United States: A Reminder — Federal Courts Cannot Litigate State Tax Disputes

From time to time, taxpayers wonder why state tax disputes, especially those involving constitutional issues, cannot be resolved in the federal court system. The answer is the federal Tax Injunction Act, 28 U.S.C. § 1341 which provides:

This prohibition against state tax claims being filed in federal court has been construed on many occasions. According to United Gas Pipe Line Co. v. Whitman, 595 F.2d 323, 326 (5th Cir. 1980), Section 1341 "is not a narrow statute aimed only at injunctive interference with tax collection," but is instead a "broad jurisdictional impediment to federal court interference with the administration of state tax systems." This construction was recently reaffirmed in Jackson Avenue Foundation, Inc. v. Louisiana Tax Commission, Docket No. 03-0905 (April 21, 2004), 2004 U.S. Dist. LEXIS 7051, by the District Court for the Eastern District of Louisiana in a case involving real property taxation.

Two different taxpayers sued the Louisiana Tax Commission and the City of New Orleans in state court, the Orleans Parish Civil District Court. The Jackson Avenue Foundation ("JAF") was a non-profit corporation that had purchased two properties from the City of New Orleans at a tax sale. JAF alleged that real estate taxes were wrongly assessed against it for tax years 2002 and 2003.

The second taxpayer, Louis R. Koerner, Jr., claimed that his homestead exemption was improperly revoked and that "unconstitutional" taxes had been levied against him.

Both taxpayers asserted damage claims for the alleged violations of their civil and constitutional rights, including Equal Protection claims. Mr. Koerner also sought an award of attorneys’ fees for the claimed constitutional violations.

In an unusual maneuver, the City of New Orleans, one of the named defendants, "removed" the case to federal District Court. This is a procedure generally used when the federal court has subject matter jurisdiction over the case. The City of New Orleans argued that the presence of the taxpayers’ constitutional claims gave the District Court the authority to hear and decide the case, rather than the state court in New Orleans.

The District Court reviewed its own jurisdiction and relied upon a long line of decisions about the Tax Injunction Act, one principle of which is that if the state tax law system provides an "adequate remedy" to the state taxpayers, then § 1341 is an absolute bar in federal court to lawsuits seeking relief in state tax cases. See City of Houston v. Standard-Triumph Motor Co., 347 F.2d 194, 201 (5th Cir. 1965).

The Court applied this principle to the taxpayers’ claims, all of which could have been raised, heard and decided in the Louisiana state court system. Acting on its own motion, the District Court remanded the taxpayers’ lawsuit back to the state court for further action. Thus, no matter how imperfect a taxpayer believes the state appeal system is, there is almost no opportunity to litigate a state tax dispute in the federal court system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.