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Brennan v. Southwest Airlines

January 28, 1998

MARGARET BRENNAN; MICHAEL MANDERS; ANN DICHOV, PLAINTIFFS-APPELLANTS,
v.
SOUTHWEST AIRLINES; ALASKA AIRLINES CORPORATION; UNITED AIR LINES CORPORATION, DEFENDANTS-APPELLEES.



D.C. No. CV-96-01841-VRW

Appeal from the United States District Court for the Northern District of California Vaughan R. Walker, District Judge, Presiding

Before: Alfred T. Goodwin and Thomas G. Nelson, Circuit Judges, and John S. Rhoades, Sr.,*fn* District Judge.

The opinion of the court was delivered by: Rhoades, District Judge:

FOR PUBLICATION

ORDER AND AMENDED

Argued and Submitted

November 7, 1997

San Francisco, California

Amended April 9, 1998

Opinion by Judge Rhoades

SUMMARY

COUNSEL

ORDER

The Opinion filed on January 28, 1988, slip op. 847, is amended:

The panel votes to deny appellants' petition for rehearing. Judge T.G. Nelson votes to reject the suggestion for rehearing en banc and judge Goodwin and judge Rhoades so recommend.

The full court has been advised of the en banc suggestion and no Judge of the court has requested a vote on it.

With the exception of the amendments listed above, the petition for rehearing is DENIED and the suggestion for rehearing en banc is REJECTED.

I. Overview

The district court denied Plaintiffs' Motion to Remand to state court and granted Defendants' Motion for Judgement on the Pleadings. Plaintiffs appeal. For the reasons stated below, we affirm the district court in both respects.

II. Background

Section 4261 of the Internal Revenue Code ("IRC") required airline passengers to pay a ten percent excise tax on domestic air transportation commenced prior to 1996. The IRC required airlines to collect the tax from their customers and remit the proceeds twice monthly to the Internal Revenue Service ("IRS"). 26 U.S.C. S 4291; 26 C.F.R. 40.6302(c)-1(b)(1)(i). The IRC had imposed this tax since 1941. See Revenue Act of 1941, ch. 412, 55 Stat. 687, 721 (1941).

Airlines routinely sold tickets in 1995 for flights in 1996 -- flights to which the tax did not apply. Many airlines collected the tax on these tickets anyway because they expected Congress to extend the tax into 1996.*fn1 The airlines, expectations were proved wrong, however, when President Clinton vetoed the bill that would have extended the tax.*fn2 Nevertheless, the airlines continued to collect the tax throughout the remainder of 1995 because they expected Congress to renew it shortly before 1996. Some airlines also collected the tax on tickets sold in early 1996 because they expected Congress to reenact the tax retroactively. However, Congress did not renew the tax until August 1996 and did not make it retroactive. Thus, thousands of airline passengers paid a "tax" that the IRC did not authorize.

The Defendant airlines remitted most of the money to the IRS, although they provided a handful of refunds directly to some passengers. In addition, Defendants may have placed some of the money into escrow accounts. Defendants apparently did not pocket any of the money for their own benefit.

On April 25, 1996 Plaintiffs filed this action in state court against Defendants Southwest Airlines Co., Alaska Airlines, Inc., and United Air Lines, Inc. Plaintiffs sued on behalf of themselves and two classes of persons: individuals who paid the tax in 1995 for air travel that commenced in 1996, and persons who paid the tax in 1996 for travel that commenced before Congress reenacted the tax. Plaintiffs alleged state-law causes of action for unlawful business practices and breach of contract. Plaintiffs also sought declaratory relief and an accounting.

The airlines removed the action to the United States District Court for the Northern District of California. Plaintiffs then filed a Motion to Remand, arguing that the district court lacked subject-matter jurisdiction over their state-law claims. Two days ...


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