*

The Honorable William C. O’Kelley, Senior United States District Judge for the Northern District of Georgia,

sitting by designation.

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 06a0039p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT _________________

JEROME R. MIKULSKI; ELZETTA C. MIKULSKI, On

Behalf of Themselves and All Others Similarly

Situated,

Plaintiffs-Appellants,

v.

CENTERIOR ENERGY CORPORATION; FIRST ENERGY

CORPORATION; CLEVELAND ELECTRIC

ILLUMINATING COMPANY; THE TOLEDO EDISON

COMPANY,

Defendants-Appellees.

X

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No. 03-4486

Appeal from the United States District Court

for the Northern District of Ohio at Cleveland.

Nos. 02-02440; 03-00191; 03-00192; 03-07043

—Donald C. Nugent, District Judge.

Argued: February 4, 2005

Decided and Filed: January 26, 2006 

Before: BATCHELDER and DAUGHTREY, Circuit Judges; O’KELLEY, District Judge.*

_________________

COUNSEL

ARGUED: Eric H. Zagrans, ZAGRANS LAW FIRM, Elyria, Ohio, for Appellants. Mitchell G.

Blair, CALFEE, HALTER & GRISWOLD, Cleveland, Ohio, for Appellees. ON BRIEF: Eric H.

Zagrans, ZAGRANS LAW FIRM, Elyria, Ohio, Thomas R. Theado, GARY, NAEGELE &

THEADO, LLC, Lorain, Ohio, Eben O. McNair IV, Daniel S. White, SCHWARZWALD &

McNAIR, Cleveland, Ohio, for Appellants. Mitchell G. Blair, Colleen M. O’Neil, Tracy S. Johnson,

Anthony J. LaCerva, CALFEE, HALTER & GRISWOLD, Cleveland, Ohio, for Appellees.

O’KELLEY, D. J., delivered the opinion of the court, in which BATCHELDER, J., joined.

DAUGHTREY, J. (pp. 10-11), delivered a separate opinion concurring in part and dissenting in part.

1
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 2

1

Pursuant to 26 U.S.C. § 6042(a)(1), the defendants were required to file an information return with the Internal

Revenue Service reporting payments of dividends aggregating $10 or more made to any person during any calendar year.

A company that furnishes an information return is required to give notice to the person who is the subject of the return

by written statement under 26 U.S.C. § 6042(c) and is subject to a penalty, under certain conditions, for failure to comply

with § 6042(a). The IRS may instruct a corporation to deduct and withhold a specified amount of tax for dividends if

the payee underreports or if there is a payee certification failure.

2

Under Internal Revenue Code (“IRC”) § 316(a), distributions to a company’s shareholders constitute taxable

dividends to the extent the corporation has earnings and profits as defined by § 312 at the time of the distribution. Those

distributions not paid from earnings and profits are returns of capital of the shareholders’ basis in the stock; these are

tax-free returns of capital when a corporation distributes more than its earnings and profits. 

_________________

OPINION _________________

WILLIAM C. O’KELLEY, District Judge. This appeal arises from four state court actions

against the defendants that were separately removed to the U.S. District Court for the Northern

District of Ohio. The four cases were later consolidated to address the defendants’ separately-filed

motions for judgment on the pleadings after the court denied the separate motions to remand.

I. Factual and Procedural History

On January 22, 2002, plaintiffs Jerome R. Mikulski and Elzetta C. Mikulski filed an action

(Mikulski I) against Centerior Energy Corporation (“Centerior”) and First Energy Corporation (the

successor company to Centerior) in Ohio’s Cuyahoga County Court of Common Pleas. The

plaintiffs sought to represent a class of individual shareholders in Centerior who claim that they

received inaccurate Forms 1099-DIV or equivalent substitutes as information statements1

 from the

company in 1986. The Mikulskis sought damages in the amount of what they claim to be overpaid

federal and state taxes plus costs and attorneys’ fees.

On October 30, 2002, the Court of Common Pleas directed the plaintiffs to clarify their

calculation of the alleged error in the shareholder information statements. On November 15, 2002,

in response to this order, the plaintiffs served First Energy with a copy of their supplemental

response to the interrogatory. In the response, they disclosed that their claims for relief involved

whether the defendants violated Section 312(n)(1) of the Internal Revenue Code.2

 The response

stated, in part: 

From its formation in 1986, [Centerior] deliberately and fraudulently manipulated

its tax accounting practices over a period of years in order to artificially inflate its

“earnings and profits” (fn. “A defined term under the Internal Revenue Code...) so

that it would look more profitable to its investors. This was vitally important to

Centerior in 1986 because it needed to justify the recent merger of CEI and Toledo

Edison. In the process, however, Centerior defrauded some 200,000 shareholders

who lost more than $35 million from being wrongly instructed by Centerior to pay

too much in federal income taxes on their 1986 distributions alone.

Centerior violated the Internal Revenue Code by doing what Section

312(n)(1) of the Code specifically forbids – Centerior illegally included in its

earnings and profits calculations for 1986 (and subsequent years) more than $1.5

billion of construction expenses that its subsidiaries had incurred in 1984 and earlier.

Code Section 312(n)(1) states that no construction expenses incurred before

January 1, 1985 may be considered in calculating a corporation’s earnings and

profits.
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 3

Pls.’ Supplemental Resp. to Interrog. No. 1 of Defs.’ Second Set of Interrogs. (Emphasis in original).

 On December 13, 2002, the defendants removed the case to the United States District Court

for the Northern District of Ohio pursuant to 28 U.S.C. § 1441(b). The defendants alleged that the

plaintiffs’ complaint raised a substantial federal question and that resolution of that question was

essential to the resolution of the plaintiffs’ claims, based upon the plaintiffs’ supplemental response

to interrogatories. 

The plaintiffs filed three additional state law actions on December 31, 2002. Mikulski II, Mikulski III, and Mikulski IV assert identical theories of liability but implicate different tax years and

different operating entities: Centerior Energy, Cleveland Electric, and Toledo Edison, the latter two

being separate operating companies that together formed Centerior in 1986. Within thirty days of

the service of the complaints in these three subsequent suits, each action was removed to the federal

district court by the defendants. 

On January 12, 2003, the plaintiffs moved to have the case remanded to the Cuyahoga

County Court of Common Pleas, which motion was denied on February 28, 2003. The district court

found that the plaintiffs’ causes of action, although structured as breach of contract and fraudulent

misrepresentation claims, raised a substantial federal question involving federal tax law. The

plaintiffs’ two subsequent motions for reconsideration were also denied. Additionally, the district

court denied the plaintiffs’ motions to remand Mikulski II, III, and IV. 

On March 19, 2003, the defendants filed a motion for judgment on the pleadings on the

grounds that the plaintiffs’ actions were preempted under federal law expressly by 26 U.S.C. § 7422

and implicitly by the scope and complexity of the Internal Revenue Code. The matter was referred

to Magistrate Judge Patricia A. Hemann for consideration of pretrial motions. Following extensive

briefing, the magistrate judge issued a report and recommendation on June 3, 2003, which concluded

that judgment on the pleadings should be granted and, to the extent that there were no distinguishing

facts in the companion cases, judgment would also be appropriate in these matters. In the report and

recommendation, the magistrate judge noted that the plaintiffs could have raised the issue with the

Internal Revenue Service, could have filed for a refund, or could have pursued administrative

remedies. The magistrate judge also noted that if the court allowed the lawsuit to proceed, it could

open the floodgates of litigation in federal court to suits by every shareholder for misstatement of

earnings and profits, by every employee for overstatements of earnings on W-2 forms by employers,

and by every independent contractor against a payor on an overstated 1099 form under a theory of

breach of implied or express contract or fraudulent misrepresentation. The report and

recommendation noted that the Internal Revenue Code was enacted to avoid these types of actions

and to allow an injured taxpayer to proceed for a refund directly against the government. 

After the magistrate judge’s report and recommendation in Mikulski I, the defendants moved

for judgment on the pleadings in the companion cases. Because this suit and the three others filed

by the plaintiffs had factual similarities, the cases were consolidated by the district court for final

briefing. The plaintiffs agreed that the report and recommendation could be considered as having

been entered in all four cases.

The plaintiffs objected to the report and recommendation on the grounds that it

mischaracterized the claim as one for a tax refund and therefore erroneously concluded that the

claims are preempted by federal tax laws. The plaintiffs also filed a motion for reconsideration of

the order denying remand. The district court held a hearing on September 25, 2003 on the plaintiffs’

objections to the report and recommendation. At the hearing, the plaintiffs primarily relied upon

the Supreme Court decision in Beneficial National Bank v. Anderson, 539 U.S. 1 (2003), stating that

the Supreme Court stressed the need for complete preemption in removal cases. The plaintiffs

alleged that there was no complete preemption, just mere presence of a federal statute in an action
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 4

that seeks relief only under state law, so there was no basis for removal jurisdiction to the federal

courts. They stressed that their suit was based on state law claims for breach of contract and fraud

and not that the defendants allegedly violated the Internal Revenue Code, which was not relevant.

The defendants responded that the magistrate judge and the district court reached the correct result

in relying on proper grounds to support removal jurisdiction.

Following oral argument, on October 6, 2003, the district court considered and rejected the

plaintiffs’ arguments for remand and adopted the magistrate judge’s report and recommendation.

Judge Donald C. Nugent stated that, construing the complaint in the light most favorable to the

plaintiffs and accepting all of the complaint’s factual allegations as true, he found the defendants

were entitled to judgment on the pleadings. The district court also granted the defendants’ motions

for judgment on the pleadings in the three companion cases. The plaintiffs then filed this appeal.

II. Standard of Review

This court reviews a district court’s decision of whether to dismiss for lack of federal subject

matter jurisdiction de novo. Dixon v. Ashcroft, 392 F.3d 212, 216 (6th Cir. 2004) (citing Joelson

v. United States, 86 F.3d 1413, 1416 (6th Cir. 1996)). The factual findings made by the district court

in deciding a motion to dismiss, however, are reviewed only for clear error. Dixon, 392 F.3d at 216

(citing Jones v. City of Lakeland, 175 F.3d 410, 413 (6th Cir. 1999) (abrogated on other grounds)

(quoting Gafford v. Gen. Elec. Co., 997 F.2d 150, 161 (6th Cir. 1993))). The court reviews the

district court’s refusal to remand a case removed from state court de novo. Harper v. AutoAlliance

Int’l, Inc., 392 F.3d 195, 200 (6th Cir. 2004) (citing Long v. Bando Mfg. of Am., Inc., 201 F.3d 754,

759 (6th Cir. 2000), and Her Majesty the Queen in Right of the Province of Ontario v. City of

Detroit, 874 F.2d 332, 338 (6th Cir. 1989)).

III. Analysis

In their briefs, the parties have outlined numerous issues addressing the motion to remand

and the motion for judgment on the pleadings. This opinion will address only the former question:

whether the district court erred in denying the plaintiffs’ motions to remand, or, stated another way,

whether the federal courts have jurisdiction over these lawsuits.

The district court premised its denial of the plaintiffs’ motions to remand on the statement

that the complaint relies upon the interpretation of the Federal Tax Code and Federal Tax

Regulations and therefore raised a substantial question of federal law. The court found that the

plaintiffs’ suit was one for a tax refund and therefore must be pursued under 26 U.S.C. § 7422,

which requires that a refund or credit be sought from the IRS before bringing suit against the

defendants. The magistrate judge found particularly relevant the fact that, if a question of tax law

were decided in state court, the federal government would not be bound by a judgment against the

defendants. The magistrate judge’s report and recommendation, approved and adopted by the

district court, also raises the artful pleading doctrine. 

A. Artful Pleading and Preemption

In the absence of diversity, a civil action filed in state court may be removed to federal court

only if the claim “arises under” federal law. Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 6 (2003)

(citing 28 U.S.C. § 1441(b)). Whether the claim arises under federal law must be determined by

applying the “well-pleaded complaint” rule. Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987)

(citing Gully v. First Nat’l Bank, 299 U.S. 109, 112-13 (1936)); Heydon v. MediaOne of Southeast

Mich., Inc., 327 F.3d 466, 469 (6th Cir. 2003) (citing Merrell Dow Pharm., Inc. v. Thompson, 478

U.S. 804, 808 (1986) and Musson Theatrical, Inc. v. Fed. Express Corp., 89 F.3d 1244, 1252 (6th

Cir. 1996)). A claim arises under federal law for jurisdictional purposes only if the plaintiff’s

statement of the cause of action on the face of its properly pleaded complaint affirmatively shows
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 5

that it is based on federal law. Beneficial Nat’l Bank, 539 U.S. at 6-8; Caterpillar, 482 U.S. at 392.

The presence of a federal defense to a state law claim, even one relying on the preemptive effect of

a federal statute, is insufficient to confer federal jurisdiction and will not provide a basis for removal.

Beneficial Nat’l Bank, 539 U.S. at 6 (citing Louisville & Nashville R.R. Co. v. Mottley, 211 U.S. 149,

152 (1908) and Taylor v. Anderson, 234 U.S. 74 (1914)); Metro. Life Ins. Co. v. Taylor, 481 U.S.

58, 63 (1987); Franchise Tax Bd. of Calif. v. Constr. Laborers Vacation Trust for S. Calif., 463 U.S.

1, 9-12 (1983); Musson Theatrical, 89 F.3d at 1252.

The exception to this is the “artful pleading” exception to the well pleaded complaint rule.

Under the artful pleading exception, when a plaintiff has carefully drafted the complaint to avoid

naming a federal statute as a basis for federal jurisdiction, but the complaint is nonetheless based

on such statute, the federal court will have jurisdiction. 

In this case, the defendants have not shown that the plaintiffs seek relief under any federal

statute but, instead, raise the artful pleading exception in their brief, arguing that the plaintiffs

structured their complaint to avoid federal jurisdiction but that such jurisdiction would be

appropriate because the case is based on federal tax law. The magistrate judge and the district court

rely heavily upon airline passenger excise tax cases to preempt the plaintiffs’ state law claims

through 26 U.S.C. § 7422. See Brennan v. Southwest Airlines Co., 134 F.3d 1405, 1409, amended

without substantive change, 140 F.3d 849 (9th Cir. 1998) (in collecting excise tax from passengers,

airlines act as agents for the IRS); Sigmon v. Southwest Airlines Co., 110 F.3d 1200, 1203 (5th Cir.),

cert. denied, 522 U.S. 950 (1997) (citing 26 U.S.C. § 4291 and Kaucky v. Southwest Airlines Co., 109 F.3d 349 (7th Cir. 1997) (airlines act as government agents in collecting airline ticket excise

taxes)); Kaucky, 109 F.3d at 351-52 (7th Cir.), cert. denied, 522 U.S. 949 (1997) (where Congress

makes a private entity like an airline a collection agent for the IRS, the airline is treated as an

employee of the IRS for § 7422 purposes). This reliance is misplaced.

In the airline cases, the preemption decisions were based on the court’s finding that the

defendant airline was acting as a collection agent of excise taxes for the Internal Revenue Service.

No such finding has been made about the defendants in this case. Other courts, including district

courts, recognize that the airline excise tax cases have limited applicability beyond their unique set

of circumstances. See In re Air Transp. Excise Tax Litig., 37 F. Supp. 2d 1133, 1137 (D. Minn.

1999) (distinguishing airline cases; refusing to preempt plaintiffs’ claims for improper collection of

excise taxes on air freight of Federal Express because elements of “true” tax refund claim not

present). 

 The plaintiffs’ state law claims do not fall within the express language of 26 U.S.C. § 7422,

which would prevent recovery for failure to file a claim against the United States with the Internal

Revenue Service. The plaintiffs’ complaints center on the alleged inflation of the defendants’

earnings and profits in violation of the Internal Revenue Code’s § 312(n)(1), the over-reporting of

taxable dividends to the plaintiffs and other taxpaying shareholders, and, as a result, the inducement

of the plaintiffs and other shareholders to overpay their respective federal and state income taxes.

Section 7422 does not apply to these complaints by its plain language; the plaintiffs do not complain

of erroneous or illegal tax assessments or collections by the defendants. 

The district court erred in adopting the report and recommendation’s conclusion that, because

the plaintiffs’ damages are calculated in terms of overpaid income taxes, the plaintiffs’ state law

claims constitute federal income tax refund claims. When the plaintiffs filed their lawsuit in 2002,

they could not file a claim against the United States for a refund for their 1986 taxes paid. The

Internal Revenue Code limits refunds to the later of three years after the tax return was filed or two

years after the tax was paid. 26 U.S.C. § 6511. 
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 6

Not all claims that seek damages against the United States for overpayment of taxes are

claims for the recovery of tax refunds, even though damages are measured in taxes. This court has

often stated that the nature of a plaintiff’s state law claims is not determined by the nature of his

underlying damages. For instance, references to retirement plan benefits or assets are insufficient

to convert a plaintiff’s state law claims into federal ERISA claims for preemption purposes; the

“reference to plan benefits was only a way to articulate specific, ascertainable damages.” Marks v.

Newcourt Credit Group, Inc., 342 F.3d 444, 453 (6th Cir. 2003) (citing Wright v. Gen. Motors

Corp., 262 F.2d 610, 615 (6th Cir. 2001)); see also Husvar v. Rapoport, 337 F.3d 603, 609 (6th Cir.

2003); Cyprus Amax Coal Co. v. United States, 205 F.3d 1369, 1376 (Fed. Cir. 2000); Brown v.

United States, 105 F.3d 621, 623 (Fed. Cir. 1997). 

The Supreme Court has found complete preemption in only three classes of cases: Section

301 of the Labor Management Relations Act of 1947 (LMRA), 29 U.S.C. § 185; the Employee

Retirement Income Security Act of 1975 (ERISA), 29 U.S.C. §§ 1001 et seq.; and the National Bank

Act, 12 U.S.C. §§ 38 et seq. Beneficial Nat’l Bank, 539 U.S. at 7-9. The Supreme Court has

explained that it found complete preemption under the LMRA and ERISA because “the federal

statutes at issue provided the exclusive cause of action for the claim asserted and also set forth

procedures and remedies governing that cause of action.” Id. at 7-8. The Court found preemption

under the National Bank Act because Congress intended the federal cause of action to be the

exclusive remedy, not because the Act merely created a federal cause of action. Id. at 9 n.5. The

Court has not yet recognized complete preemption for damage claims caused by allegedly inaccurate

tax reporting by corporations to their taxpaying shareholders, especially when the claim involves

both federal and state income taxes. This court ruled likewise when it found that ERISA did not

preempt a state tax refund claim. Thiokol Corp. v. Roberts, 76 F.3d 751 (6th Cir. 1996).

Courts must take care to avoid creating complete preemption beyond the three areas of law

recognized by the Supreme Court. See, e.g., N.Y. State Conference of Blue Cross & Blue Shield

Plans v. Travelers Ins. Co., 514 U.S. 645, 654 (1995). This circuit has recognized that complete

preemption is a narrow rule for determining federal jurisdiction and has held that the National Flood

Insurance Act, 42 U.S.C. § 4072, completely preempts state law because it explicitly confers

“original exclusive jurisdiction” on the federal district courts. Gibson v. Am. Bankers Ins. Co., 289

F.3d 943, 947 (6th Cir. 2002). It has declined, however, to extend complete preemption to statutes

that lack similar language. See Wellons v. Northwest Airlines, Inc., 165 F.3d 493 (6th Cir. 1999)

(Airline Deregulation Act does not preempt state law race discrimination claim against airline);

Musson Theatrical, 89 F.3d at 1253 (Airline Deregulation Act does not preempt state law fraud and

misrepresentation claims against air freight carrier); Strong v. Telectronics Pacing Sys., Inc., 78 F.3d

256 (6th Cir. 1996) (Medical Device Amendments to Federal Food, Drug, and Cosmetic Act do not

preempt state law negligence claims against pacemaker manufacturer); Gustafson v. City of Lake

Angelus, 76 F.3d 778 (6th Cir. 1996) (Federal Aviation Act does not preempt city ordinance

prohibiting seaplanes from operating on city lake). 

The United States District Court for the Northern District of Ohio seems to be the first court

in the country to find complete preemption in the Internal Revenue Code. If the district court were

correct, it would federalize most state law claims that remotely address tax issues, such as suing

one’s accountant or tax preparer.

There is no reason for this court to conclude that Congress intended to create an exclusive

federal remedy under the Internal Revenue Code for miscalculation of earnings and profits and

misreporting of taxable dividends. As the Supreme Court has recognized, Congress knows how to

enact exclusive private rights of action and expressly impose liability for private misconduct in the

Internal Revenue Code in other areas, such as Section 6701. Cent. Bank of Denver, N.A. v. First

Interstate Bank of Denver, N.A., 511 U.S. 164, 176-77, 182-83 (1994). Congress has expressly

provided non-exclusive federal private causes of action for violation of several sections of the
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 7

3

In July 1996, Congress enacted 26 U.S.C. § 7434, which expressly creates a private right of action in favor

of any taxpayer who is injured because another person or entity has willfully filed a fraudulent information return

asserting that payments have been made to a taxpayer. All events giving rise to plaintiffs’ cases preceded the enactment

of Section 7434. Its enactment by Congress, however, is indicative of the fact that the legislative branch never intended

for Section 7422 to create an implied right of action, much less to provide the exclusive remedy for fraudulent filing

claims. 

Internal Revenue Code, including Sections 7426(a)(1), 7431(a)(2), 7432, and 7434. See In re

Hawkins, 224 B.R. 334, 337 (Bankr. E.D. La. 1998) (§ 7426(a)(1) is not an exclusive remedy for

a person suing over an IRS levy). Four specific provisions of the Code indicate that Congress

intended the private federal remedy to be exclusive: Sections 6110(j)(1)(B), 897(I)(4), 7433(a), and

7433(e). No such provisions for exclusive federal causes of action are set forth in Sections 312(n)(1)

or 6042(c)). The language and legislative history of Section 7422 also indicate that Congress did

not intend for the tax refund procedure to be the exclusive federal remedy for fraudulent dividend

reporting causing shareholders to overpay their income taxes. See S. Rep. 89-1625, 89th Cong. 2d

Sess. (1966), 1966 USCCAN 3676, 3681-82.3

 The intended purpose of Section 7422 was to protect

government collection officers from being sued by taxpayers and to provide taxpayers with a means

to obtain relief from improper collections by tax collectors. Id.

The plaintiffs did not artfully plead in their complaint to improperly avoid federal

jurisdiction, nor are their claims completely preempted by federal law. For these reasons, this court

finds that the district court erred in its decision that the plaintiffs’ state law claims were federal tax

claims preempted by 26 U.S.C. § 7422.

B. Substantial Federal Question

The district court also based its finding of removal jurisdiction on the substantial federal

question doctrine. The Supreme Court in Franchise Tax Board v. Construction Laborers Vacation

Trust, 463 U.S. 1 (1983), created the “substantial federal question” exception to the well-pleaded

complaint rule. Franchise Tax Bd. of Calif. v. Constr. Laborers Vacation Trust for S. Calif., 463

U.S. 1. Before the Supreme Court decided Beneficial National Bank v. Anderson, 539 U.S. 1 (2003),

some courts recognized two narrow exceptions to the well-pleaded complaint rule: the “substantial

federal question” exception and the “complete preemption” exception. The defendants in this case

originally based removal on the substantial federal question doctrine. 

Under the substantial federal question doctrine, a state law cause of action actually arises

under federal law, even though Congress has not provided a federal private right of action, “where

the vindication of a right under state law necessarily turn[s] on some construction of federal law.”

Franchise Tax Bd., 463 U.S. at 9 (citing Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921)

and Hopkins v. Walker, 244 U.S. 486 (1917)). The mere presence of a federal issue in a state law

cause of action, however, does not automatically confer federal question jurisdiction, either

originally or on removal. In order to invoke the substantial federal question doctrine announced in

Franchise Tax Board, this circuit held prior to the Beneficial National Bank decision that the federal

question raised by the state law complaint must be: 1) substantial; 2) disputed; 3) of great federal

interest; and 4) resolution of the federal question must be necessary to the resolution of the state law

claim. Long v. Bando Mfg. of Am., Inc., 201 F.3d 754, 757-59 (6th Cir. 2000). The nature of the

federal interest is vitally important. “[E]ven when there is [a private] cause of action, the use of a

federal statute as an element of a state cause of action may or may not raise a substantial federal

question depending upon the nature of the federal interest at stake in the case.” Miller v. Norfolk

& W. Ry. Co., 834 F.2d 556, 562 (6th Cir. 1987) (citing Merrell Dow Pharm., Inc. v. Thompson, 478

U.S. 804, 814 n.12 (1986)).
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 8

4

The uncertainty regarding the private right of action requirement has resulted in some inconsistency within

this court. In Long, the court noted that the Supreme Court’s holding in Merrell Dow was unclear but read it as having

“left open the possibility of federal jurisdiction even in the absence of an express or implied federal cause of action, if

a substantial federal question of great federal interest is raised by a complaint framed in terms of state law, and if

resolution of that federal question is necessary to the resolution of the state-law claim.” 201 F.3d at 759. In Heydon v.

MediaOne, 327 F.3d 466 (6th Cir. 2003), however, the court found that federal question jurisdiction did not exist where

the plaintiffs’ claim was a state law claim for trespass and the federal law upon which they attempted to predicate

jurisdiction did not provide a private right of action.

5

Some courts have found that the Supreme Court removed doubt about the elimination of the substantial federal

question doctrine as a basis for removal jurisdiction in Beneficial National Bank. The Court held that, absent diversity,

there are only two ways a state claim can be removed to federal court: where Congress expressly provides or where

complete preemption is present. Beneficial Nat’l Bank, 539 U.S. at 8. In Grable & Sons, however, the Supreme Court

reinforced the viability of the substantial federal question doctrine. 

The Supreme Court first eroded the substantial federal question doctrine in its Merrell Dow

decision. Merrell Dow Pharm., 478 U.S. 804. In Merrell Dow, the Court held that federal question

jurisdiction was not warranted in a state law negligence claim in which the plaintiff argued that the

defendant was negligent under state law for misbranding a drug in violation of federal law. A

substantial factor in the holding in Merrell Dow is the absence of a private federal cause of action

for the violation of the federal law involved. In these circumstances, the violation of a federal

statute, pleaded as an element of a state law cause of action, does not state a claim arising under

federal law. “The mere presence of a federal issue in a state cause of action does not automatically

confer federal-question jurisdiction.” Id. at 813. The Court implied that the congressional

determination not to provide a private federal remedy for violation of a federal statute is “tantamount

to a congressional conclusion that the presence of a claimed violation of the statute as an element

of a state cause of action is insufficiently ‘substantial’ to confer federal question jurisdiction.” Id.

at 814. 

Merrell Dow, however, left uncertain whether the absence of a federal private cause of action

precluded federal question jurisdiction.4

 The Supreme Court, in Grable & Sons Metal Products, Inc.

v. Darue Engineering & Manufacturing, __ U.S. __, 125 S.Ct. 2363 (2005), provided clarification

regarding the requirement of a federal private right of action for federal question jurisdiction. In

Grable & Sons, the Court stated that Merrell Dow “should be read in its entirety as treating the

absence of a federal private right of action as evidence relevant to, but not dispositive of, the

‘sensitive judgments about congressional intent’ that § 1331 requires.” 125 S.Ct. at 2368 (internal

citation omitted). The Court ruled that federal question jurisdiction existed in a quiet title action

where the title claim depended on the resolution of whether the taxpayer was given adequate notice,

as defined by federal law. Id. The meaning of that notice provision, according to the Court, was “an

essential element of [the plaintiff’s] quiet title claim, and . . . it appears to be the only legal or factual

issue contested in the case.” Id.5 The Court also noted the strong interest of the federal government

in the collection of delinquent taxes and the rarity of state title questions that would raise contested

matters of federal law. Id. Clear in this case is that the key point under the analytical framework

is the nature of the federal interest at issue.

The substantial federal question doctrine does not provide the federal courts with jurisdiction

in this case. As this court held in Long and Miller, the federal question raised by the state law

complaint must be substantial, and the mere presence of a federal statute as an element of the

complaint does not necessarily confer jurisdiction under the doctrine. Long, 201 F.3d at 757-59;

Miller, 834 F.2d at 562. Although the amended complaints and the responses to interrogatories

mention federal tax law, the true issues in this case are breach of contract and fraudulent

misrepresentation with damages measured in the amount of federal and state income taxes overpaid

by the plaintiffs because of the allegedly false information provided to them. If a court were to

analyze the merits of the case, it would engage in only insubstantial analysis or interpretation of
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 9

federal law. The true questions at issue in the case involve fraud and misreporting to shareholders,

both of which claims are governed by state statutes. For this reason, federal courts do not have

jurisdiction over the case under the substantial federal question doctrine. While this court finds that

these cases should have been remanded to the state court, we do not express any opinion on the

merits of the claims under the laws of Ohio.

IV. Conclusion

This court finds that the federal district court lacked jurisdiction over the cases and erred in

denying the plaintiffs’ motions to remand. Such a decision pretermits discussion of the merits of

the case. For this reason, the district court’s decision is hereby REVERSED and REMANDED for

action not inconsistent with this opinion.
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 10

_____________________________________________

CONCURRING IN PART, DISSENTING IN PART

_____________________________________________

MARTHA CRAIG DAUGHTREY, Circuit Judge, concurring in part and dissenting in part.

Although I agree with the majority’s determination that the plaintiffs' state law claims are not

preempted by § 7422 of the Internal Revenue Code, I disagree with the majority’s conclusion that

this case fails to present a substantial question of federal law sufficient to establish jurisdiction in

federal court.

The majority correctly points out that the plaintiffs' claims turn on Centerior's failure to

comply with § 312(n)(1) of the Code and do not fall within the language of the refund provision of

§ 7422. It is also evident that the plaintiffs are not suing to recover a tax or sum improperly

collected; they are suing for tortious conduct, the damages for which may be measured by the

amount of their overpayment of taxes. The plaintiffs’ alleged overpayment to the IRS establishes

a baseline for measuring their damages, but that amount may or may not represent the actual damage

from the injuries alleged.

Section 7422 protects private entities that act as federal collection agents from returning an

improperly collected tax out of their own coffers. However, defendant Centerior, unlike the

defendant in Brennan v. Southwest Airlines Co., 140 F.3d 849 (9th Cir. 1998), on which the

magistrate and district court judge relied, did not collect the alleged overpayment. Therefore, the

defendant here does not face the prospect of having to refund monies it paid to the IRS without any

recourse, as was the case with Southwest Airlines, which had remitted the sums it collected to the

IRS. Centerior merely reported payouts to shareholders that were the basis for taxes paid directly

to the IRS by those shareholders.

Sixth Circuit precedent recognizes that federal jurisdiction is a “possibility . . . even in the

absence of an express or implied federal cause of action, if a substantial federal question of great

federal interest is raised by a complaint framed in terms of state law, and if resolution of that federal

question is necessary to the resolution of the state-law claim.” Long v. Bando Mfg. of Am., Inc., 201

F.3d 754, 759 (6th Cir. 2000). That would certainly appear to be the case here, especially in light

of the Supreme Court's recent opinion in Grable & Sons Metal Products, Inc. v. Darue Engineering

& Manufacturing, __ U.S. __, 125 S.Ct. 2363 (2005). There, the Court ruled that a state court action

to quiet title raising the question of the meaning of the notice provision of the Internal Revenue Code

for a seizure of property by the Internal Revenue Service warranted the exercise of federal

jurisdiction. Specifically, it held that “[t]he meaning of the federal tax provision is an important

issue of federal law that sensibly belongs in a federal court” because the government “has a strong

interest in the prompt and certain collection of delinquent taxes, and the ability of the IRS to satisfy

its claims from the property of delinquents requires clear terms of notice to allow buyers . . . to

satisfy themselves that the Service has touched the bases necessary for good title.” Id. at 2368

(internal quotes omitted) (emphasis added). The Grable Court also noted both the relative rarity of

such quiet-title actions and the likelihood that finding federal jurisdiction would "portend only a

microscopic effect" on the allocation of the caseload between federal and state courts. Id.

Under Grable’s reasoning, the question of Centerior’s compliance with Section 312(n)(1)

of the Code, which is central to the plaintiffs’ state law claim, also supports the district court’s

exercise of federal jurisdiction. In their complaint, the plaintiffs charged that the defendants “failed

to follow and apply the structure and conceptual framework of the tax laws, as set forth in the

Internal Revenue Code and the regulations promulgated thereunder.” They also answered an

interrogatory intended to clarify their claims with the statement that “Centerior violated the Internal

Revenue Code by doing what . . . the Code specifically forbids . . . .” Furthermore, at oral argument
No. 03-4486 Mikulski, et al. v. Centerior Energy Corp., et al. Page 11

on the issue of federal jurisdiction before the district court, the attorney for the plaintiffs

acknowledged that an analysis of the tax code is “critical” to the case and that a violation of the

Code is not only the measure of damages but also the “underlying rationale for the fraud.” The

majority asserts that in analyzing the plaintiffs’ claims, a federal court would “engage in only

insubstantial analysis or interpretation of federal law,” but this conclusion fails to recognize that

determining whether the defendants complied with the Code is essential to a resolution of the

plaintiffs’ claims. The federal government's interest in the construction of a statute that controls how

much tax security-holders must pay is surely as great as its interest in being able to collect

delinquent taxes by seizing and selling properties.

It could be argued, of course, that a decision finding jurisdiction in this case might invite a

flood of tax-refund suits masquerading as breach-of-contract claims in the federal courts – this case,

after all, is based on IRS filings as far back as 1986. However, it is likely that the refund procedures

in the Internal Revenue Code, in conjunction with state statutes of limitation, would act as a

reasonable limit on the number of cases that were actually heard in federal court.

For these reasons, I concur in the majority’s holding that the plaintiffs’ state law claims are

not preempted by federal law but dissent from the remainder of the opinion. I would affirm the

district court’s decision to deny the plaintiffs’ motion to remand to state court, reverse the judgment

dismissing the complaint on the merits, and remand the case to the district court for further

proceedings.