When a religious organization applies for but is denied a property tax exemption under state law, the Tax Injunction Act may prevent a federal court from hearing a claim challenging such a decision.
The Tax Injunction Act (“TIA”) prohibits federal district courts from enjoining, suspending or restraining the “assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341 (emphasis added). According to the plain language of the statute, if an organization is aggrieved by the assessment, levying, or collection of any tax under state law, it must seek a remedy in the courts of that state if there is a plain, speedy and efficient one.
In Islamic Center of Nashville v. Tennessee, 872 F.3d 377 (6th Cir. 2017), the Sixth Circuit highlighted the broad application of the TIA and the importance of seeking a remedy in state court before filing a federal lawsuit. There, a bank entered into a financial arrangement with the Islamic Center of Nashville (the “Center”). The arrangement provided that the bank will finance a new construction project by buying the Center’s property (a mosque and a school), leasing it back to the Center to occupy and use, and then ultimately selling it back to the Center.
This financial arrangement, also known in the Arabic language “the leasing that ends by selling,” is a way for Islamic organizations to borrow money without running afoul of the Islamic prohibition on paying interest (making money from money).
The problem arose when the property, which was undisputedly used for religious purposes, was placed on the tax roll from 2008 until 2014. Specifically, from the time that the property was transferred to the bank until the time the Center regained legal title, as was agreed upon under the terms of the financial arrangement.
Although the Center was granted the exemption in 2014, the Tennessee State Board of Equalization denied the Center’s application to apply the exemption retroactively for the time period in which the bank held legal title to the property. In its federal lawsuit, the Center was seeking to invalidate the relevant Tennessee tax statute on constitutional grounds—a request that the Sixth Circuit found as falling within the bounds of the TIA.
Moreover, although the TIA exception applies only when there is a “plain, speedy and efficient remedy,” the Sixth Circuit emphasized that the exception is a narrow one. To find that a remedy is “plain, speedy and efficient,” it must be that the taxpayer receives a full hearing and judicial determination at which federal constitutional objections to the tax could be raised. Here, the Center admitted that it could have taken its appeal to the Tennessee chancery court, but did not for reasons that the district court found insufficient. Accordingly, the dismissal of the Center’s complaint was affirmed based on the lack of subject matter jurisdiction.
In conclusion, if your organization is aggrieved by state tax laws and would like to seek a remedy, you might have to go to the courts of that state before proceeding in federal court. If you have any question or concern, feel free to reach out to the attorneys at Dalton & Tomich PLC.