Freedom From Religion Foundation, Inc. ("FFRF"), a nonprofit organization that advocates for the separation of church and state, and several of its members who live in California have filed this action against Timothy Geithner, in his official capacity as the Secretary of the United States Department of Treasury, and Douglas Shulman, in his official capacity as Commissioner of the Internal Revenue Service, and Selvi Stanislaus, in her official capacity as Executive Officer of the California Franchise Tax Board, seeking a declaration that 26 U.S.C. §§ 107 and 265(a)(6) violate the Establishment Clause of the United States Constitution and that sections 17131.6 and 17280(d)(2) of the California Revenue and Taxation Code violate the Establishment Clause of the United States and California Constitutions and seeking injunctive relief.
Defendants Geithner and Shulman ("federal defendants") and defendant Stanislaus separately move to dismiss plaintiffs' Complaint pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction and pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted.
I. The Assailed Statutes and Regulations Section 107 of the Internal Revenue Code ("IRC") provides that:
In the case of a minister of the gospel, gross income does not include-(1) the rental value of a home furnished to him as part of his compensation; or
(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishing and appurtenances such as a garage, plus the cost of utilities.
26 U.S.C. § 107. Subsection 1.107-1(a) of the Treasury Regulations further provides:
In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are "ordinarily the duties of a minister of the gospel." In general, the rules provided in § 1.402(c)-5 will be applicable to such determination. Examples of specific services the performance of which will be considered duties of a minister for purposes of § 107 include the performance of sacerdotal functions, the conduct of religious organizations and their integral agencies, and the performance of teaching and administrative functions at theological seminaries.
The Complaint alleges that the IRS also requires ministers of the gospel to be "duly ordained, commissioned, or licensed" in order to be entitled to the exclusion. (Compl. ¶¶ 43-44.)
The § 107 exclusion*fn1 is available only when a minister is given use of a home or receives a housing allowance as compensation for services performed "in the exercise" of his ministry, language that is borrowed from § 1402(c)(4). The Treasury Regulations promulgated under § 1402(c)(4) provide that services performed by a minister "in the exercise" of his ministry include: (1) the ministration of sacerdotal functions; (2) the conduct of religious worship; and (3) the control, conduct, and maintenance of religious organizations under the authority of a religious body constituting a church or church denomination. Treas. Reg. § 1.1402(c)-(5)(b)(2).
IRC § 265(a)(6) allows "ministers of the gospel" to claim deductions under §§ 163 and 164 of the IRC for residential mortgage interest and property tax payments, even if the money used to pay those expenses was received in the form of a tax-exempt § 107 allowance. Plaintiffs allege that non-clergy taxpayers are not able to take advantage of this "double dipping." (Compl. ¶ 47.)
Sections 17131.6 and 17280(d)(2) of the California Revenue and Taxation Code correspond to sections 107 and 265(a)(6) of the IRC.
A. Motions to Dismiss for Lack of Subject Matter Jurisdiction
Defendants first argue that the court lacks subject matter jurisdiction over plaintiffs' claims because, in the case of Stanislaus only, the Eleventh Amendment bars plaintiffs' suit and, with respect to all defendants, plaintiffs lack standing.
"Federal courts are courts of limited jurisdiction. They possess only that power authorized by Constitution and statute." Rasul v. Bush, 542 U.S. 466, 489 (2004) (quoting Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). The court is presumed to lack jurisdiction unless the contrary appears affirmatively from the record. DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3 (2006). Consistent with these basic jurisdictional precepts, the Ninth Circuit has articulated the standard for surviving a motion to dismiss for lack of jurisdiction as follows:
When subject matter jurisdiction is challenged under Federal Rule of Civil Procedure 12(b)(1), the plaintiff has the burden of proving jurisdiction in order to survive the motion. A plaintiff suing in a federal court must show in his pleading, affirmatively and distinctly, the existence of whatever is essential to federal jurisdiction, and, if he does not do so, the court, on having the defect called to its attention or on discovering the same, must dismiss the case, unless the defect be corrected by amendment.
Tosco Corp. v. Cmtys. for a Better Env't, 236 F.3d 495, 499 (9th Cir. 2001) (citations and internal quotations omitted). Additionally, "[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action." Fed. R. Civ. P. 12(h)(3).
1. Eleventh Amendment Immunity
Stanislaus argues that plaintiffs' claims against her in her official capacity are barred by the Eleventh Amendment. See Hans v. Louisiana, 134 U.S. 1 (1890). The Eleventh Amendment to the United States Constitution provides: "The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State."
The Eleventh Amendment grants states sovereign immunity against suits in federal court. The State's sovereign immunity poses "a bar to federal jurisdiction over suits against non-consenting States." Alden v. Maine, 527 U.S. 706, 728-29 (1999); accord V.O. Motors v. Cal. State Bd. of Equalization, 691 F.2d 871, 873 (9th Cir. 1982). The bar extends to suits in federal court against a state by its own citizens as well as by citizens of another state. Edelman v. Jordan, 415 U.S. 651, 662-63 (1974). This jurisdictional bar applies to suits "in which the State or one of its agencies or departments is named as the defendant" and "applies regardless of the nature of the relief sought," Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89, 100 (1984), including suits for declaratory or injunctive relief. Cory v. White, 457 U.S. 85, 91 (1982). Furthermore, a suit for damages against a state official in his or her official capacity is tantamount to a suit against the state itself, and is thus subject to the Eleventh Amendment. Pennhurst, 465 U.S. at 101-02.
"The Eleventh Amendment immunity is designed to allow a state to be free to carry out its functions without judicial interference directed at the sovereign or its agents." V.O. Motors, 691 F.2d at 872 (emphasis added). In this case, plaintiffs sue Stanislaus only in her official capacity as Executive Director of the California Franchise Tax Board, an agency of the State of California. Plaintiffs' claims against her are therefore subject to the Eleventh Amendment's guarantee of sovereign immunity to the states. Id.; Pennhurst, 465 U.S. at 101-02.
Claims under 42 U.S.C. § 1983 for deprivation of federal civil rights are limited by the Eleventh Amendment. Because suits against state officials in their official capacity are tantamount to suits against the state itself, "state officials sued in their official capacities are not 'persons' within the meaning of § 1983." Doe v. Lawrence Livermore Nat'l Lab., 131 F.3d 836, 839 (9th Cir. 1997). An exception to the rule that state officials are not "persons" under § 1983 is found in Ex parte Young, 209 U.S. 123 (1908). When sued for prospective injunctive relief, a state official in her official capacity is considered a "person" for § 1983 purposes. See Will v. Mich. Dep't of State Police, 491 U.S. 58, 71 n.10 (1989) ("Of course a state official in his or her official capacity, when sued for injunctive relief, would be a person under § 1983 because 'official-capacity actions for prospective relief are not treated as actions against the State.'") (quoting Kentucky v. Graham, 473 U.S. 159, 167 n.14 (1985)).
This provides a narrow exception to Eleventh Amendment immunity where the plaintiff seeks to "end a continuing violation of federal law." Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 73 (1996) (quoting Green v. Mansour, 474 U.S. 64, 68 (1985)); see Green, 474 U.S. at 68 ("[T]he availability of prospective relief of the sort awarded in Ex parte Young gives life to the Supremacy Clause. Remedies designed to end a continuing ...