A federal district court in Tennessee recently dismissed for lack of subject matter jurisdiction a claim by the Islamic Center of Nashville (ICN) lawsuit challenging a Tennessee property tax exemption law on religious freedom grounds. Please see our previous blog post about the case here.

Since 1995, ICN has operated a religious school, the Nashville International Academy (NIA), an independently operating but related entity. To finance a new educational building, while still adhering to the Islamic tenet against interest-bearing loans, ICN entered into an Ijara agreement through which a bank’s subsidiary held the property’s title until payments on the finance agreement were complete. During the agreement (August 2008 — October 2013) ICN and NIA exclusively operated on the property, with no oversight by Devon Bank or its related entities. During this time neither the Bank nor its related entities on the property paid any taxes, nor did they depreciate the property for tax purposes.

In February 2014, ICN sought a property tax exemption for the building, to be applied retroactively, seeking continuity of exempt status as provided by Tenn. Code Ann. 67-5-212(b)(3)(B). The State Board of Equalization denied tax exempt status for the period prior to October 2013, when the Ijara payments were ongoing, but granted exemption from that time onward. ICN appealed the decision before an Administrative Law Judge (ALJ) in January 2015, and after receiving an unfavorable ruling, appealed again to the Tennessee Assessment Appeals Committee, which also found that ICN was not entitled to the exemption prior to October 2013 due to the transfer of property in the Ijara agreement.

ICN’s Complaint
ICN’s complaint alleges violations of the Religious Freedom Restoration Act (RFRA) and its Tennessee counterpart, RLUIPA, the Elementary and Secondary Education Act of 1965, and the First Amendment of the United States Constitution.

ICN argued that it was “ironically denied the religious exemption from property taxes by Defendant specifically because of its adherence to its religious tenets.” It also contended that the tax exemption statute favored non-Islamic religions and non-religious organizations, and that the statute substantially burdened its free exercise of religion. Had it not been for ICN’s strict adherence to its religious tenets, ICN likely would not have transferred title to the property, nor would it have been removed from its previous exemption status. Removing ICN’s exemption status violated its religious rights under RLUIPA.

Upon review, the district court did not have an opportunity to address ICN’s substantive claims. Instead, the court’s review was limited to a discussion of the application of the Tax Injunction Act to this case.

The Tax Injunction Act, 28 U.S.C. § 1341, prevents district courts from interfering with local tax matters where a remedy is available in state court. Here, Tennessee law provides the opportunity for judicial review of decisions by the State Board of Equalization in the state chancery court. Because ICN did not appeal to the chancery court, it failed to exhaust an available state remedy. Consequently, the district court concluded that it lacked jurisdiction and dismissed the case. Had the district court considered ICN’s RLUIPA claim, it would have had to decide whether the tax exemption statute was a “land use regulation” as defined by RLUIPA and, if so, whether having to pay taxes somehow prevented it from exercising its religious beliefs as distinct from merely paying taxes.

The Court’s Memorandum of Decision in Islamic Center of Nashville v. Tennessee, No. 3-16-2498 (M.D. Tenn. Dec. 14, 2016) is available here.