Winn v. Killian

• Decision Date: 03 October 2002
• Docket Number: No. 01-15901.,01-15901.
• Citation: 307 F.3d 1011
• Parties: Kathleen M. WINN, an Arizona taxpayer; Diane Wolfthal, Arizona taxpayer; Maurice Wolfthal, Arizona taxpayer; Lynn Hoffman, an Arizona taxpayer, Plaintiffs-Appellants, v. Mark W. KILLIAN, in his official capacity as Director of the Arizona Department of Revenue, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

307 F.3d 1011

Kathleen M. WINN, an Arizona taxpayer; Diane Wolfthal, Arizona taxpayer; Maurice Wolfthal, Arizona taxpayer; Lynn Hoffman, an Arizona taxpayer, Plaintiffs-Appellants, v. Mark W. KILLIAN, in his official capacity as Director of the Arizona Department of Revenue, Defendant-Appellee.

No. 01-15901.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 11, 2002.

Filed October 3, 2002.

COPYRIGHT MATERIAL OMITTED

Paul Bender, Arizona State University College of Law, Phoenix, AZ, and Marvin S. Cohen, and Isabel M. Humphrey, Sacks Tierney P.A., Scottsdale, AZ, for the plaintiffs-appellants.

Patrick Irvine, Deputy Attorney General, Phoenix, AZ, Joseph A. Kanefield, Asst. Attorney General, Phoenix, AZ, for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona; Earl H. Carroll, District Judge, Presiding. D.C. No. CV-00-00287-EHC.

Before: SCHROEDER, Chief Judge, D.W. NELSON and REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge.

This case raises the question of when the federal courts may entertain constitutional challenges to state tax laws. Appellants, who are Arizona residents and taxpayers, contend that an Arizona statute permitting tax credits for contributions that support parochial schools violates the Establishment Clause. The district court granted the state's motion to dismiss on the basis that the Tax Injunction Act divests the federal courts of subject matter jurisdiction in this case, and on the basis of general principles of comity and federalism. Neither the statute nor the doctrines relied on by the district court bar Appellants' action. Because Appellants do not challenge any of the types of procedures specified in the Tax Injunction Act, and because they seek to enjoin the granting of a tax credit, rather than the collection of state revenue, the action is justiciable in federal court.

I. BACKGROUND

The statute at issue in this case is Arizona Revised Statute § 43-1089 (hereinafter "§ 1089"). Enacted in 1997, the law permits state tax credits for contributions to organizations called "school tuition organizations." ("STOs"). Section 1089 provides that STOs must be charitable organizations under § 501(c)(3) of the Internal Revenue Code. The tax credit program works as follows: Each Arizona taxpayer may receive a tax credit of up to $500 for the amount of voluntary contributions he or she makes to STOs in any single year; married couples filing jointly may receive a credit of up to $625. § 1089(A)(1)-(2).

There are several limits on the activities of STOs. The organizations are required to spend at least 90% of their revenue on educational scholarships or grants for children in order to allow those children to attend a private school, including parochial schools. § 1089(E)(3). An STO is not permitted to dispense all of its scholarships or grants to students attending the same school; the statute provides that recipients of an STO's funds must be drawn from at least two different schools. Id. A taxpayer cannot request that a contribution to an STO be used for the direct benefit of his dependent. § 1089(D). Finally, an STO cannot distribute grants or scholarships to students who attend schools that discriminate on the basis of race, color, handicap, familial status, or national origin. § 1089(E)(2).

There are no other limits on how STOs operate; thus, an STO may distribute grants only to students attending Catholic schools, Protestant schools, Muslim schools, Jewish schools, or schools maintained by any other single religious sect. STOs may also limit their grants to children of families who belong to a particular faith — Catholic children, Protestant children, Muslim children, or Jewish children, for example. The total amount of funds available for STO grants (and the concomitant revenue loss to the state) is limited only by the number of taxpayers who elect to contribute, rather than pay the amount of their contributions as taxes.

Appellants contend that the tax credit scheme is an impermissible government subsidy of religious schools in violation of the First and Fourteenth Amendments of the Constitution. They point out that under the tax credit system, a substantial amount of money that would otherwise be received by the state and be available for funding public education and other essential public services is diverted to religious institutions to be used for the promulgation of particular religious views. Appellants filed this action in February, 2000, seeking a declaration that the STO program violates the Establishment Clause of the First Amendment; they also requested an injunction both enjoining the future operation of the program, and requiring the return to the state's general fund of monies already distributed to (but not yet expended by) STOs.

In their complaint, plaintiffs described how the STO tax scheme has worked in practice:¹ In calendar year 1998, the first full year that the tax credit was in effect, STOs reported to the Arizona Department of Revenue that they had received $1.8 million in contributions. At least 94% of that amount was donated to STOs that restrict their scholarships or grants to students attending religious schools; three religious STOs received 85% of the donations made that year. The principal beneficiary of the funds that otherwise would have been paid to the state as tax revenues was the Catholic Diocese of Phoenix.² The program expanded significantly in 1999, its second year of operation; according to plaintiffs, the Catholic Diocese of Phoenix alone received $4.5 million for its STO that year, and the Catholic Diocese of Tucson reported more than $850,000 in donations as a result of the tax scheme.

The STO program was challenged in the Arizona courts as soon as it was enacted. The program was upheld as constitutional by the Arizona Supreme Court, in a 3-2 decision. Kotterman v. Killian, 193 Ariz. 273, 972 P.2d 606, cert. denied, 528 U.S. 921, 120 S.Ct. 283, 145 L.Ed.2d 237 (1999). Plaintiffs assert that principles of res judicata do not bar the instant action, and defendants have not raised a res judicata, defense either here or in the district court.

Arizona³ moved to dismiss the complaint on two grounds: (1) on the basis of Eleventh Amendment immunity; and (2) on the basis of a lack of subject matter jurisdiction resulting from the Tax Injunction Act, 28 U.S.C. § 1341, as well as from principles of comity. Simultaneously, a number of parties sought intervention in the lawsuit. The district court granted the motion to dismiss on the ground that the Tax Injunction Act as well as comity preclude federal jurisdiction over plaintiffs' claim; it did not rule on either the motions to intervene or the Eleventh Amendment argument. A timely appeal was filed.

II. DISCUSSION

A. Tax Injunction Act

The Tax Injunction Act precludes district courts from interfering with a state's "assessment, levy, or collection" of state taxes where an efficient remedy is available in state court.⁴ Arizona does not contend that any relief that the district court might order in this case would interfere with a "levy" or "collection" of any taxes. Rather, it asserts that the Tax Injunction Act bars this action because the STO tax credit is part of Arizona's general system of tax "assessment." In other words, according to Arizona, the tax credit is part of the overall calculus by which the state determines how much revenue it will receive from each taxpayer. This broad reading of the word "assessment," however, is supported neither by any precedent interpreting "assessment" in this manner, nor by the meaning of the word itself. The term "assessment" has two definitions relevant to the question presented in this case: (1) "to estimate officially the value of (property, income, etc.) as a basis for taxation," and (2) "to impose a tax or other charge on." RANDOM HOUSE DICTIONARY OF THE ENGLISH LANGUAGE 90 (1979). Neither definition of the term describes the role of the STO tax credit in the Arizona tax system: (1) the STO credit available to a taxpayer is a uniform amount that is applied to the calculation of taxes after a taxpayer's gross income has been determined and therefore plays no part in the "assessment" of property or income as a basis for the imposition of taxes,⁵ and (2) the challenged practice is not the imposition of a tax; quite the contrary, it is the grant of a benefit in the form of an excuse from paying a portion of the taxes already assessed.

The district court agreed with Arizona's contention that the STO credit constitutes a "tax assessment," and that this action is consequently barred. It stated that Blangeres v. Burlington Northern, Inc., 872 F.2d 327, 328 (9th Cir.1989), compelled its conclusion. Blangeres, however, involved a federal lawsuit in which individuals sought to prevent a company from disclosing documents that were necessary to the state's valuation of certain taxable assets belonging to a corporation. Thus, the suit affected the state's ability to determine the value of a taxpaying entity's taxable income, or to "assess" the assets as the term is defined in the first of the two definitions set forth above. In short, Blangeres held that a lawsuit challenging the methods by which the state obtains information used for the valuation of taxable property is barred by the Tax Injunction Act, because any relief would prevent the state from accurately assessing taxes. Blangeres does not support defendant's argument here.

Moreover, if plaintiffs were to receive the relief that they seek in this action, there would be no violation of the purposes or policy underlying the Tax Injunction Act. Congress sought to implement two purposes when it passed the Act in 1937. They are well-documented in both the legislative record and in subsequent cases. See, e.g., Aluminum Co. v. Department of Treasury, 522 F.2d 1120, 1124 (6th Cir. 1975); Hargrave v. McKinney, 413 F.2d 320, 326 (5th...