On October 10, 2007, the IRS issued an examination report asserting that Papillon owed $6,452,094 in back taxes for unpaid taxable transportation excise tax liabilities pursuant to section 4261 of the Internal Revenue Code. The IRS also asserted $1,290,375 in negligence penalties under section 6662 in connection with the underpayment. In the report, the IRS asserted that Papillon had been operating its flights on an “established line” and therefore was not entitled to the exemption under section 4281 from taxable transportation taxes under section 4261. Papillon made a partial payment and sought a refund, which the IRS denied. Papillon sued for refund.