Sigmon v. Southwest Airlines Co.

United States Court of Appeals,

Fifth Circuit.

No. 96-10720.

Ernesto D. SIGMON, individually and on behalf of all others
similarly situated; William Gregory Hassler, individually and on
behalf of all others similarly situated, Plaintiffs-Appellants,

v.

SOUTHWEST AIRLINES COMPANY, Defendant-Appellee.

April 28, 1997.

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

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

the 10% charge to all tickets sold on or before December 31, 1995,

including tickets for travel in 1996. Southwest charged this

amount in expectation that Congress would renew a longstanding

excise tax on domestic airline tickets.1 See 26 U.S.C. § 4261.

1
The parties entered into the following stipulation:

Throughout the period from July 1995 through January
1996, Southwest Airlines knew that the ten percent (10%)

1
 Congress had repeatedly renewed the airline ticket excise tax

provision at the eleventh hour. See Pub.L. No. 88-52, § 3(a)(3),

77 Stat. 72 (1963); Pub.L. No. 88-348, § 2(a)(3), 78 Stat. 237

(1964); Pub.L. No. 89-44, § 303(a), 79 Stat. 136, 148 (1965);

Pub.L. No. 100-223, § 402(a)(1), 101 Stat. 1486, 1532 (1987);

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

Southwest's expectation that the tax once again would be renewed

was disappointed when President Clinton vetoed the bill containing

the airline ticket excise tax. The tax expired on December 31,

1995. Although Congress reenacted the tax nearly nine months

later, the tax was not given retroactive application. Pub.L. No.

104-188, § 1609(b), 110 Stat. 1755, 1841 (1996).2

When the excise tax provision expired at the end of 1995,

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.
2
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).

2
Southwest had already collected the tax on tickets sold during 1995

for travel during 1996. Ultimately, the taxes collected on these

tickets, including those purchased by putative class

representatives Sigmon and Hassler,3 were not owed; the excise tax

provision in effect in 1995 imposed the tax based on the date of

travel rather than the date of purchase.4 The total amount of

erroneously collected excise taxes at issue is unclear; Southwest

remitted approximately $18 million to the IRS in January of 1996

for all excise taxes collected during December of 1995.

Sigmon and Hassler allege that they requested refunds from

Southwest and that Southwest denied their requests. They brought

a class action suit in state court, alleging common-law causes of

action for fraud, "for money had and received," and for conversion.

Southwest removed the suit to federal district court. Sigmon and

Hassler did not move to remand the case to state court. In

addition to actual damages, they seek attorneys' fees and costs,

exemplary damages, and pre- and post-judgment interest.

Shortly after removal, Southwest filed a motion to dismiss the

plaintiffs' complaint. In response, plaintiffs moved for leave to

amend their complaint; the district court granted the motion. The

plaintiffs' amended complaint asserted an implied cause of action

3
The case was dismissed before any class was certified.
4
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 expiration date. Pub.L. No. 105-2, § 2(b)(1), 111 Stat. 4
(1997).

3
under 26 U.S.C. § 6415(c) and alleged that Southwest had failed to

remit to the IRS the amounts collected as excise taxes.5 After

plaintiffs filed their amended complaint, Southwest moved to have

its motion to dismiss be treated as a motion for summary judgment.

The district court granted Southwest's motion and allowed the

parties to submit summary judgment evidence.

On May 23, 1996, the district court granted summary judgment

in favor of Southwest on three grounds: (1) the Internal Revenue

Code, 26 U.S.C. § 7422, preempts the plaintiffs' claims; (2) the

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

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

implied cause of action in favor of the plaintiffs.

I.

On appeal, Sigmon and Hassler assert that the district court

lacked subject-matter jurisdiction because they asserted only state

common-law causes of action against Southwest Airlines in their

state-court petition. Southwest Airlines removed to federal court

5
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."

4
on the ground that plaintiffs stated federal claims under 26 U.S.C.

§§ 4261 and 6415. The plaintiffs' state-court petition cites 26

U.S.C. § 6415(c), which they now claim provides them with an

implied federal cause of action. We need not decide whether the

reference to Section 6415(c) in the state-court petition is

sufficient to create a federal question, because plaintiffs'

amended federal complaint clearly states an implied cause of action

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

question and thus gives the district court original jurisdiction

under 28 U.S.C. § 1331.

Although subject-matter jurisdiction is generally assessed as

of the time of removal, there is an exception if the plaintiff

voluntarily amends his or her complaint after removal to add a

federal cause of action, and the case is "tried on the merits

without objection." See Kidd v. Southwest Airlines Co., 891 F.2d

540, 547 (5th Cir.1990).6 In this case, the district court

acquired jurisdiction, if it did not already exist, when the

plaintiffs amended their federal complaint to include an implied

cause of action under federal law. See id. at 546 ("[A]lthough

[plaintiff's] initial complaint was not removable, [plaintiff's]

decision to "throw in the towel' and amend his complaint to state

an "unmistakeable federal cause of action' conferred original

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

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

6
Summary judgment is equivalent to a trial on the merits for
the purpose of this rule. Id. at 546 (citations omitted).

5
 The district court had discretion to exercise supplemental

jurisdiction over plaintiffs' pendent state-law claims. 28 U.S.C.

§ 1367(a), (c)(3); see also Cinel v. Connick, 15 F.3d 1338, 1344

(5th Cir.), cert. denied, 513 U.S. 868, 115 S.Ct. 189, 130 L.Ed.2d

122 (1994). The district court's decision to retain jurisdiction

in this case was far from an abuse of discretion, especially given

that the court disposed of the plaintiffs' pendent state-law claims

based on federal preemption. Cf. Statland v. American Airlines,

Inc., 998 F.2d 539, 541 (7th Cir.) (after affirming the district

court's conclusion that the Federal Aviation Act did not create an

implied cause of action in favor of plaintiffs, the court of

appeals exercised supplemental jurisdiction to dispose of

plaintiffs' remaining state-law claims based on federal

preemption), cert. denied, 510 U.S. 1012, 114 S.Ct. 603, 126

L.Ed.2d 568 (1993).

II.

The Internal Revenue Code governs tax refund suits. Under

Section 7422(a) of the Code, a taxpayer7 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

7
Airline ticket purchasers, not airlines, are the taxpayers of
the airline ticket excise tax. See 26 U.S.C. § 4261(d).

6
administrative resolution, the taxpayer's remedy is to file suit

against the government. 26 U.S.C. § 7422(f)(1)("A suit [for

erroneously or illegally assessed or collected taxes] may be

maintained only against the United States ....")(emphasis added);

Kaucky v. Southwest Airlines Co., 109 F.3d 365, 370 (7th

Cir.1997)("Money collected in error by a lawful agent, public or

private, of the [IRS] can be recovered only from the government,

because a claim or suit to collect such money is a claim or suit

for a tax refund.").

Southwest acts as the government's agent in collecting

airline ticket excise taxes. 26 U.S.C. § 4291; see also Kaucky,

109 F.3d at 368. Section 7422 protects from lawsuits private

entities, like Southwest, that are required by statute to collect

taxes for the government under threat of criminal penalty for

failure to do so. DuPont Glore Forgan Inc. v. AT & T, 428 F.Supp.

1297, 1306 (S.D.N.Y.1977), aff'd, 578 F.2d 1366 (2d Cir.), cert.

denied, 439 U.S. 970, 99 S.Ct. 465, 58 L.Ed.2d 431 (1978).8

Although appellants seek the return of amounts collected by

Southwest to pay anticipated excise taxes, they argue that the

Internal Revenue Code's refund scheme does not apply. The amounts

collected, they argue, were not "taxes" because the excise tax

8
Other courts in other contexts have likewise held that 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 Servs., Inc. v. Reffet Ltd., 861 F.2d 18, 22
(2d Cir.1988).

7
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 368.

Appellants advance two hypotheticals in support of their

position. Suppose, they posit, a law firm added a 10% surcharge to

its fees and called it a "federal excise tax," when no such tax

existed. Or what if an airline dreamed up a 5% "carry on luggage

tax"? The government would have no interest in the collected funds

because they are not really "taxes." The culpable tax collectors

would not deserve the protection of Section 7422 because they were

not really acting as agents for the government. Southwest, they

argue, is no different from their hypothetical tax collectors.

Unlike the defendants in these hypotheticals, however,

Southwest was not imposing a make-believe tax, nor did it dream up

a surcharge and pocket the money for itself. Southwest was

collecting an excise tax that has been part of the airline

passenger ticket sales landscape for nearly four decades. Here, it

was stipulated that Southwest "expect[ed] throughout the second

half of 1995 that Congress 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." Thus, Southwest was acting as an agent of the government

in collecting a tax that it had every expectation would be

reenacted, as it had been on several previous occasions. See

8
Kaucky, 109 F.3d at 368.

Citing Enochs v. Williams Packing & Navigation Co.,

appellants contend that, Section 7422 notwithstanding, 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.9 We need not decide whether the Enochs exception loosens

the strictures of Section 7422; Enochs is not satisifed in this

case because Southwest was acting with colorable authority when it

collected the tax. See Kaucky, 109 F.3d at 369. Appellants argue

that "[n]either the IRS nor Southwest Airlines could conceivably

9
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 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.

9
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

administrative 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.10

III.

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

10
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.

10
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 370 (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 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.

11
 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 recognized an implied private

cause of action under Section 6415(c), and with good reason. See

Kaucky, 109 F.3d at 370; 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 legislative intent, explicit or implicit, to create

12
a private cause 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

enforcement 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

13
remedy. See Kaucky, 109 F.3d at 370 ("[T]here is ... no indication

that Congress would have wanted the courts to entertain such suits

despite the absence of express authorization.").

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]he 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

14
than a permissive 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 Governors of the Federal Reserve Sys. v. DLG

Fin. Corp., 29 F.3d 993, 1001 (5th Cir.1994), cert. dismissed, ---

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

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) ("[I]f 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

15
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 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.

16