causes of action for fraud,

“for money had and received," and for conversion.

Southwest removed the suit to federal district court.

Sigmon and Hassler did not move to remand the case

to state court. In addition to actual damages, they seek

attorneys’ fees and costs, exemplary damages, and pre-

and post-judgment interest.

Shortly after removal, Southwest filed a motion

to dismiss the plaintiffs’ complaint. In response,

plaintiffs moved for leave to amend their complaint;

the district court granted the motion. The plaintiffs’

amended complaint asserted an implied cause of action

under 26 U.S.C. § 6415(c) and alleged that Southwest

had failed to remit to the IRS the amounts collected as

excise taxes.° After plaintiffs filed their amended

* Although the parties fought long and hard in the

district court about whether Southwest actually

remitted the collected amounts to the IRS, the

appellants do not pursue this line of argument on

appeal. Rather, they argue that regardless of whether

the collected funds were remitted to the IRS, Southwest

is not entitled to protection from suit under the Internal

Revenue Code. Even if appellants had raised the issue,

however, it appears that Southwest did remit the taxes

it collected, although it took credits and deductions

against those amounts and remitted its net tax liability.

In support of its motion for summary judgment,

Southwest submitted the affidavit of Rhonda Heatley,

Southwest's Senior Tax Accountant, who swore that “all

excise tax proceeds collected by Southwest Airlines

Company on or prior to December 31, 1995 have been

remitted to the United States government” and that

"Southwest Airlines Company no longer has possession

or control of any such monies."

A-5

complaint, Southwest moved to have its motion to

dismiss be treated as a motion for summary judgment.

The district court granted Southwest's motion and

allowed the parties to submit summary judgment

evidence.

On May 23, 1996, the district court granted

summary judgment in favor of Southwest on three

grounds: (1) the Internal Revenue Code, 26 U.S.C. §

7422, preempts the plaintiffs’ claims; (2) the Airline

Deregulation Act, 49 U.S.C. § 41713, preempts the

plaintiffs’ claims; and (3) 26 U.S.C. § 6415 does not

create an implied cause of action in favor of the

plaintiffs.

On appeal, Sigmon and Hassler assert that the

district court lacked subject-matter jurisdiction because

they asserted only state common-law causes of action

against Southwest Airlines in their state court petition.

Southwest Airlines removed to federal court on the

ground that plaintiffs stated federal claims under 26

U.S.C. §§ 4261 and 6415. The plaintiffs’ state-court

petition cites 26 U.S.C. § 6415(c), which they now claim

provides them with an implied federal cause of action.

We need not decide whether the reference to Section

6415(c) in the state-court petition is sufficient to create a

federal question, because plaintiffs’ amended federal

complaint clearly states an implied cause of action

under 26 U.S.C. § 6415(c). This claim constitutes a

federal question and thus gives the district court

original jurisdiction under 28 U.S.C. § 1331.

Although subject-matter jurisdiction is generally

assessed as of the time of removal, there is an exception

if the plaintiff voluntarily amends his or her complaint

A-6

after removal to add a federal cause of action, and the

case is "tried on the merits without objection." See Kidd

v. Southwest Airlines Co., 891 F.2d 540, 547 (5th Cir.

1990). In this case, the district court acquired

jurisdiction, if it did not already exist, when the

plaintiffs amended their federal complaint to include

an implied cause of action under federal law. See id. at

546 ("[A]lthough [plaintiff's] initial complaint was not

removable, [plaintiff's] decision to ‘throw in the towel’

and amend his complaint to state an ‘unmistakeable

federal cause of action’ conferred original jurisdiction

on the federal court.") (quoting Bernstein v. Lind-

Waldock & Co., 738 F.2d 179, 185 (7th Cir. 1984)).

The district court had discretion to exercise

supplemental jurisdiction over plaintiffs’ pendent

state-law claims. 28 U.S.C. § 1367(a), (c)(3); see also

Cinel v. Connick, 15 F.3d 1338, 1344 (5th Cir.), cert.

denied, 513 U.S. 868, 115 S.Ct. 189, 130 L.Ed.2d 122

(1994). The district court's decision to retain jurisdiction

in this case was far from an abuse of discretion,

especially given that the court disposed of the

plaintiffs’ pendent state-law claims based on federal

preemption. Cf. Statland v. American Airlines, Inc., 998

F.2d 539, 541 (7th Cir.) (after affirming the district

court's conclusion that the Federal Aviation Act did not

create an implied cause of action in favor of plaintiffs,

the court of appeals exercised supplemental juris-

diction to dispose of plaintiffs’ remaining state-law

claims based on federal preemption), cert. denied, 510

U.S. 1012, 114 S.Ct. 603, 126 L.Ed.2d 568 (1993).

*Summary judgment is equivalent to a trial on the

merits for the purpose of this rule. Id. at 546 (citations

omitted).

—————

A-7

Il.

The Internal Revenue Code governs tax refund

suits. Under Section 7422(a) of the Code, a taxpayer’

who seeks a refund of federal taxes must first make an

administrative refund claim with the Secretary of the

Treasury. “No suit or proceeding shall be maintained

in any court for the recovery of any internal revenue

tax alleged to have been erroneously or illegally

assessed or collected...until a claim for refund or credit

has been duly filed with the Secretary..." 26 U.S.C. §

7422(a). Failing an administrative resolution, the

taxpayer's remedy is to file suit against the

government. 26 U.S.C. § 7422(f)(l) ("A suit [for erron-

eously or illegally assessed or collected taxes] may be

maintained only against the United States....”)

(emphasis added); Kaucky v. Southwest Airlines Co., 109

F.3d 365, 370 (7th Cir. 1997) ("Money collected in error

by a lawful agent, public or private, of the [IRS] can be

recovered only from the government, because a-claim

or suit to collect such money is a claim or suit for a tax

refund.").

Southwest acts as the government's agent in

collecting airline ticket excise taxes. 26 U.S.C. § 4291;

see also Kaucky, 109 F.3d at 351-52. Section 7422 protects

from lawsuits private entities, like Southwest, that are

required by statute to collect taxes for the government

under threat of criminal penalty for failure to do so.

DuPont Glore Forgan Inc. v. AT&T, 428 F.Supp. 1297,

1306 (S.D.N.Y.1977), aff'd, 578 F.2d 1366 (2d Cir.), cert.

denied, 439 U.S. 970, 99 S.Ct. 465, 58 L.Ed.2d 431 (1978).°

’ Airline ticket purchasers, not airlines, are the

taxpayers of the airline ticket excise tax. See 26

US.C. § 4261(d).

* Other courts in other contexts have likewise held that

A-8

Although appellants seek the return of amounts

collected by Southwest to pay anticipated excise taxes,

they argue that the Internal Revenue Code's refund |

scheme does not apply. The amounts collected, they |

argue, were not "taxes" because the excise tax statute

was not reenacted. It is literally true that the amounts |

collected ultimately were not taxes. For the reasons that |

follow, however, "we do not think the literal sense is

the right sense." Kaucky, 109 F.3d at 351.

Appellants advance two hypotheticals in sup-

port of their position. Suppose, they posit, a law firm

added a 10% surcharge to its fees and called it a

“federal excise tax," when no such tax existed. Or what

if an airline dreamed up a 5% "carry on luggage tax"?

The government would have no interest in the collect-

ed funds because they are not really "taxes." The

culpable tax collectors would not deserve the protect-

ion of Section 7422 because they were not really acting

as agents for the government. Southwest, they argue, is

no different from their hypothetical tax collectors.

Unlike the defendants in these hypotheticals,

however, Southwest was not imposing a make-believe

tax, nor did it dream up a surcharge and pocket the |

money for itself. Southwest was collecting an excise

tax that has been part of the airline passenger ticket

sales landscape for nearly four decades. Here, it was

if taxpayers seek to compel a refund, they must

proceed against the United States rather than against a

private tax collector. See, e.g., Burda v. M. Ecker Co., 954

F.2d 434, 439 (7th Cir. 1992) (employment tax); Econ

Inc. v. Illinois Bell Tel. Co., 351 F.Supp. 1087, 1089 (N.D.

Ill. 1972) (communications excise tax); see also Columbia

Marine Seros., Inc. v. Reffet Ltd., 861 F.2d 18, 22 (2d Cir.

1988).

A-9

stipulated that Southwest "expect[edl throughout the

second half of 1995 that Congress and the President

would extend the application of 26 U.S.C. § 4261 or

otherwise enact a statute requiring the collection of a

ten percent (10%) excise tax on tickets sold by South-

west Airlines for travel on or after January 1, 1996."

Thus, Southwest was acting as an agent of the govern-

ment in collecting a tax that it had every expectation

would be reenacted, as it had been on several previous

occasions. See Kaucky, 109 F.3d at 352.

Citing Enochs v. Williams Packing & Navigation

Co., appellants contend that, Section 7422 notwith-

standing, they may sue Southwest because Southwest

lacked a “colorable basis" for collecting the anticipated

excise tax. 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292

(1962). The Supreme Court in Enochs acknowledged a

limited exception to 26 U.S.C. § 7421, which prohibits

the courts from issuing injunctions against the

collection of taxes. See Miller v. Standard Nut Margarine

Co., 284 U.S. 498, 509, 52 S.Ct. 260, 263, 76 L.Ed 422

(1932). Under the Enochs exception, a taxpayer can

obtain an injunction against the collection of taxes if it

is “clear that under no circumstances could the

Government ultimately prevail..." and equity

jurisdiction otherwise exists. Enochs, 370 U.S. at 6-7, 82

S.Ct. at 1128-29. The Enochs exception, however, has

never been applied to allow a taxpayer to sue a private

tax collector for the refund of erroneously collected

taxes.” We need not decide whether the Enochs

° To allow an exception to Section 7422 based on a lack

of a colorable basis, especially if evaluated at the time

suit is filed, would open Pandora's box. Plaintiffs, in

search of common-law damages in addition to a tax

refund, would have strong incentives to attempt to

A-10

exception loosens the strictures of Section 7422; Enochs

is not satisfied in this case because Southwest was

acting with colorable authority when it collected the

tax. See Kaucky, 109 F.3d at 352. Appellants argue that

“[njJeither the IRS nor Southwest Airlines could

conceivably prove that Southwest Airlines properly

collected the ‘excise taxes’ in issue." Although it is now

apparent that passengers who paid the excise tax in

1995 for travel in 1996 are entitled to a refund from the

IRS, that ex-post knowledge does not establish that

Southwest lacked a colorable basis for collecting the

tax. The issue is whether Southwest had a colorable

basis to collect the tax at the time.

Although the collection may ultimately have

been erroneous, the Internal Revenue Code provides

the exclusive remedy for the erroneous or illegal

collection of taxes: The taxpayer may file an adminis-

trative claim for a refund with the IRS. If the IRS does

not return the erroneously or illegally collected tax, the

taxpayer may then resort to the courts. But under

Section 7422, the proper defendant in such a suit is the

United States, not Southwest. The exclusive remedy

provided by the Internal Revenue Code thus preempts

the appellants’ state-law claims against a private

entity.”

bypass the normal administrative tax refund process.

Such an exception would allow taxpayers to seek a

judicial resolution of whether a collected tax was

colorable before challenging the tax through the

administrative process provided by the IRS.

‘Because we conclude that appellants’ claims are

precluded by 26 U.S.C. § 7422, we need not determine

the propriety of the district court's conclusion that these

claims are preempted by the Airline Deregulation Act.

A-11

Appellants also ask this court to hold that 26

U.S.C. § 6415(c) creates a private cause of action for the

return of the erroneously collected amounts. That

section provides that if a private collector of excise

taxes “make[s] an overcollection of such tax, such

person shall, upon proper application, refund such

overcollection to the person entitled thereto." 26 U.S.C.

§ 6415(c). Appellants claim that the plain language of

this statute creates a federal right for their benefit,

which they are entitled to enforce in a private cause of

action in state or federal court against Southwest. We

disagree.

As an initial matter, Section 6415(c) may not

even apply to the sort of refund sought by the

appellants in this case. See Kaucky, 109 F.3d at 353

(citing AT & T, 428 F.Supp. at 1304-05 and Lehman v.

USAIR Group, Inc., 930 F.Supp. 912, 915 (S.D.N.Y.

1996)). Section 6415(c) on its face is limited to

“overcollection” of excise taxes, which has historically

been distinguished from "illegal" or "erroneous"

collection under Section 7422. Early Treasury

regulations explained that "overcollection" referred

only to cases in which "an excess amount [was]

collected or paid" "as a result of some clerical or

mechanical error." See Treas. Reg. 43, art. 65 (1921).

The traditional distinction between taxes collected as

the result of a mechanical or clerical error and taxes

collected because of an error of law makes sense. The

IRS has no interest in taxes collected purely as a result

of mechanical or clerical error and hence need not be

involved in the refund decision. If excise taxes are

collected as the result of a legal error, however, the

IRS's interest in being involved in the refund decision

A-12

is apparent. In the case of a legal error, the private tax

collector would also risk being unable to recover the

amounts refunded if the IRS determined the amount in

fact was owed. See AT&T, 428 F.Supp. at 1306.

Of course, in this case, there is no dispute that

the taxes were not ultimately owed. But if Section

6415(c) creates a right of action and applies to

collections due to an error of law, as the appellants

suggest, there is no principle by which the right would

be limited to cases in which the tax was clearly not

owed. Under appellants’ interpretation, Section 6415(c)

would allow any taxpayer to challenge any excise tax

in court without first complaining to the IRS. If, for

example, the appellants alleged that Southwest had

misinterpreted the statute and as a result collected

taxes erroneously, nothing would prevent them from

seeking a refund in court before seeking an

administrative resolution through the IRS. No rational

basis exists for giving excise taxpayers special access to

the courts that is denied all other taxpayers under

Section 7422. See AT & T, 428 F.Supp. at 1304.

Even if Section 6415(c) does apply in this case, it

does not create a private right of action enforceable in

federal district court. No court appears to have recog-

nized an implied private cause of action under Section

6415(c), and with good reason. See Kaucky, 109 F.3d at

353; AT & T, 428 F.Supp. at 1305; Lehman, 930 F.Supp.

at 915. In evaluating whether a federal statute creates

an implied cause of action, this circuit has applied the

four factors set forth by the Supreme Court in Cort v.

Ash: (1) whether the statute creates a federal right or

“especial benefit" for a class of which plaintiffs are

members; (2) whether there is any indication of legisla-

tive intent, explicit or implicit, to create a private cause

A-13

of action; (3) whether implying a private cause of

action would be consistent with the purpose of the

legislative scheme; and (4) whether the cause of action

urged by the plaintiff is one traditionally relegated to

state law. 422 U.S. 66, 78-79, 95 S.Ct. 2080, 2088, 45

. L.Ed.2d 26 (1975). In Touche Ross & Co. v. Redington, the

Supreme Court explained that congressional intent is

the touchstone for determining whether a federal

statute creates a private right of action. 442 U.S. 560,

578, 99 S.Ct. 2479, 2490, 61 L.Ed.2d 82 (1979); See also

Louisiana Landmarks Soc'y, Inc. v. City of New Orleans, 85

F.3d 1119, 1123 (5th Cir. 1996) (citations omitted). This

circuit has recognized a "presumption that Congress

did not intend to create a private right of action."

Louisiana Landmarks, 85 F.3d at 1123 (citation and

internal quotation marks omitted). Appellants "bear[ ]

the relatively heavy burden of demonstrating that

Congress affirmatively contemplated private enforce-

ment when it passed the relevant statute." Id. (citations

and internal quotation marks omitted) They have not

met that burden.

Nothing indicates that Congress intended

Section 6415(c) to create an exception to Section 7422

that would allow excise taxpayers to seek relief from

the courts in the first instance. Congress's failure even

to hint that it intended to allow excise taxpayers to sue

private tax collectors directly for refunds, combined

with Section 7422's express bar on tax refund suits

against a defendant other than the United States,

compels the conclusion that Congress did not intend to

provide a private remedy. See Kaucky, 109 F.3d at 353

("[There is ... no indication that Congress would have

wanted the courts to entertain such suits despite the

absence of express authorization.").

A-14

The third Cort v. Ash factor is particularly salient

on the issue of congressional intent. The structure of

the Internal Revenue Code shows that Congress

intended the courts to play a role only after the IRS has

been given an opportunity to resolve the taxpayer's

claims. We have held that the "existence of [an]

administrative scheme of enforcement is strong

evidence that Congress intended the administrative

remedy to be exclusive." Till v. Unifirst Federal Sav. &

Loan Ass'n, 653 F.2d 152, 160 (5th Cir.1981). "Indeed, it

is clear under the maxim -- expressio unius est exclusio

alterius -- that a pervasive remedial scheme provided

by Congress is an indication there was no intent to

provide an additional private remedy." Id.

Section 6415(c) is part of a scheme set up by

Congress by which taxpayers can obtain refunds from

the IRS. See AT & T, 428 F.Supp. at 1305 ("[T]Jhe overall

structure of the refund provisions of the Code negates

plaintiffs’ efforts to seek a tax refund from

defendants."). To recognize a private cause of action

against a nongovernmental tax collector under Section

6415(c) would be inconsistent with that scheme.

Appellants rely heavily on the word "shall" in 26

U.S.C. 6415(c), which provides that a private tax

collector “shall, upon proper application, refund such

overcollection to the person entitled thereto." They

argue that "shall" is a mandatory rather than a permis-

sive term and that this fact alone indicates that

Congress intended to make refunds by private tax

collecting agents mandatory. But courts do not always

construe “shall” as mandatory. See, e.g., Board of Gover-

nors of the Federal Reserve Sys. v. DLG Fin. Corp., 29 F.3d

993, 1001 (5th Cir.1994), cert. dismissed, 513 U.S. 1140,

115 S.Ct. 1085, 130 L.Ed.2d 1055 (1995). Moreover, we

A-15

are especially reluctant to infer a private cause of action

from Congress's use of "shall" in Section 6415(c) when

another component of the legislative scheme, Section

7422, indicates that an aggrieved taxpayer's remedy lies

solely in a proceeding against the United States. See 3

NORMAN J. SINGER, SUTHERLAND STATUTORY

CONSTRUCTION § 57.06, at 20 (5th ed. 1992) ("[If] the

particular provision in question is a part of a general

legislative scheme, a consideration of the entire scheme

together may make the particular provision clear. If the

construction, mandatory or directory, would produce

conflict with other statutes, the opposite ruling would

ordinarily be adopted.").

Other than their heavy reliance on the statute's

use of the phrase "shall ... refund," appellants merely

point to the absence of evidence that Congress did not

intend to create a private right of action. This is

insufficient to overcome this circuit's presumption

against implying causes of action.

IV.

Holding that appellants’ state-law claims are

precluded by Section 7422 does not leave consumers at

the mercy of the airlines. Consumers can seek a refund

of any erroneously collected excise taxes from the IRS.

We recognize that this may inconvenience taxpayers.

As a practical matter, however, many taxpayers would

have been far more inconvenienced if Southwest had

failed to collect the tax and it had been renewed as

expected, especially those taxpayers who learned about

their tax deficiencies at the departure gate.

Federal law provides an additional protection to

consumers. The Airline Deregulation Act gives the

Secretary of Transportation authority to investigate an

‘ A-16

airline’s unfair or deceptive acts or practices or unfair

methods of competition. See 49 U.S.C. § 41713. Upon

discovering such an act or practice, the Secretary may

issue cease-and-desist orders or levy civil sanctions

against an offending airline. Id.; see also American

Airlines, Inc. v. Wolens, 513 U.S. 219, 228 n. 4, 115 S.Ct.

817, 823 n. 4, 130 L.Ed.2d 715 (1995) (citations omitted).

We do not suggest that such an action would be

appropriate against Southwest in this case, only that

the law provides another protection against the airlines

engaging in the mischief prophesied by the appellants.

For the foregoing reasons, the summary

judgment of the district court is AFFIRMED.

A-17

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

CIVIL NO. 396-CV0393-H

ERNESTO D. SIGMON and WILLIAM

GREGORY HASSLER, individually and

on behalf of all others similarly situated,

Plaintiffs-Appellants,

SOUTHWEST AIRLINES CO.,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Texas, Dallas.

(Filed June 10, 1997)

[JUDGMENT

Before Duhé, Benavides and Stewart, Circuit Judges.

This cause came on to be heard on the record on

appeal and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now

here ordered and adjudged by this Court that the

judgment of the District Court in this cause is affirmed.

IT IS FURTHER ORDERED that plaintiffs-

appellants pay to defendant-appellee the costs on

appeal to be taxed by the Clerk of this Court.

ISSUED ASMANDATE: JUN 05 1997

B-1

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

ERNESTO D.SIGMON’ §

and WILLIAM GREGORY §

HASSLER, Individually §

and on behalf of all others §

similarly situated, §

Plaintiffs, 8

§ CIVIL NO.

§ 396-CV0393-H

v. §

SOUTHWEST §

AIRLINES CO., §

Defendant. §

ORDER

On May 23, 1996, the Court heard argument on

Defendant’s Motion for Summary Judgment, filed

February 15, 1996, and pleadings related thereto."

After considering the pleadings, the relevant

authorities, and the argument and representations of

counsel, the Court was of the opinion, for reasons

stated in open court, that Defendant's Motion for

Summary Judgment should be, and it was GRANTED.

Judgment will be entered accordingly.

‘The Motion was originally filed as a Motion to

Dismiss but was converted to a Motion for Summary

Judgment. See Order filed April 25, 1996.

SO ORDERED.

DATED: May 23, 1996.

THE HONORABLE BAREFOOT SANDERS,

JUDGE, UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

B-3

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

ERNESTO D.SIGMON_ §

and WILLIAM GREGORY §

HASSLER, Individually §

and on behalf of all others §

similarly situated, §

Plaintiffs, §

§ CIVIL NO.

§ 396-CV0393-H

V. §

SOUTHWEST §

AIRLINES CO., §

Defendant. §

UDGMENT

This Judgment is entered pursuant to the Court’s

Order filed May 23, 1996, granting Defendant’s Motion

for Summary Judgment.

IT IS ORDERED, ADJUDGED AND DECREED

by the Court that Plaintiffs take nothing by their suit

against Defendant Southwest Airlines, Co., and that

this suit be, and it is hereby, DISMISSED on the merits

at Plaintiffs’ cost.

SIGNED this 23rd day of May, 1996.

THE HONORABLE BAREFOOT SANDERS,

JUDGE, UNITED STATES DISTRICT COURT,

NORTHERN DISTRICT OF TEXAS

C-1

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

CIVIL NO. 396-CV0393-H

ERNESTO D. SIGMON and WILLIAM

GREGORY HASSLER, Individually and on

behalf of all others similarly situated,

Plaintiffs-Appellants,

SOUTHWEST AIRLINES CO.,

Defendant-Appellee.

Appeal from the United States District Court

7 for the Northern District of Texas, Dallas.

ON PETITION FOR REHEARING

(Filed May 28, 1996)

Before Duhé, Benavides and Stewart, Circuit Judges.

PER CURIAM:

IT IS ORDERED that the petition for rehearing

filed in the above case is denied.

eS ee a oe

D-1

26 U.S.C.A. § 6415

(West 1989)

Credits or Refunds to Persons

Who Collected Certain Taxes

(a) Allowance of credits or refunds. -- Credit

or refund of any overpayment of tax imposed by

section 4251, 4261 or 4271 may be allowed to the person

who collected the tax and paid it to the Secretary if

such person establishes, under such regulations as the

Secretary may prescribe, that he has repaid the amount

of such tax to the person from whom he collected it, or

obtains the consent of such person to the allowance of

such credit or refund.

(b) Credit on returns. -- Any person entitled

to a refund of tax imposed by section 4251, 4261 or 4271

paid, or collected and paid, to the Secretary by him

may, instead of filing a claim for refund, take credit

therefor against taxes imposed by such section due

upon any subsequent return.

person required under section 4251, 4261 or 4271 to

collect any tax shall make an overcollection of such tax,

such person shall, upon proper application, refund

such overcollection to the person entitled thereto.

(d) Refund of taxable payment. -- Any

person making a refund of any payment on which tax

imposed by section 4251, 4261 or 4271 has been

collected may repay therewith the amount of tax

collected on such payment.

D-2

26 U.S.C.A. § 7421

(West 1989)

Prohibition of Suits to

Restrain Assessment or Collection

(a) Tax. -- Except as provided in sections

6212(a) and (c), 6213(b), 6672(b), 6694(c), and 7426(a)

and (b)(1), and 7429(b), no suit for the purpose of

restraining the assessment or collection of any tax shall

be maintained in any court by any person, whether or

not such person is the person against whom such tax

was assessed.

* + &

26 U.S.C.A. § 7422

(West Supp. 1997)

ivil Actions for n

(a) No suit prior to filing claim for refund. —

No suit or proceeding shall be maintained in any court

for the recovery of any internal revenue tax alleged to

have been erroneously or illegally assessed or

collected, or of any penalty claimed to have been

collected without authority, or of any sum alleged to

have been excessive or in any manner wrongfully

collected, until a claim for refund or credit has been

duly filed with the Secretary, according to the

provisions of law in that regard, and the regulations of

the Secretary established in pursuance thereof.

++ *

(f) Limitation on right of action for refund. —

(1) General rule. — A_ suit or

proceeding referred to in subsection (a) may be

maintained only against the United States and

not against any officer or employee of the

r D-3

United States (or former officer or employee) or

his personal representative.

+ + +

26 U.S.C.A. § 4263

(West 1989)

Special Rules

+ + +

imposed by section 4261 is not paid at the time

payment for transportation is made, then, under

regulations prescribed by the Secretary, to the extent

that such tax is not collected under any other provision

, of this subchapter —

(1) such tax shall be paid by the

person paying for the transportation or by the

person using the transportation;

(2) such tax shall be paid within such

time as the Secretary shall prescribe by

regulations after whichever of the following first

occurs:

(A) the rights to the transport-

ation expire; or

(B) the time when the transport-

ation becomes subject to tax; and

(3) | payment of such tax shall be made

to the Secretary, to the person to whom the

payment for transportation was made, or, in the

case of transportation other than transportation

described in section 4262(a)(1), to any person

furnishing any portion of such transportation.

D-4

(d) Application of tax -- The tax imposed by

section 4261 shall apply to any amount paid within the

United States for transportation of any person by air

unless the taxpayer establishes, pursuant to regulations

prescribed by the Secretary, at the time of payment for

the transportation, that the transportation is not

transportation in respect of which tax is imposed by

section 4261.

* + +

26 U.S.C.A. § 4261

(West Supp. 1996)

Imposition of Tax

(a) Im general. - There is hereby imposed

upon the amount paid for taxable transportation (as

defined in section 4262) of any person a tax equal to 10

percent of the amount so paid. In the case of amounts

paid outside of the United States for taxable

transportation, the tax imposed by this subsection shall

apply only if such transportation begins and ends in

the United States.

++ +

(g) | Termination. -- The taxes imposed by this

section shall apply with respect to transportation

beginning after August 31, 1982, and before January 1,

1996.

26 U.S.C.A. § 4261

(West Supp. 1997)

Imposition of Tax

+ + +

(g) | Termination. -- The taxes imposed by this

section shall apply with respect to transportation

D-5

beginning after August 31, 1982, and before January 1,

1996, and to transportation beginning on or after the

date which is 7 calendar days after the date of the

enactment of the Small Business Job Protection Act of

1996 and before January 1, 1997.

26 U.S.C.A. § 4261

(West Pamphlet May, 1997)

Imposition of Tax

+ + +

(g) Application of Taxes. -

(1) In general. - The taxes imposed

by this section shall apply to -

(A) transportation beginning

during the period --

(i) beginning on the 7th

day after the date of the enactment

of the Airport and Airway Trust

Fund Tax Reinstatement Act of

1997, and

(ii) | ending on September

30, 1997, and

(B) amounts paid during such

period for transportation beginning after

such period.

(2) Refunds -- If, as of the date any

transportation begins, the taxes imposed by this

section would not have applied to such trans-

portation if paid for on such date, any tax paid

under paragraph (1)(B) with respect to such

transportation shall be treated as an over-

payment.

D-6

PL 105-34, 1997 H 2014, lll Stat. 788

Subtitle D -- Excise and

Employment Tax Provisions

SEC. 1031. EXTENSION AND MODIFICA-

TION OF TAXES FUNDING AIRPORT AND

AIRWAY TRUST FUND; INCREASED

DEPOSITS INTO SUCH FUND.

(b) TICKET TAXES. --

(1) PERSONS - Clause (ii) of section

4261(g)(1)(A) is amended by _ striking

“September 30, 1997” and inserting “September

30, 2007.”

(e) EFFECTIVE DATES. --

(2) TICKET TAXES. --

(A) IN GENERAL. -- Except as

otherwise provided in this paragraph, the

amendments made by subsections (b) and

beginning on or after October 1, 1997.

(B) TREATMENT OF AMOUNTS

PAID FOR TICKETS PURCHASED

BEFORE OCTOBER 1, 1997. — The

amendments made by subsection (c) shall

not apply to amounts paid before October

1, 1997; except that —

(i) the amendment made

to section 4261(c) of the Internal

Revenue Code of 1986 shall apply

‘

D-7

to amounts paid more than 7 days

after the date of the enactment of

this Act for transportation begin-

ning on or after October 1, 1997,

and

(ii) the amendment made

to section 4263(c) of such Code

shall apply to the extent related to

taxes imposed under the amend-

ment made to such section 4261(c)

on the amounts described in clause

(i).

++ +

26 C.F.R. § 49.4264(c) -1

Special Rule for the Payment of Tax.

(a) Rule -(1) In general. Except as provided

in subparagraph (2) of this paragraph, when any tax

imposed by section 4261 is not paid at the time

payment for the transportation is made, then to the

extent that such tax is not collected under any other

provision of law, such tax shall be paid by the person

paying for the transportation or by the person using the

transportation. The provisions of section 4264(c) apply

where the amount paid for transportation is (i) subject

to tax at the time such payment is made, but no tax is

paid at the time, or (ii) not subject to tax at the time

such payment is made, but because of some subsequent

event the payment becomes subject to tax. The

payment of tax shall be made to the district director of

internal revenue for the district in which the taxpayer

resides, or to the person from whom the transportation

was purchased, within 30 days after whichever of the

following first occurs: (a) The rights to the transport-

D-8

ation expire, or (b) the transportation becomes subject

to tax. Such payment shall be accompanied with an

explanation that it is being made in accordance with

section 4264(c).

26 C.F.R. § 49.4261-4

Payments Made Within the United States;

Evidence of Nontaxability.

(a) | Presumption of taxability. The tax imposed

by section 4261(a) shall apply to any amount paid

within the United States for the transportation of any

person, unless the taxpayer establishes in accordance

with the provisions of this section that at the time of

payment the transportation is not transportation in

respect of which tax is imposed by section 4261(a) (see

section 4264(d)).

Internal Revenue Act of 1939

Sec. 1715

Payment of Tax

(d) Excess Payments. --

(1) Any person making a refund of any

payment upon which tax is collected under this section

may repay therewith the amount of the tax collected on

such payment; and the amount so repaid may be

credited against amounts included in any subsequent

return.

(2) In the case of any overpayment or

overcollection of any tax imposed by this chapter, the

person making such overpayment or overcollection

may take credit therefor against taxes due upon any

i i a a el alle ee

D-9

return, and shall make refund of any excessive amount

collected by him upon proper application by the person

entitled thereto.

Treasury Regulation 42 (1932)

Art. 51. Credits. - Every person required by the Act to

collect tax, who overcollects and overpays, or who

overpays from his own funds, any tax with one

monthly return may, in cases where the overpayment

was the result of some clerical, mechanical, or like

error, take-a credit for such overpayments against the

tax due under any subsequent monthly return.

Art. 52. Refunds. - There are two classes of cases in

which claims for refund may be considered, namely,

(1) those in which a credit may be taken as provided in

article 51 and (2) those in which erroneous or illegal

payments of tax have been made, as distinguished

from overpayments resulting from clerical, mechanical,

or like errors. In cases falling within class (1) the

principles applicable to the allowance of the credit (see

art. 51) apply likewise to the allowance of refunds.

Where a collecting agency has erroneously or

illegally overpaid from his own funds any tax, the

collecting agency may be granted a refund. In case a

collecting agency has erroneously or illegally over-

collected and overpaid any tax due, a refund may be

granted to the collecting agency, but only if it is

established (1) that the tax so overcollected and

overpaid has been returned to the person from whom

collected or (2) that the collecting agency has obtained

the consent of such person to the granting of the

refund.

D-10

If the taxpayer files.a claim for refund in his own

name, he must attach thereto the original receipts

issued by the collecting agency showing payment of

the tax involved and a sworn statement of the facts on

which the claim for refund is based.

A claim for refund should be prepared on Form

843 and presented to the collector of internal revenue

for the district in which the amount claimed was paid.

The affidavit on Form 843 must submit: (1) in the case

of a taxpayer claiming refund of amounts overpaid to a

collecting agency, that no repayment of the tax alleged

to have been overpaid, or any part thereof, has been

made to him by the collecting agency, and that he has

not consented to the allowance of credit or refund to

the collecting agency, and (2) in the case of the

collecting agency, that no credits have been taken for

the alleged overpayment in the manner provided for in

article 51.

T R ion 42

Sec. 130.77 Credits. -- Every person required to pay

tax, or collect and pay tax, who overpays from his own

funds, tax on any monthly return may, in cases where

the overpayment was the result of a clerical or

mechanical error, take credit for such overpayment

against the tax due on a subsequent monthly return.

+ ¢

Sec. 130.78 Abatement or Refund of Erroneous or

Illegal Assessments or Collections. - A claim for

abatement or refund of taxes alleged to have been

erroneously or illegally assessed or paid (or of any

penalties assessed or collected without authority) shall

D-11

be prepared on Form 843 and presented to the collector

of internal revenue for the district in which the amount

claimed was assessed or paid. (See section 3313 of the

Code.)

Where a collecting agency has erroneously or

illegally overpaid from its own funds any tax, the

collecting agency may claim a refund of such

overpayments. In case a collecting agency has erron-

eously or illegally overcollected and overpaid any tax

due, the collecting agency may claim a refund of the

amount so overcollected and overpaid, but only if it is

established by affidavit or otherwise as may be

required (a) that the tax so overcollected and overpaid

has been returned to the person from whom collected,

or that the collecting agency has obtained the written

consent of such person to the granting of the refund

and (b) that no credits have been taken for the alleged

overpayment in the manner provided for in section

130.77.

If a person who has paid tax to a collecting

agency files a claim for refund in his own name, there

should be attached to the claim the original receipts

issued by the collecting agency showing payment of

the tax involved and a sworn statement of the facts on

which the claim for refund is based, and the affidavit

on Form 843 must show that no repayment of the tax

alleged to have been overpaid or any part thereof has

been made to the claimant by the collecting agency and

that he has not consented to the allowance of credit or

refund to the collecting agency.

D-12

Internal Revenue Act of 1918

40 Stat. 1057

Sec. 1310. - (a) That in the case of any overpayment or

overcollection of any tax imposed by section 628 or 630

or by Title V, Title VII, or Title IX, the person making

such overpayment or overcollection may take credit

therefor against taxes due upon any monthly return,

and shall make refund of any excessive amount

collected by him upon proper application by the person

entitled thereto.

Treas R ation 43 (1921

Sec. 1310. (a) That in the case of any overpayment or

overcollection of any tax imposed by . . . Title VI

[which includes sections 800 and 802] . . . the person

making such overpayment or overcollection may take

credit therefor against taxes due upon any monthly

return, and shall make refund of any excessive amount

collected by him upon proper application by the person

entitled thereto.

26 C.F.R. § 42.04

Extent to which the regulations in this part supersede

prior regulations.

The regulations in this part, with respect to the

subject matter within the scope thereof, supersede the

following regulations and such regulations as

prescribed and made applicable to the Internal

Revenue Code of 1954 by Treasury Decision 6091, 19 F.,

R. 5167, Aug. 17, 1954. . .

D-13

... and transportation of persons -- Regulations

42 (1942 edition, as amended), 26 CFR (1939) Part 130.

E-1

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

ERNESTO D.SIGMON_ §

and WILLIAM GREGORY §

HASSLER, Individually §

and on behalf of all others §

similarly situated, §

Plaintiffs, §

§ CIVIL NO.

§ 396-CV0393-H

V. §

SOUTHWEST §

AIRLINES CO., §

Defendant. §

(Filed May 21, 1996)

STIPULATION

COME NOW Plaintiffs Ernesto D. Sigmon and

William Gregory Hassler and Defendant Southwest

Airlines Co. and respectfully submit the following

stipulation:

1. Throughout the period from July 1995

through January 1996, Southwest Airlines knew that

the ten percent (10%) excise tax Southwest Airlines was

required by 26 U.S.C. § 4261 to collect on tickets sold by

Southwest Airlines for travel on or before December 31,

1995, had not been extended by Congress to apply to

tickets sold for travel on or after January 1, 1996, and

that no statute in force at any time in 1995 required an

E-2

excise tax to be collected on tickets sold by Southwest

Airlines for travel on or after January 1, 1996.

Nevertheless, based on Southwest Airlines’ expectation

throughout the second half of 1995 that Congress and

the President would extend the application of 26 U.S.C.

§ 4261 or otherwise enact a statute requiring the

collection of a ten percent (10%) excise tax on tickets

sold by Southwest Airlines for travel on or after

January 1, 1996, Southwest Airlines collected from

customers who purchased tickets in 1995 for travel on

or after January 1, 1996, an amount equal to the ten

percent (10%) excise tax that Southwest Airlines was

required by 26 U.S.C. § 4261 to collect on tickets sold by

Southwest Airlines for travel on or before December 31,

1995.

*+2

3. Southwest Airlines was told of the

pendency of this action on January 5, 1996, received a

copy of Plaintiffs’ Original Class Action Petition on

January 11, 1996, and was served with a citation and a

copy of Plaintiffs’ Original Class Action Petition herein

on January 16, 1996.

Respectfully submitted,

Stanley, Mandel & Vinson & Elkins, L.L.P.

Kleinman, P.C. Attorneys for Defendant

Attorneys for Plaintiffs

E-3

Excerpts From

Airline Ticket Tax: Victim of Budget Impasse’

WASHINGTON, Dec. 20 -- The Federal Aviation

Administration said today that the 10 percent airline

excise tax, which it collects to pay for the air traffic

control system, would probably be a temporary victim

of the budget impasse between the White House and

Congress.

The loss of the tax, which will expire on

December 31 unless it is renewed, would cost the

Treasury about $15 million a day but would provide a

windfall for air travelers.

It may also send hundreds of thousands of

passengers to the airlines or the Internal Revenue

Service seeking refunds.

"It's ridiculous, quite frankly" said James W.

Coat, a staff member at the House Aviation

Subcommittee. "You would just hope this budget

situation in Washington works itself out."

Renewal of the ticket tax and two others -- a

10% a person fee on international departures and a 25

percent tax on air freight -- was in the budget

reconciliation bill that President Clinton vetoed earlier

this week. Lawrence J. Haas, a spokesman for the

Office of Management and Budget, said that the

Administration supported extension, but that the

President had to veto the budget because of

disagreements over Medicaid, Medicare and other

issues.

‘Wald, Matthew L., The New York Times, p. 16,

December 21, 1995.

E-4

"Should there be a better way?" He asked. "Yes,

there should be a better way. But in this case our

hands are tied."

+ + +

For the fiscal year that ended on Sept. 30 -

which is the last day that the Federal Government had

a fully functional budget -— the ticket tax brought in

$4.88 billion; the departure tax, $244 million and the air

freight tax $323 million.

E-5

“Mix-Up Over Airline Tax Has

Treasury's Face Red”?

WASHINGTON, Feb. 3 -- It is not only taxpayers

who have trouble figuring taxes. So does the United

States Treasury, which, it turns out, never actually

collected $1.2 billion in income last year that it thought

it was receiving all along from the nation’s airlines.

Stranger yet, although the airlines ultimately

paid up and the Treasury now has the cash in hand, the

money cannot be spent as intended.

There will be no tax penalties in this case. It is

just that the Federal Aviation Administration, for

which the money was bound, may have to stop

repaving runways, buying new radar and making

other investments in air travel improvement in about a

month, officials say. And there are some red faces at

the Treasury.

The money at issue was from an airline ticket tax

that goes to the Airport Trust Fund, which pays for

more than 80 percent of the aviation agency’s budget.

The ticket tax has lapsed twice in the last 13 months --

once at the beginning of last year and then, after it was

reimposed in August, again at the beginning of this

year.

The foul-up, which occurred after the tax took

effect again late last summer, resulted from several

things. First the airlines, through a close reading of the

tax code, were able to avoid forwarding the money to

the Treasury promptly. Then the Treasury failed to

notice that the money was not coming in. By the time

* Wald, Mathew L., The New York Times, February 4,

1997.

E-6

the airlines paid up, the tax had expired again, and

along with it, the Treasury’s authority to transfer the

money to the trust fund.

As a result, the Clinton Administration has had

to ask Congress to straighten out the mess, allowing

Republicans on Capitol Hill to assert that reimposing

the tax a second time — a step that would have been

inevitable sometime this year in any case -- is at the

White House’s request.

Hearings by the Senate Finance Committee are

scheduled to begin on Tuesday; the House will

probably follow before the end of the week.

Representative Bill Archer, the Texas Republican

who heads the House Ways and Means Committee,

said in a statement this evening that the members “are

anxious to have from the Administration a complete

explanation of the events leading up to this error, and

their recommendations for rectifying the funding

shortfall in the trust fund.”

What become a tax nightmare began on Jan. 1,

1996, when Congress let the ticket tax lapse in a

disagreement over how it should be structured: the tax

was a flat 10 percent of the ticket price, and high-faire

airlines argued that as a result their passengers were

subsidizing those of low-fare airlines even though all

air travelers put equal strain on public facilities.

Congress reimposed the tax on Aug. 27 but, with

the issue still unresolved, let it lapse again this Jan. 1.

For the four months that the tax was back in

effect late last year, the Treasury thought the airlines

would pay the money twice a month, as they had for

years. But the airlines read the tax code closely and

| |

E-7

found a “safe harbor” clause that said no matter how

much was due, they could not be assessed penalties for

paying late if they paid at least what they had collected

two quarters previously. Because the tax had lapsed in

early 1996, that number was zero.

The Treasury never noticed that the money was

not coming in, mostly, officials say, because the

Treasury account that receives the tax was swollen by

other excise taxes, on gasoline, liquor and tobacco. So

every month the Treasury kept funneling money from

general revenue into the Airport Trust Fund, as if the

airlines were paying.

By the time the airlines had paid up, at the end

of January, the tax had expired again, and the Treasury

no longer had the authority to funnel the $1.2 billion

into the F.A.A. fund.

The tax has always been part of the quoted sales

price for a ticket and for years was mostly invisible to

consumers. If it is reimposed, customers may see their

fares rise, although airline experts say the ultimate

price will depend on competition among the carriers.

While the mix-up threatens to bring a temporary

halt to the F.A.A.’s capital projects, the agency says it

has enough money to continue operations, including

air traffic control, through the end of the year. The

agency has survived without crisis so far because when

the tax first lapsed, at the beginning of 1996, the trust

fund had a balance of $4.4 billion.

E-8

“Senate Committee Prepares to

Revive Airline Ticket Tax”

“Southwest Chief Opposes Large Carriers’

User Fee Proposal”

WASHINGTON -— The Senate Finance Committee

will move to reinstate a handful of lapsed aviation

taxes Wednesday in response to reports that the fund

that pays for airport construction and improvements

will run out of money four months earlier than

anticipated.

“There is no question that adequate funding of

the trust fund is critical to the safety and well-being of

airline passengers,” said the committee’s chairman,

Delaware Republican Sen. William V. Roth.

Transportation Department officials warn that if

lawmakers don’t act quickly to resolve the Federal

Aviation Administration’s current funding dilemma,

airport construction and improvement projects across

the country, including new terminal construction at

Washington National Airport and Dulles International

Airport in northern Virginia, could grind to a halt next

month.

On Wednesday, Mr. Roth’s comumittee will begin

work on legislation to revive the 10 percent airline

ticket tax that expired Dec. 31 and to transfer about $1.2

billion in airline tax payments from the Treasury

Department's general fund to the aviation trust fund.

Meanwhile, at Tuesday's hearing on FAA

funding, Herbert D. Kelleher, president and chief

executive officer of Dallas-based Southwest Airlines,

> The Dallas Morning News, February 5, 1997 (from wire

reports).

here

E-9

told lawmakers they should stick with the recently

lapsed 10 percent ticket tax rather than replace it with a

“user fee” system championed by the seven largest U.S.

Mr. Kelleher, whose low-fare carrier has been

widely credited with driving domestic air fares down,

called the user fee espoused by the Big Seven a

“destructive idea” that would actually raise U.S.

domestic fares an average of 11.4 percert.

“The American people will abhor it,” Mr.

Kelleher said, arguing that the most price-sensitive

segment of the air travel market will be hit by a highly

regressive tax. As a result, Mr. Kelleher said, fewer

people will fly.

“Southwest is America’s low-fare policeman,”

Mr. Kelleher said. “The Big Seven want to kill the cop

on the beat.”

The proposal put forth by the seven largest U.S.

airlines - AMR Corp.’s American Airlimes, Continental

Airlines Inc., Delta Air Lines Inc., Northwest Airlines,

Trans World Airlines, UAL Corp.’s United Airlines,

and USAIR Group Inc. — would replace the tax with a

user fee of $2 per jet aircraft seat or $1 per commuter

plane seat, plus $4.50 per passenger and a half-cent per

passenger, per mile, not counting connecting flights.

Michael Levine, executive vice president for

marketing and international affairs at Northwest

Airlines, said Southwest's opposition to changing the

method of FAA funding is not surprising. “They have

such an amazingly good and unfair dea! that there are

no changes you could propose that wouldn’t make

them unhappy,” Mr. Levine said Tuesday.

E-10

Government Accounting Office auditors say that

while the 10 percent tax may not precisely reflect use of

the system, the user fee proposal has some inequities of

its own. For example, the fee is based on passenger

miles between two points as the crow flies, and doesn’t

take into account the hub-and-spoke systems used by

major airlines.

Treasury Secretary Robert Rubin sent a letter to

Mr. Roth on Tuesday, urging him to act quickly on the

issue.

“Some federal aviation capital programs will,

absent a reinstatement of these aviation excise taxes,

totally run out of money in the near future, Mr. Rubin

wrote.

E-11

IRS Gives Travelers Wrong Directions‘

Refunds of Airline Tax Not Taking Off —

Millions of airline passengers who bought

tickets in advance for early 1996 travel found their trips

more taxing than the law requires.

It turned out to be $1 billion or so more taxing --

and most travelers still haven't gotten refunds of the

on-again off-again 10 percent ticket tax.

The $1 billion figure came from an airline

industry official confirming the low end of estimates by

Dallas lawyer Roger L. Mandel, who sued Southwest

Airlines. Mr. Mandel filed a class-action lawsuit for

travelers who tried in vain to get refunds the way the

Internal Revenue Service directed them.

In the end, the courts said this week, the IRS was

wrong all the time.

Although the IRS has a refund procedure, it told

the industry to handle the task so it would escape the

paperwork.

"They-refuse to put out a release explaining how

to get a direct IRS refund and went down a path where

they didn't know the way and didn’t know how to get

back. So they told passengers to pressure airlines," said

an industry executive who cited harsh words between

The excise tax lapsed on Dec. 31, 1995, and was

renewed in August 1996, but not retroactively, costing

the government more than $3 billion in all in lost

revenue. Tickets sold in early 1996 didn't include the

tax, but tickets for 1996 trips sold before the new year

* Murray, Frank J., The Washington Times, May 5, 1997.

E-12

included it in the expectation it would be renewed, as it

had for four decades.

While some large airlines — including American,

Delta and United - facilitated refunds for competitive

reasons, Southwest, USAir and Alaskan were among

those refusing to shoulder the expensive task.

The law “does not leave consumers at the mercy

of the airlines. Consumers can seek a refund of any

erroneously collected excise taxes from the IRS,” a three

judge panel of the 5th U.S. Circuit Court of Appeals

said Monday in New Orleans.

"We recognize that this may inconvenience

taxpayers,” the court said, contending it would have

been even more inconvenient to pay the tax at

departure gates headed been reenacted. (A change in

the law prevented a recurrence when the tax lapsed

again for two months at the end of 1996.)

Federal courts in New York, Illinois and

California reached similar conclusions.

Since Supreme Court intervention appears

unlikely, the IRS may expect a blizzard of applications.

But few travelers are likely to have kept original

documents or be able to correctly apply on Form 8849,

whose eight options do not include this once-in-a-

lifetime error.

IRS spokesman could not provide anyone this

week to explain the misdirection given taxpayers, but

the agency said that in the first 14 months after the tax

lapsed, it paid 49,807 refunds averaging $55.19, less

than $3 million.

That is a tiny fraction of what lawyer Roger L.

Mandel called "a huge windfall,” and he says most of it

E-13

went to "sophisticated" tour operators, travel agents or

corporate travel staffs.

IRS Special Taxes Director Marshall V.

Washburm's letter telling the airlines to handle refunds

so the IRS would have less paperwork triggered a

nasty fight. The IRS set up a system to avoid duplicate

refunds and promised no tax-audit problems from

payouts.

IRS spokesmen were quoted in the press as

sending taxpayers to airlines for refunds.

“Because they didn't want to issue the refunds,

they tried to put the onus on the carriers," said Ed

Merlis, the Air Transport Association's top lobbyist.

He said the tax produces $5 billion to $6 billion

in most years and based his "upper limit" estimate of $1

billion overpaid on statistics for average advance

purchased times.

"Too low," said Mr. Mandel, who sued

Southwest Airlines, which maintained it only collects

the tax and sends the money to the IRS.

‘It's probably somewhere in the $1 billion to $2

billion range we're talking about here,” Mr. Mandel

said in an interview.

"The box that we have ourselves in is that courts

are holding we can't get our money back from the

airline and have to go to the IRS, but the IRS has made

it practically impossible for the majority of people to

get a refund,” Mr. Mandel said.

E-14

Ann 96-9,1996-8 IRB, 02/09/96 -- IRC Secs. 4001, 4041,

4081, 4261, 4611

Ann. 96-9, 1996-8 IRB, 02/09/96

February 09, 1996

Code Secs. 4001; 4041; 4081; 4261; 4611

Retail and manufacturers excise taxes.

HEADNOTE:

Excise tax changes effective 1/1/96 were

discussed, including fuel tax rate changes,

expiration of superfund tax and air transport-

ation tax, and increase in base amount of pas-

senger cars not subject to luxury tax.

References: Code Sec. 4001, Code Sec. 4041, Code

Sec. 4081, Code Sec. 4261, Code Sec. 4611

FULL TEXT:

The changes listed below are effective

after December 31, 1995, and will be reflected on

Form 720 for the first quarter of 1996, as well as

on the next revisions of Forms 4136 and 8849. If

these rates are modified by legislation, the IRS

will issue another announcement and will revise

all forms accordingly.

#22

II. Luxury Tax

The base amount not subject to the luxury tax for

passenger vehicles has increased from $32,000 to

$34,000 effective for sales or uses occurring after

December 31, 1995. Get Form 8807, Certain Manu-

E-15

facturers and Retailers Excise Taxes, from the IRS to

compute the luxury tax.

III. Transportation Taxes

The excise tax on transportation of persons and

property by air and use of international air travel

facilities (IRS Nos. 26, 28, and 27) expired December 31,

1995. Travelers that paid for tickets in 1995 for travel in

1996 may be entitled to refunds of the tax. Some

airlines are refunding the tax to the traveler. Therefore,

contact the airline to discuss its refund policy or get

Form 8849, Claim for Refund of Excise Taxes, from the

IRS to obtain a refund. All refund claims submitted to

IRS require an original passenger receipt.

E-16

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

(Date Stamped January 11, 1996)

To: Ms. Laurie Sands

Director - Taxes

Alaska Airlines, Inc.

Seattle, WA 98168

The Federal excise tax imposed under section

4261 of the Internal Revenue Code on amounts paid for

the transportation of persons by air has expired with

respect to transportation beginning after December 31,

1995. Any extension of this tax may not be made retro-

active to January 1, 1996.

We understand that you have been collecting

and remitting the tex on tickets sold before January 1,

1996, for travel scheduled after December 31, 1995, on

the assumption that the tax would be extended. Since

the tax imposed uncer section 4261 has lapsed, persons

who purchased tickets from you are entitled to refunds

of the taxes collected and remitted for travel during the

period the tax does not apply.

Section 6415 of the Internal Revenue Code pro-

vides that a carrier may claim the credit or refund for

the overpaid taxes, provided the carrier can show that

it refunded the tax to its customers, or if it obtains a

statement from its customers that they consent to the

-carrier claiming therefund or credit. Alternatively, the

customer can file a claim for refund of the overpaid

taxes directly wit: the Internal Revenue Service

(Service).

In order to ninimize the number of customer

refund claims filed with the Service during the income

E-17

tax filing season, we are encouraging the airline

industry to use the provisions of section 6415 to either

refund the taxes to their customers or to obtain

customer consents to allow the carriers to claim the

Overpayment.

We have advised our field personnel that we

expect to see temporary aberrations in deposit amounts

and taxes reflected on returns as a result of the lapse in

the tax imposed under section 4261 and the resulting

refunds of the tax by the carriers to their customers.

Such an aberration will not, in and of itself, trigger an

examination or be the sole reason for deciding whether

this issue should be scrutinized during an examination.

We have advised our field personnel that

carriers might establish contingent refund liability

accounts based on the passenger refunds they expect to

make. This will result in adjustments to the carriers’

separate tax accounts that may produce zero or

negative balances. We also advised our field personnel

that it would be appropriate for carriers to maintain

these contingent accounts through the first calendar

quarter of 1997.

No examination techniques beyond those ordi-

narily used in examining other customer credits. or

refunds will be used in examining this issue. No re-

funds to customers resulting from the lapse in the tax

will be included in any audit sample for extrapolation

over any period other than the period during which the

tax has lapsed.

Acceptable documentation for this issue will

include either a consent executed by the traveler or, in

cases where customer refunds or credits have been

issued, canceled checks, credit card credit vouchers, or

—~

E-18

an electronic system of records with an appropriate

audit trail. It is not necessary that you obtain the Social

Security or Taxpayer Identification Numbers of the

recipients of any refund resulting from the lapse in the

tax. However, ticket numbers must be recorded in |

order to decrease the risk of duplicate claims. |

In any examination, our personnel will accept

refunds that are ticket specific and will not focus on

situations where the passenger is not the purchaser.

No adjustments will be proposed on refunds made to

passengers where the identity of the purchaser is

unknown or unclear.

In order to avoid situations where someone

other than the purchaser receives a refund or a

customer receives a refund from you and also files a

claim for refund with the Service, the original

passenger receipts should be taken out of circulation at

the time you make a refund. You may either collect the

passenger receipts or mark them to indicate that a

refund has been issued by the carrier. It is not

necessary that you keep the receipts collected. You

may certify that they have been collected and

destroyed. As an alternative to collecting or marking

the passenger receipts, you may provide us with

computerized records of refunds issued due to the

lapse in tax, so that we can identify possible duplicate

refunds.

E-19

If you have any questions, please contact me at

(202) 622-5563 or Ricky Stiff, Director, Office of Excise

Taxes at (202) 622-5521.

Sincerely,

Marshall V. Washburn

National Director,

Specialty Taxes

E-20

Excerpts from Form 8849

Claim for Refund of Excise Taxes?

‘ Type of return filed, if any (see

instructions):

O 720

O 730

O 2290

2. Amount to be refunded: $

a Gasoline Wholesale Distributors (See

instructions.)

4. Gasohol Blenders (See instructions.)

a Off-Highway Business Use of Gasoline

(See instructions.)

6. Registered Ultimate Vendors of Diesel

Fuel (claims for fuel sold to a buyer for the buyer’s use

on a farm for farming purposes or to a state or local

government for its exclusive use) (See instructions.)

° To view the complete form as published, see Internal

Revenue Service Form 8849, “Claim for Refund of Excise

Taxes,” published by Tax Management, Inc., a sub-

sidiary of The Bureau of National Affairs, Inc., Jan.

1994, OMB No. 1545-1420, Exp. 12-31-96.

E-21

t Nontaxable Use of Undyed Diesel Fuel

(except for use on a farm for farming purposes or the

exclusive use of a state or local government) (See

instructions.)

8. Train and Intercity Bus Use of Undyed

Diesel Fuel (See instructions.)

9. Explanations and additional claims.

Explain why you believe this claim should be allowed,

and show computation of amount to be refunded. Also

include claims for fuel not covered on lines 3 - 8.

E-22

Excerpts from Instructions for Form 8849

(January 1994)

Claim for Refund of Excise Taxes®

+ +

General Instructions

Use Form 8849 to claim refunds of excise taxes

you reported on Form 720, 730 or 2290, including the

repealed luxury taxes. Also use Form 8849 to claim

refunds of excise taxes imposed on fuels, chemicals,

and other articles that are later used for nontaxable

purposes or for which there is reduced rate of tax.

+ * €

Processing of your claim will be delayed or it

will be returned to you if you do not follow the

‘required procedures or do not provide all the required

information.

+ & €

Specific Instructions

Line 1

Check the appropriate box to show the type of

excise tax return you filed, if any, to report the tax

being refunded.

+ + €

Claims for Excise Taxes on Gasoline

Line 3, Gasoline Wholesale Distributors

*To view the complete form as published, see

“Instructions for Form 8849,” Cat. No. 204681, published

by Tax Management, Inc., a subsidiary of The Bureau

of National Affairs, Inc., Mar. 1994.

ltt

a os.

E-23

Line 4, Gasohol Blenders

+ t+

Line 5, Off-Highway Business Use of Gasoline

+ + *

Claims for Excise Taxes on Diesel Fuel

Line 6, Registered Ultimate Vendors of Diesel

Fuel

+ +

Line 7, Nontaxable Use of Undyed Diesel Fuel

* t=

Line 8, Train and Intercity Bus Use of Undyed

Diesel Fuel

+ +

Line 9, Explanations and Additional Claims

Include on this line any additional information

as required in the instructions. Use this line to claim

refunds for chemicals and other articles used for

nontaxable purposes. Also include on this line claims

for nontaxable uses of fuel not listed on lines 3-8,

including nontaxable uses of gasoline.

The other nontaxable uses of gasoline are:

1. Gasoline that is exported;

2. Use in a boat employed in the business of

commercial fishing;

3. Use in a bus while the bus is engaged in

the transportation of students and employees of schools

E-24

(as defined in the last sentence of _ section

4221(d)(7)(C));

4. Use in a a qualified local bus (described

in section 6427(b(2)(D)) while the bus is engaged in

furnishing (for compensation) intracity passenger land

transportation that is available to the general public

and is scheduled and along regular routes;

3 Exclusive use of a state or local

government;

6. Exclusive use of a nonprofit educational

organization; and

,. Use by the purchaser as supplies for

vessels or aircraft.

Lysate wcabek na

E-25

Excerpt from Form 8849’

“Claim for Refund of Excise Taxes,” Showing

How the IRS Requires the Form to be Filled Out

-To Receive a Refund of the Airline Ticket Tax

+ &

9. Explanations and additional claims.

Explain why you believe this claim should be allowed,

and show computation of amount to be refunded. Also

include claims for fuel not covered on lines 3 - 8.

“TRANSPORTATION OF PERSONS BY AIR

Claimant purchased air travel ticket on or before

December 31, 1995, and traveled using such ticket after

December 31, 1995, at a time when there was no

domestic air transportation tax or international air

transportation tax imposed.

DATES TICKET PURCHASED -

DATE(S) FLOWN USING TICKET -

DOMESTIC AIR TRANSPORTATION TAX (PER

TICKET) 10.0% $

INTERNATIONAL AIR TRANSPORTATION TAX

(PER TICKET) $6.00 ~

TOTAL S ”

* *

’ To view the complete form as published, see Revenue

Service Form 8849, “Claim for Refund of Excise Taxes,”

published by Tax Management, Inc., a subsidiary of

The Bureau of National Affairs, Inc., Jan. 1994, OMB

No. 1545-1420, Exp. 12-31-96.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.