No. 07-961OFF!CE ~F " ~~ l H~ CLERKSUPREME COURT U.S.

IN THE

CENTERIOR ENERGY CORPORATION, ET AL.,

Petitioners,V.

JEROME R. MIKULSKI, ET AL.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARITO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE CHAMBER OF COMMERCE OFTHE UNITED STATES OF AMERICA AS

AMICUS CURIAE SUPPORTING PETITIONERS

ROBIN S. CONRAD

AMAR D. SARWALNational Chamber

Litigation Center, Inc.1615 H. St. NWWashington, DC 20062(202) 463-5337

ROBERT A. LONG, JR.Counsel of Record

JONATHAN L. MARCUSENRIQUE ARMIJOCovington & Burling LLP1201 Pennsylvania Ave., NWWashington, DC 20001(202) 662-6000

February 2008

TABLE OF CONTENTS

Page_

TABLE OF AUTHORITIES ......................................iii

INTEREST OF AMICUS CURIAE .............................1

STATEMENT ..............................................................3

SUMMARY OF ARGUMENT .....................................8

REASONS FOR GRANTING THEPETITION .............................................................11

The Questions Presented Are ImportantTo U.S. Businesses And The FederalTreasury ...............................................................11

Ao The Sixth Circuit’s Decision CreatesSubstantial Problems For U.S.Businesses ...................................................11

Bo The Federal Government Has ASubstantial Interest In A FederalForum For The Interpretation OfInternal Revenue Code ProvisionsThat Affect Federal Tax Revenues .............15

II. The Sixth Circuit’s Decision Cannot BeReconciled With This Court’s DecisionsOn Federal-Question Jurisdiction ..........................17

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Ao This Court’s Decision In GrableReaffirmed Federal JurisdictionOver State Law Causes Of ActionThat Turn On A Substantial AndDisputed Interpretation Of FederalLaw ...............................................................18

So Empire Did Not Curtail Federal-Question Jurisdiction Reaffirmed InGrable ...........................................................19

Co The Sixth Circuit’s ApproachEliminates Federal QuestionJurisdiction In Cases In Which ThisCourt’s Precedents Call For ItsExercise ........................................................21

CONCLUSION ..........................................................25

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TABLE OF AUTHORITIES

Pa~e(s)

CASES

Bennett v. Southwest Airlines Co.,484 F.3d 907 (7th Cir. 2007) ........................19-20

Brennan v. Southwest Airlines Co.,134 F.3d 1405, amended by 140 F.3d 849(9th Cir. 1998) ...................................................22

Buchanan v. Dowdy,772 F. Supp. 968 (S.D. Tex. 1991) ....................23

Cheatham v. United States,92 U.S. 85 (1875) .................................................4

Clemens v. USV Pharm.,838 F.2d 1389 (5th Cir. 1988) ...........................23

Empire Healthchoice Assurance, Inc. v.Mc Veigh,126 S. Ct. 2121 (2006) ...............................passim

Flora v. United States,357 U.S. 63 (1958) ............................................5-6

Grable & Sons Metal Prods., Inc. v. DarueEng’g & Mfg.,545 U.S. 308 (2005) ...................................passim

Griffin v. Fraser,251 S.E.2d 650 (N.C. Ct. App. 1979) ................12

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Hinck v. United States,127 S. Ct. 2011 (2007) .........................................5

Kaucky v. Southwest Airlines Co.,109 F.3d 349 (7th Cir.), cert. denied, 552U.S. 949 (1997) ..................................................22

Merrell Dow Pharm., Inc. v. Thompson,478 U.S. 804 (1986) ...........................................22

Sigmon v. Southwest Airlines Co.,110 F.3d 1200 (5th Cir.), cert. denied, 552U.S. 950 (1997) ..................................................22

ShuIthis v. McDougal, 225 U.S. 561 (1912) ..........16

Stands v. Weingrad,416 N.Y.S.2d 969 (N.Y. Sup. Ct. 1979) .............12

Tankovits v. Glessner,563 S.E.2d 810 (W. Va. 2002) ...........................12

U.S. v. Generes,405 U.S. 93 (1972) .............................................15

Wisecup v. Gulf Dev.,565 N.E.2d 865 (Ohio Ct. App. 1989) ...............23

STATUTES

26 U.S.C. § 312(n)(1) ......................................passim

26 U.S.C. § 316(a) .....................................................4

26 U.S.C. § 6042(a)(1) .....................................2, 6, 11

26 U.S.C. § 6335 .....................................................17

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26 U.S.C.

26 U.S.C.

26 U.S.C.

26 U.S.C.

26 U.S.C.

26 U.S.C.

26 U.S.C.

28 U.S.C.

28 U.S.C.

28 U.S.C.

§ 6511 .....................................................11

§ 6721 .................................................7, 11

§ 6722 .......................................................7

§ 7203 .......................................................7

§ 7422 .......................................4, 5, 11, 15

§ 7434 .................................................7,22

§ 7801(a)(1) ...............................................5

§ 1331 ...............................................17,22

§ 1340 .......................................................5

§ 1346(a)(1) ...........................................5, 6

Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494 (1984) ......................................4

OTHER AUTHORITIES

Fed. R. Civ. P. 11 ......................................................7

H.R. Rep. No. 104-506 (1996) ...................................7

S. Rep. No. 87-1881 (1962) .......................................7

Staff of Joint Comm. on Taxation, 98th Cong.,Gen. Explanation of the Revenue Provisionsof the Deficit Reduction Act of 1984 (Comm.Print 1984) ...........................................................4

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INTEREST OF AMICUS CURIAE

This brief amicus curiae in support ofpetitioners Centerior- j Energy Corporation,FirstEnergy Corporation, Cieveland ElectricIlluminating Company, and the Toledo EdisonCompany is filed on behalf of the Chamber ofCommerce of the United States of America("Chamber").1 The Chamber is the world’s largestbusiness federation. Its underlying membershipincludes more than three million companies andprofessional organizations of every size, in everyindustry sector, and from every region of the country.An important function of the Chamber is torepresent the interests of its members in mattersbefore Congress, the Executive Branch, and thecourts. To that end, the Chamber regularly filesamicus curiae briefs in cases that raise issues of vitalconcern to the nation’s business community.

The Chamber’s members have a significantinterest in the issue in this case. Under federal law,the Chamber’s corporate members that pay adividend to shareholders above a nominal sum arerequired to report to the Internal Revenue Service(IRS), and to individual shareholders, the amount of

1 Pursuant to Rule 37.6, amicus affirms that no counsel for aparty authored this brief in whole or in part, and no counsel orparty made a monetary contribution intended to fund thepreparation or submission of this brief. No person other thanamicus, its members, or its counsel made a monetarycontribution to its preparation or submission. Pursuant to Rule37.2, counsel of record for all parties received timely notice ofamicus’s intention to file this brief. The parties have consentedin writing to the filing of this brief.

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the dividend distributed. See 26 U.S.C.§ 6042(a)(1), (c). Several federal tax code provisionsdirect a corporation’s calculation of corporateearnings and profits in connection with the reportingof dividends. The provision directly at issue in thiscase, 26 U.S.C. § 312(n)(1), establishes that interestexpenses incurred in connection with certainconstruction loans cannot be deducted after theprovision’s effective date. The Chamber is concernedthat the decision below allows state courts to adoptindependent and inconsistent interpretations ofSection 312(n)(1). The court’s decision will directlyaffect members’ compliance with federal revenuelaws and the amount of tax revenue deposited intothe United States Treasury.

The Chamber is also concerned about thebroader implications of the Sixth Circuit’s decision.The court of appeals read this Court’s decision inEmpire Healthchoice Assurance, Inc. v. McVeigh, 126S. Ct. 2121, 2127 (2006), a case involving a contract-based claim "ordinarily resolved in state courts," topare back the longstanding jurisdiction of federalcourts over cases that arise under statutes of theUnited States. This Court reaffirmed thatjurisdiction only one year earlier in Grable & SonsMetal Products Inc. v. Darue Engineering &Manufacturing, 545 U.S. 308 (2005), which held thatfederal courts have jurisdiction over state quiet titleactions that implicate a federal tax provisiongoverning the validity of the IRS’s seizure ofproperty. Under the Sixth Circuit’s decision, thefederal courthouse door is now closed to partiesdefending against state causes of action premisedentirely on the alleged misinterpretation of federal

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tax laws that the court determines in its "subjectiveview" are not important enough to require a federalforum. Pet. App. 33a.

The Chamber’s members have a considerableinterest in ensuring that the construction of federaltax law continues to be consistent, a goal that thedecision below places in serious jeopardy. Amicusrespectfully requests that this Court grant thepetition and make clear that federal courts havejurisdiction over state causes of action that hinge onthe interpretation of federal tax law, implicate theeffective administration of the Internal RevenueCode, and closely resemble federal causes of actionthat must be brought in federal court.

STATEMENT

Respondents brought this suit for fraudulentmisrepresentation and breach of contract in theCuyahoga County (Ohio) Court of Common Pleasseeking to recover from petitioners taxes they claimthey overpaid by virtue of petitioners’ allegedmisinterpretation of a provision of the InternalRevenue Code. In particular, respondents allegethat petitioners intentionally misinterpreted theeffective date provision of 26 U.S.C. § 312(n)(1),which prohibits the deduction of interest expenses onconstruction loans in "computing the earnings andprofits of a corporation." Id. § 312 (n) (1) (A) (i) .Although petitioners’ interpretation of the effectivedate increased their own tax liability, see Pet. App.3a, respondents allege nevertheless that petitionersintentionally misinterpreted Section 312(n)(1)"in

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order to make itself appear more profitable." Id.2

Respondents further allege that they were injured bypetitioners’ alleged misinterpretation, which causedthem to receive distributions from petitioners thatwere characterized as dividends rather than returnsof capital and thereby increased respondents’ taxliability. Id. at 14a-15a (comparing taxation ofdividends to taxation of returns of capital); see 26U.S.C. § 316(a) (defining "dividend" to mean "anydistribution of property made by a corporation to itsshareholders.., out of its earnings and profits"). Inpaying their taxes in "1986 and all other relevantperiods," Pet. App. 14a, respondents contend thatthey relied on that characterization to theirdetriment.

1. This case implicates many importantaspects of the federal regime Congress hasestablished for the administration of the InternalRevenue Code. As this Court explained long ago,"the United States have.., enacted a system ofcorrective justice, as well as a system of taxation, inboth its customs and internal-revenue branches.That system is intended to be complete." Cheathamv. United States, 92 U.S. 85, 88 (1875). Under 26

2 Section 312 was enacted as part of the Deficit Reduction Act

of 1984, Pub. L. No. 98-369, 98 Stat. 494 (1984). C, ongressestimated that Section 312 would increase federal revenue bymore than $1.2 billion in five years. Staff of Joint Comm. onTaxation, 98th Cong., General Explanation of the RevenueProvisions of the Deficit Reduction Act of 1984 184 (Comm.Print 1984). Although Congress "anticipated that regulationswill be issued" (id. at 177) to govern the application of Section312(n)(1), the Treasury Department has not issued any suchregulations.

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U.S.C. § 7422, a taxpayer claiming to have overpaidits taxes cannot seek judicial relief "until a claim forrefund or credit has been duly filed with theSecretary [of the Treasury].’’3 A taxpayer whocomplies with that administrative requirement andsubsequently pursues judicial relief must bring suchan action against the United States in the UnitedStates Court of Federal Claims or a United StatesDistrict Court. See id. § 7422(e), (f)(1); 28 U.S.C.§ 1346(a)(1). Taxpayers also have the option ofchallenging a tax before paying it by invoking thejurisdiction of the United States Tax Court. SeeHinck v. United States, 127 S. Ct. 2011, 2016-17(2007) (referring to the "structure of tax controversyjurisdiction, under which the Tax Court generallyhears prepayment challenges to tax liability, whilepostpayment actions are brought in the districtcourts or the Court of Federal Claims") (internalquotation marks and citations omitted).

Congress has long sought to ensure a federalforum for the resolution of disputes arising under thefederal tax laws. See 28 U.S.C. § 1340 ("The districtcourts shall have original jurisdiction of any civilaction arising under any Act of Congress providingfor internal revenue[.]"); Flora v. United States, 357U.S. 63, 67 n.8 (1958) (tracing history of Section1340); 28 U.S.C. § 1346(a)(1) ("The district courtsshall have original jurisdiction, concurrent with theUnited States Court of Federal Claims, of... [a]ny

3 Congress has provided that "[e]xcept as otherwise expressly

provided by law, the administration and enforcement of [Title26] shall be performed by or under the supervision of theSecretary of the Treasury." 26 U.S.C. § 7801(a)(1).

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civil action against the United States for the recoveryof any internal-revenue tax alleged to haw~ beenerroneously or illegally assessed or collected[.]");Flora, 357 U.S. at 65-66 (tracing history of Section1346(a)(1)).

Respondents did not pursue any of thosetraditional methods for obtaining relief, which wouldhave invoked the exclusively federal system of"corrective justice." See Pet. App. 94(a) ("There is noquestion that plaintiffs could have raised this issuewith the IRS, could have filed for a refund and couldhave pursued administrative remedies."). Instead,respondents chose to sue petitioners in state courtunder state law on the theory that petitioners causedthem to overpay their taxes by filing with the IRS aninformation return that was based on amisinterpretation of Section 312(n)(1).

Under Section 6042 of the Code, corporationsmaking dividend payments of $10 or more to anyperson in a calendar year "shall make a returnaccording to the forms or regulations prescribed bythe Secretary." 26 U.S.C. § 6042(a)(1). Section 6042also requires information return tilers such aspetitioners to furnish to the dividend recipients anannual statement indicating the "aggregate amountof [the dividend] payments." Id. § 6042(c)(2).

In enacting the Code’s information reportingrequirements for dividend income, Congressrepeatedly has recognized their important revenue-collection function.4 The importance of those

4 For example, when Congress established the reporting

requirements, the Senate Finance Committee observed that(continued...)

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requirements is also reflected in Congress’s decisionto closely regulate the information reporting process.Congress has enacted both civil and criminalpenalties for the failure to file correct informationreturns. See 26 U.S.C. §§ 6721(a),(e), 6722, 7203.

In 1996, Congress provided a federal cause ofaction for damages resulting from the willful filing ofa fraudulent information return. 26 U.S.C. § 7434.That provision limits the damages that may beawarded to the "actual damages sustained by theplaintiff as a proximate result of the filing of thefraudulent information return," costs, andreasonable attorneys’ fees. Id. § 7434(b). The lawalso contains a statute of limitations, id. § 7434(c),and a requirement that the IRS be served with acopy of the complaint, id. § 7434(d). In authorizingsuch a cause of action to combat information returntilers who are "intent on either defrauding the IRS orharassing taxpayers," Congress cautioned that it did"not want to open the door to unwarranted orfrivolous actions or abusive litigation practices" andemphasized that "actions brought under this sectionwill be subject to Rule 11 of the Federal Rules ofCivil Procedure, relating to the imposition ofsanctions in the case of unfounded or frivolousclaims." H.R. Rep. No. 104-506, at 35 (1996).

"the underreporting of dividends.., on tax returns is a seriousproblem," Senate Finance Comm. Rep. on the Revenue Act of1962, S. Rep. No. 87-1881, at 119 (1962), and the reportingrequirements were "designed to decrease tax evasion (whetheror not deliberate)," id. at 2.

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2. Petitioners removed respondents’ suit tofederal district court, which ruled that removal wasproper because respondents’ state law causes ofaction "clearly required the construction andinterpretation of the Internal Revenue Code,relevant Regulations, and Federal Law." Pet. App.80a. The court also held that federal law "completelypreempts" respondents’ state-law claims. Id.

3. The Sixth Circuit ultimately heard the caseen banc and held by an 8 to 5 vote that the federaldistrict court lacked jurisdiction becauserespondents’ claims do not arise under federal law.The court recognized that the merits of respondents’state law claims hinge on a disputed interpretationof a federal tax law. Pet. App. 31a ("[Respondents]concede that their claim will fail under [petitioners’]interpretation of [Section 312(n)(1)]."). The majoritynevertheless ruled that "the federal interest in thepresent issue is not substantial." Id. The majority’sanalysis was shaped largely by its conclusion thatthis Court’s decision in Empire requires that Grable"be read narrowly." Id. at 26a.

Five judges dissented from the majority’sholding that federal jurisdiction was lacking. Thedissent observed that "the federal interest :in theinterpretation of federal tax laws still remains notonly substantial, but paramount." Pet. App. 45a.

SUMMARY OF ARGUMENT

This Court should grant review because thecourt of appeals’ decision denies to defendants whoreport income on behalf of the IRS a federal forumfor the resolution of a dispute over the properinterpretation of a federal statute that implicates the

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information reporting system that Congress hasestablished. Congress has enlisted private partiessuch as petitioners to assist the IRS in the collectionof taxes by requiring them to file with the IRSinformation returns that identify payments ofdividends made to shareholders. In carrying outtheir obligations under federal law, U.S. businesses"ought to be able to... resort to the experience,solicitude, and hope of uniformity that a federalforum offers." Grable, 545 U.S. at 312.

The court of appeals denied petitioners afederal forum based on its mistaken conclusion thatthis Court’s decision in Empire restricted thecircumstances in which a federal court may exercisejurisdiction over an action that hinges on a disputeover the meaning of a federal tax statute. Empireinvolved a "fact-bound dispute" about whether aninsurer had a right under a federal contract torecover medical costs from the proceeds of theinsured’s state tort settlement, 126 S. Ct. at 2137.This Court did not address the circumstancespresented here and did not alter the standard that ithas long applied to cases like this one. Mostrecently, in its unanimous decision in Grable, theCourt held that "the national interest in providing afederal forum for federal tax litigation" is"sufficiently substantial to support the exercise offederal question jurisdiction" over a state quiet titleaction. Grable, 545 U.S. at 310. Under Grable andits predecessors, federal jurisdiction clearly lies overthis action because a federal forum is necessary toprotect U.S. businesses from differing interpretationsof a federal tax provision that they are required to

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interpret in carrying out their information reportingobligations under federal law.

Contrary to the courtdecision recognizing federalcircumstances presented

of appeals’ ru][ing, ajurisdiction in thehere would not

"impermissibly disrupt the congressionally approvedbalance of federal and state judicial responsibilities."Pet. App. 38a. In fact, it is the court of appeals’decision that frustrates Congress’s demonstratedintent to establish a scheme of federal enforcement ofthe tax laws. See pp. 4-7, supra. Taxpayers claimingoverpayment of their federal taxes may seek a refundonly in federal court, and only after pursuing anadministrative remedy before the IRS. All,houghrespondents are suing petitioners and not the IRS,they are seeking a tax refund from petitioners andtheir claim implicates the same concerns thatprompted Congress to impose strict limitationsand federal control over--refund actions. This Courtshould grant review because the Sixth Circuit’sdecision closes the federal courthouse door to partiesdefending against putatively state causes of actionthat are, at bottom, third-party tax refund ~ctions,and thus directly implicate the effectiveadministration of the Internal Revenue Code. Andthis Court should reverse that decision because iteffects a substantial retreat from the exercise offederal jurisdiction over cases arising under federallaw that this Court has approved since Congressestablished federal-question jurisdiction.

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REASONS FOR GRANTING THE PETITION

The Questions Presented Are ImportantTo U.S. Businesses And The FederalTreasury.

The court of appeals’ decision createssignificant problems for U.S. business. If leftunreviewed by this Court, the decision placesbusinesses at risk of multiple decisions by statecourts that conflict with each other and withdecisions of federal courts. Moreover, the court ofappeals’ decision threatens the collection of federaltax revenues by giving businesses an incentive totake tax positions designed to minimizeshareholders’ liability in order to ward off classactions in state court. The court of appealsincorrectly downplayed the federal interest in the"private duties involved in [tax] collection." Pet.App. 32a. U.S. businesses play an integral role inassisting the IRS in collecting federal revenuethrough the information return reporting system.For these reasons, the Sixth Circuit erred inconcluding that there is no substantial federalinterest in this case.

A. The Sixth Circuit’s DecisionCreates Substantial Problems ForU.S. Businesses.

Respondents allege that petitionersmisinterpreted a provision of the Internal RevenueCode, 26 U.S.C. § 312(n)(1), to prohibit the deductionof certain interest expenses from corporate earningsand profits beginning in fiscal year 1985. As aresult, respondents allege, the federal income tax

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liability of petitioners’ shareholders was overstated.Respondents could have sought a tax refund from theIRS, and could have challenged an adverse IRSdetermination in federal court. See 26 U.S.C.§§ 6511; 7422(a), (f)(1); Pet. App. 94a. Moreover,petitioners are subject to substantial penalties underfederal law for failure to comply with the provisionsof the Internal Revenue Code, including theirinformation reporting obligations under Section 6042that are affected by the construction of Section312(n)(1). See, e.g., 26 U.S.C. § 6721.

Rather than availing themselves of theirremedies under federal law, respondents filed classaction suits in state court alleging that petitioners’interpretation of Section 312(n)(1) amounted to abreach of contract and fraudulent misrepresentation.The Sixth Circuit recognized that respondents "havecertainly staked their claim on this federal issue,"and "the parties have crossed swords over it." Pet.App. 30a-31a (internal quotation marks omitted).The court of appeals nevertheless held that thefederal courts lack subject-matter jurisdictionbecause, in the court’s "subjective view," id. at 33a,the federal interest in the interpretation of "arelatively obscure provision of the tax code" (id. at39a) was not "substantial" (id. at 32a), and becausethe exercise of jurisdiction would "impermissiblydisrupt the congressionally approved balance offederal and state judicial responsibilities." Id. at38a.

The Sixth Circuit’s approach createssignificant problems for U.S. business. Businessesreport hundreds of billions of dollars in income everyyear to the IRS. For example, in 2005 alone,

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businesses reported more than $166 billion inordinary dividend income and more than $118 billionin qualified dividend income. See Selected Incomeand Tax Items for Selected Years, 2001-2005,http://www.irs.gov/pub/irs-soi/05intba.xls. Under thecourt’s decision, a corporation’s interpretation offederal tax laws or regulations is subject to challengein the courts of all 50 states so long as the plaintiffs’claims are cloaked in the garb of state contract ortort law. State courts lack expertise in federal taxissues.5 In addition, state courts may reach resultsthat conflict with each other, as well as with federalcourts and the IRS. The risk of conflicting statecourt decisions is particularly acute for businessesthat operate on a multistate or nationwide basis.The court of appeals nevertheless held that federal

5 Some state courts refuse to resolve questions of federal tax

law. See, e.g., Tankovits v. Glessner, 563 S.E.2d 810, 817 (W.Va. 2002) ("the lower court had no authority to require the trustto file, or not to file, any particular type of tax form or return"because "[i]t is beyond discussion that a [state] circuit court iswithout authority to address issues of federal tax law"); Griffinv. Fraser, 251 S.E.2d 650, 654 (N.C. Ct. App. 1979) (the "State’strial courts" are an "inappropriate~ ... forum for constructionof federal taxation statutes" because "[q]uestions of federaltaxation are generally matters of substantial complexity, andthe federal courts and the [IRS] have well establishedprocedures for determining tax controversies and construingthe meaning of federal tax statutes"); Stands v. Weingrad, 416N.Y.S.2d 969, 972 (N.Y. Sup. Ct. 1979) (contrasting action thatrequires "a court [to] make a factual determination" under theInternal Revenue Code, over which a state court may exercisejurisdiction, and an action that "involve[s] the interpretation ofcomplex Federal tax laws, rules or regulations," which "mightproperly be left to the Federal tribunals which have afamiliarity and expertise with such matters").

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courts are powerless to decide such cases, andtherefore they must remain in state court.

The Sixth Circuit’s decision placescorporations in a dilemma. Before the Sixth C:ircuit’sdecision, corporations looked to the IRS and thefederal courts to interpret federal tax law. As aresult of the Sixth Circuit’s decision, they must alsoconsider the risk of class action lawsuits allegingthat their interpretation of the Internal RevenueCode amounts to a tort or breach of contract understate law. The high cost of defending corporationsagainst such actions, as well as the potential forlarge awards of damages (including p~nitivedamages in some cases), will create an economicincentive for corporations to adopt tax positions thatare calculated to minimize shareholder tax li.abilityin order to discourage expensive and risk), classaction litigation.

There are many provisions of the InternalRevenue Code and its implementing regulations thatcould potentially be made the basis for state lawactions alleging that, by misinterpreting federal taxlaw, the defendant has committed a tort or breacheda contract. The Sixth Circuit’s opinion holds thatfederal courts will lack jurisdiction in many if not allof these cases (to which a federal agency is unlikelyto be a party), because "the :Federalgovernment.., has only a limited interest in privatetort or contract litigation over the private dutiesinvolved in th[e] collection [of taxes].’’~ Pet. App.

6 As discussed infra, p. 16, that determination is

fundamentally flawed.

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32a. At a minimum, the Sixth Circuit’s decisioncreates substantial uncertainty about whetherfederal courts have jurisdiction over any casesbetween private parties that hinge on theinterpretation of provisions of the Internal RevenueCode and implicate the Code’s effectiveadministration. That uncertainty, in turn, providesan incentive for corporations to minimize theirexposure to class action suits in state court, to thedetriment of the federal fisc.

Bo The Federal Government Has ASubstantial Interest In A FederalForum For The Interpretation OfInternal Revenue Code ProvisionsThat Affect Federal Tax Revenues.

This Court recently recognized "the nationalinterest in providing a federal forum for federal taxlitigation." Grable, 545 U.S. at 310. Congress hasrequired taxpayers who seek reimbursement for theoverpayment of federal income taxes to first petitionthe IRS for administrative relief, see 26 U.S.C.§ 7422(a), and has vested jurisdiction to review theIRS’s decisions solely in the federal courts, see id.§ 7422(f). Taxpayers seeking to challenge a notice ofdeficiency before paying the tax may petition the TaxCourt. The tax enforcement regime adopted byCongress ensures that federal tax issues arechanneled to expert decisionmakers and that federalrevenue laws receive a uniform interpretation. Thecourt of appeals’ decision undermines thoseimportant goals by allowing plaintiffs to framequestions of federal tax law, including claims forreimbursement of federal income taxes, as questions

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of state law that cannot be removed from state courtto federal court.

The court of appeals minimized theimportance of the federal interest at stake byobserving that "[t]he government’s ability to collecttaxes from an individual shareholder or acorporation is not affected by the resolution of thedispute between these two [private] parties." Pet.App. 32a. That view is shortsighted. To be sure, thegovernment will not have to refund respondents’money in the event they were to prevail :in thisaction, but that is only because respondents areusing state tort law to bring what is effectively a taxrefund suit. Allowing the proliferation of litigationin the state courts over the interpretations of federaltax law rendered by an information return filer willhave systemic effects on "the government’s ability tocollect taxes.’’7 The tax system is "largely dependenton voluntary compliance." U.S.v. Generes, 405 U.S.93, 104 (1972). If cases such as this one ~nay belitigated in 50 different state courts, corporationswill seek to reduce their risk of liability. As a result,corporations will have an incentive to adopt taxpositions that minimize the tax liability ofshareholders, employees, and others with whom theydeal--at the expense of the federal Treasury.

7 Congress has demonstrated a substantial interest in the"private duties" (Pet. Appo 32a) at issue in this case by enactingnumerous provisions regulating the filing of informationreturns. See pp. 6-7, supra.

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II. The Sixth Circuit’s Decision Cannot BeReconciled With This Court’s DecisionsOn Federal-Question Jurisdiction.

This Court should grant the petition becausethe Sixth Circuit’s decision represents a substantialscaling back of federal-question jurisdiction that thecourt justified by reference to this Court’s decision inEmpire. The court of appeals’ reliance on thatdecision is misplaced. Empire involved a "fact-boundand situation specific" claim (126 S. Ct. at 2137) of"the sort ordinarily resolved in state courts" (id. at2127)mand this Court did not purport to restrict thecircumstances in which federal courts may exercisejurisdiction over claims that "really andsubstantially involv[e] a dispute or controversyrespecting the validity, construction or effect of[federal] law." Grable, 545 U.S. at 313 (quotingShulthis v. McDougal, 225 U.S. 561, 569 (1912))(alterations in Grable). By mechanically applying"factors" that it derived from Empire, the court ofappeals lost sight of the fact that respondents’ actionarises under federal law because it is whollypremised on a disputed interpretation of a federaltax provision, 26 U.S.C. § 312(n)(1), that implicatesthe sound administration of the Internal RevenueCode. The conflict between the court of appeals’approach and this Court’s longstanding recognitionof federal question jurisdiction in the circumstancespresented here warrants this Court’s review.

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This Court’s Decision In GrableReaffirmed Federal JurisdictionOver State Law Causes Of ActionThat Turn On A Substantial AndDisputed Interpretation Of FederalLaw.

This Court’s unanimous holding in Grablereaffirmed--in a case implicating the administrationof the federal tax laws--the longstanding rule thatstate law causes of action arise under federal lawwhen they are premised on a "substantial" and"contested federal issue," id. at 313, and when theirresolution by a federal forum "is consistent withcongressional judgment about the sound division oflabor between state and federal courts," id. InGrable, the Court applied that rule to a state quiettitle action that the plaintiff premised on the theorythat record title to the property, which the defendanthad purchased from the IRS, was invalid beca’t~se themanner in which the IRS had provided notice; of theseizure to the plaintiff, the prior owner of theproperty, did not comport with 26 U.S.C. § 6335.

The defendant removed the case to districtcourt under 28 U.S.C. § 1331 on the ground that itpresented a substantial and disputed federalquestion--namely, whether the prior owner hadreceived "notice" in the manner required by Section6335--and therefore arose under federal law.Grable, 545 U.S. at 315. This Court agreed, holdingthat "[t]he meaning of the federal tax provision is animportant issue of federal law that sensibly belongsin a federal court." Id. The Court elaborated that

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the federal government "has a strong interest in theprompt and certain collection of delinquent taxes," aswell as a "direct interest in the availability of afederal forum to vindicate its own administrativeaction." The Court further observed that privateparties involved in such cases "may find it valuableto come before judges used to federal tax matters,"id., and that the exercise of federal jurisdictionwould "portend only a microscopic effect on thefederal-state division of labor," because state titlecases would rarely "raise~ a contested matter offederal law." Id.

Bo Empire Did Not Curtail Federal-Question Jurisdiction ReaffirmedIn Grable.

This Court in Empire rejected federaljurisdiction over a claim by a health insurancecarrier that administered a federal health insuranceplan against the estate of a deceased employeecovered by the plan. The decedent’s estate hadsettled a state law tort claim against the partiesalleged to have caused the decedent’s injuries.Empire, 126 S. Ct. at 2129-30. The insurance carriertook no part in the state court action, but later itbrought a claim in federal court against the estatefor repayment of amounts it had paid for thedecedent’s medical care, on the ground that thereimbursement provision in the decedent’s policy sorequired. In support of federal jurisdiction, theinsurance carrier contended that federal commonlaw governed its reimbursement claim, andalternatively that the federal health insurance planitself constituted federal law. Id. at 2130.

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In holding that the carrier’s reimbursementaction, did not arise under federal law, the Courtexplained that claims "seeking recovery from theproceeds of state-court litigation" are "auxiliaryclaims" of "the sort ordinarily resolved in statecourts." Empire, 126 S. Ct. at 2127. The Courtobserved that, in the absence of a conflict "betweenan identifiable federal policy or interest and theoperation of state law," there was "no cause todisplace state law, much less to lodge this case infederal court." Id. at 2132-33. The Court furthernoted that Congress had not created a federa~ causeof action enabling insurance carriers to sue planbeneficiaries for reimbursement, id., and that, whileCongress had expressly provided for :federaljurisdiction over some contract-related actions, it hadnot so provided for the carrier’s reimbur~,~ementclaims, id.

Finally, the Court rejected an argument by theUnited States that the case was governed by Grable.The Court explained that Empire was "poles apart"from Grable, which "presented a nearly pure issue oflaw," namely, "the interpretation of a federalstatutory provision.., of the Internal RevenueCode," and "centered on the action of a :federalagency (IRS) and its compatibility with a :federalstatute." Empire, 126 S. Ct. at 2137 (citing Grable).Empire, by contrast, involved a "fact-bound, situationspecific" claim triggered "by the settlement of apersonal-injury action launched in state court,"whose resolution depended not on "a context-freeinquiry into the meaning of a federal law," but ratheron a "fact-specific application of rules that come fromboth federal and state law." Bennett v. So~,~thwest

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Airlines Co., 484 F.3d 907, 910 (7th Cir. 2007)(Easterbrook, C.J.) (contrasting Grable and Empire).

In distinguishing Grable and rejecting theUnited States’ reliance on that decision, the Court inEmpire did not purport to establish a morerestrictive test for federal jurisdiction than the Courtapplied in Grable to the "classic" situation in which"federal-question jurisdiction [is] predicated on thecentrality of a federal issue." Empire, 126 S. Ct. at2136 n.5. By mechanically applying four "factors"derived from Empire’s treatment of Grable, the SixthCircuit departed from a line of this Court’s casesculminating in Grable and eliminated federal-question jurisdiction over ostensibly state law causesof action that implicate the effective administrationof the Internal Revenue Code.

C. The Sixth Circuit’s ApproachEliminates Federal QuestionJurisdiction In Cases In Which ThisCourt’s Precedents Call For ItsExercise.

In rejecting federal jurisdiction here, the SixthCircuit concluded that the explanations this Courtprovided in Empire for distinguishing Grable definethe universe of circumstances in which the federalinterest in the resolution of a disputed question offederal law is sufficiently "substantial" to invoke thejurisdiction of the federal courts. For example, thecourt of appeals reasoned that the federal interest inthis case is not substantial because the federalquestion implicates "private duties involved in [tax]collection" and not the IRS’s own compliance withfederal law. Pet. App. 32a. But, as discussed above,

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the federal interest in the role private parties suchas petitioners play in assisting the IRS in collectingrevenue undoubtedly is substantial. Moreover, thecourt of appeals’ "subjective view" (id. at 33a) thatthe federal government would not find the questionpresented in this case "particularly important"represents an ad hoc approach to federal-questionjurisdiction that this Court should reject. Althoughthis Court has recognized that there is no "single,precise, all-embracing test for jurisdiction overfederal issues embedded in state-law claims," Grable,545 U.S. at 314, that acknowledgment does notpermit courts to create uncertainty by employing aself-acknowledged, highly subjective approach (Pet.App. 33a) when a clear answer exists.

Here, the answer is clear and can be found incongressional intent. Congress long ago created afederal cause of action for a refund that may besought only in federal court and only afl~er thetaxpayer exhausts an exclusively federaladministrative remedy. Respondents, who concedethat the damages they seek are measured by theamount by which they claim to have overpaid theirtaxes, could have obtained the relief they now seekby invoking the refund scheme. Even assuming thatrespondents’ current causes of action are distinctfrom a refund suit by virtue of their pursuingrecovery against petitioners rather than the IRS,their action closely resembles a refund suit.

Indeed, several courts of appeals have held incircumstances analogous to those presented herethat state law actions seeking to recover money fromairlines that, in their role as tax collection agents forthe IRS, mistakenly collected an excise tax on

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domestic air transportation, were barred by thefederal refund statute. See Brennan v. SouthwestAirlines Co., 134 F.3d 1405, amended by 140 F.3d849 (9th Cir. 1998); Sigmon v. Southwest AirlinesCo., 110 F.3d 1200 (5th Cir.), cert. denied, 552 U.S.950 (1997); Kaucky v. Southwest Airlines Co., 109F.3d 349 (7th Cir.), cert. denied, 552 U.S. 949 (1997).Given that respondents’ action closely resembles anaction over which Congress intended the federalcourts to exercise exclusive jurisdiction, the SixthCircuit’s decision to preclude federal jurisdiction doesnot reflect the "’sensitive judgmentN aboutcongressional intent’ that § 1331 requires." Grable,545 U.S. at 317 (quoting Merrell Dow Pharm., Inc. v.Thompson, 478 U.S. 804, 810 (1986)); see id.(observing that the existence of a federal cause ofaction to vindicate the underlying right is "asufficient condition for federal-question jurisdiction")(footnote omitted),s

Finally, the court of appeals’ concern thatrecognizing federal jurisdiction here would portend aflood of federal litigation involving "common

s More recently, Congress has created a federal cause of actionfor the willful filing of a fraudulent information return. See 26U.S.C. § 7434. Although that cause of action apparently wasunavailable to respondents for the tax years in question,Congress’s decision to authorize such federal actions is relevantin determining whether permitting federal courts to exercisejurisdiction today over an analogous state law claim would beconsistent with congressional intent. Congress’s concern abouttaxpayers abusing the cause of action against an informationreturn filer, see p. 7, supra, provides further support for theconclusion that precluding federal jurisdiction in this casefrustrates congressional intent.

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malpractice actions against tax preparationprofessionals" and "actions by employees foroverstatement of earnings on W-2 forms" ismisplaced. Malpractice actions do not typicallyhinge on "disputed interpretations of tax codeprovisions" and, even where they do, the exercise offederal jurisdiction could be rejected on the groundthat Congress has not manifested an intent to havefederal courts resolve state malpractice actions thathave no federal analog (in circumstances in which,unlike here, the taxpayer is not seeking a refund).As for actions against other categories of informationreturn tilers such as employers, such claims are morelikely to be premised on clerical or factual mistakesthan misinterpretations of federal tax law. 9 ]For thecategory of those cases that hinge on a disputedinterpretation of federal tax law, federal jurisdictionwould be proper for the same reasons that :it is inthis case.

9 See Clemens v. USV Pharm., 838 F.2d 1389, 1395 (5th Cir.1988) (company that filed erroneous information return liablefor negligently failing to correct erroneous W-2); Buchanan v.Dowdy, 772 F. Supp. 968, 972-74 (S.D. Tex. 1991) (defendantnegligent in failing to correct erroneous Form 1099); Wisecup v.Gulf Dev., 565 N.E.2d 865, 866 (Ohio Ct. App. 1989) (plaintiffalleged defendant "negligent and careless" in misreporting hisearned income).

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CONCLUSION

The petition for a writ of certiorari should begranted.

Respectfully submitted,

ROBIN S. CONRAD

AMAR D. SARWALNational Chamber

Litigation Center, Inc.1615 H. St. NWWashington, DC 20062(202) 463-5337

ROBERT A. LONG, JR.Counsel of Record

JONATHAN L. MARCUSENRIQUE ARMIJO

Covington & Burling LLP1201 Pennsylvania Ave., NWWashington, DC 20001(202) 662-6000

February 2008

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