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Kathrein v. City of Evanston

September 18, 2009


The opinion of the court was delivered by: Judge Ronald A. Guzmán


Plaintiffs Michael L. Kathrein and Victoria Kathrein, owners of property located in the City of Evanston ("the City"), have sued the City, its mayor and nine aldermen, pursuant to 42 U.S.C. § 1983, claiming that the City's Affordable Housing Demolition Tax ("Demolition Tax") violates their rights as guaranteed by the Fifth and Fourteenth Amendments to the U.S. Constitution, the Illinois Constitution, as well as state law. Defendants have moved to dismiss the complaint for want of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(1). For the reasons provided in this Memorandum Opinion and Order, the Court grants the motion.


In 2003, the Illinois General Assembly enacted the Affordable Housing Planning and Appeal Act to encourage local governments "to assist in providing affordable housing opportunities to assure the health, safety, and welfare of all citizens in the State." 310 Ill. Comp. Stat. 67/5. Pursuant to the Act, the City established an affordable housing fund and passed Ordinance 139-0-05, the Demolition Tax. The stated purpose of the Demolition Tax is "to provide a source of funding for the creation, maintenance, and improvement of safe and decent affordable housing in the city of Evanston." EVANSTON, ILL. CODE § 4-22-1. Under the provisions of the Demolition Tax, any person granted a permit for demolition of a residential structure in Evanston must pay (in addition to the applicable permit fees) a "tax" of $10,000.00, or $3,000.00 per demolished unit of a multi-unit structure, whichever is greater. Id. § 4-22-3(A). The tax is due upon issuance of the demolition permit, and funds received by the City in fulfillment of the demolition tax are deposited directly into the City's affordable housing fund. Id.

Property owners can avoid paying the tax under various circumstances.*fn1 First, the applicant will not be liable for the demolition tax if he enters into an agreement with the City to provide affordable housing via the new structure or if the director of the City community development department determines that the new building will constitute affordable housing as defined by the City Code. Id. § 4-22-3(B). In addition, an applicant who has been the record titleholder and occupant of the property for at least three years can defer payment of the tax ("Tax Deferral Option"), though the City will retain a lien on the property in the amount owed. Id. § 4-22-4(A). If the owner who exercised the Tax Deferral Option continues to occupy the property for three consecutive years following the issuance of the final certificate of occupancy for the replacement structure, the City will release the lien without payment of the tax. Id. § 4- 22-4(B). Finally, under the City's "Stability Incentive," any property owner who has been the record titleholder and occupant for three years prior to application for a demolition permit and pays the Demolition Tax at the time of permit issuance can apply for a refund of the tax so long as he remains record titleholder and occupant for an additional three years. Id. § 4-22-5.

Plaintiffs own a parcel of land in the City that is improved with a residential dwelling unit. Plaintiffs wish to remove the existing structure and create a vacant lot.*fn2 Michael Kathrein presented his application for demolition to the City Clerk and asked whether the City would grant a demolition permit if the plaintiffs refused to pay the Demolition Tax.*fn3 The Clerk responded in the negative. Plaintiffs did not pay the Demolition Tax, not even under protest. Shortly thereafter, plaintiffs offered to sell their property to Eitan Ouzan. According to Ouzan's affidavit, the parties agreed orally to a cash sales price of $225,000.00. However, when plaintiffs informed Ouzan of the Demolition Tax, he demanded a $10,000.00 reduction. Plaintiffs refused, and the sale was not consummated. At no stage of the negotiation process was any offer or covenant memorialized in writing, including the purported sales agreement.

Plaintiffs then filed this suit claiming that: (1) the Demolition Tax violates their rights under the Fifth and Fourteenth Amendments to the U.S. constitution, the uniformity of taxation clause of the Illinois constitution and constitutes an inverse condemnation of their property; (2) the Demolition Tax is permit fee, not a tax; and (3) the Tax Injunction Act, 28 U.S.C. § 1341, is unconstitutional. Defendants move to dismiss the amended complaint for lack of subject matter jurisdiction, asserting that the Tax Injunction Act divests the Court of jurisdiction over plaintiffs' complaint and plaintiffs lack standing to challenge the Demolition Tax.


When raising a Rule 12(b)(1) challenge, a defendant may launch either a facial or factual attack on jurisdiction. Stroman Realty, Inc. v. Grillo, 438 F. Supp. 2d 929, 932 (N.D. Ill. 2006). In the former, a defendant contends that the allegations in the pleadings are insufficient on their face to support federal jurisdiction; in the latter, a defendant challenges the truth of the facts relied upon by the plaintiff in the complaint to allege that jurisdiction exists. Freiburger v. Emery Air Charter, 795 F. Supp. 253, 256 (N.D. Ill. 1992). When a defendant launches a facial attack, "allegations are taken as true and construed in a light most favorable to the complainant." Cedars-Sinai Med. Ctr. v. Watkins, 11 F.3d 1573, 1583 (Fed. Cir. 1993). Courts are not bound by the pleadings when confronted with factual attacks on jurisdiction and may look beyond the allegations to resolve factual disputes. Rennie v. Garrett, 896 F.2d 1057, 1057-58 (7th Cir. 1990); see Hay v. Ind. State Bd. of Tax Comm'rs, 312 F.3d 876, 879 (7th Cir. 2002). If the motion "denies or controverts the pleader's allegations of jurisdiction,... the movant is deemed to be challenging the factual basis for the court's subject matter jurisdiction." Cedars-Sinai Med. Ctr., 11 F.3d at 1583. When federal jurisdiction is challenged, the party seeking to invoke subject matter jurisdiction bears the burden of establishing it. DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3 (2006); see Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 104 (1998).

Defendants launch a two-pronged factual attack on jurisdiction, arguing that the Tax Injunction Act ("TIA") prevents the district court from exercising jurisdiction over this suit and that plaintiffs lack standing to pursue their challenges to the Demolition Tax.*fn4

A.Tax Injunction Act

The TIA provides that "district courts shall not enjoin, suspend or restrain 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. It functions as a "broad restriction on federal court jurisdiction over state and local tax matters," Collins Holding Corp. v. Jasper County, S.C., 123 F.3d 797, 799 (4th Cir. 1997), and courts interpret the language of the TIA broadly to prevent "taxpayers from running to federal court to stymie the collection of state taxes," Wright v. Pappas, 256 F.3d 635, 636 (7th Cir. 2001); see Collins Holding Corp., 123 F.3d at 799 n.2 (stating that the TIA to cases concerning state or local taxes that seek declaratory, monetary or injunctive relief). However, the TIA divests this Court of subject matter jurisdiction only if the Demolition Tax is, in fact, a tax not a fee, and the Illinois courts provide a "plain, speedy and efficient" remedy. Collins, 123 F.3d at 799.

Whether the Demolition Tax qualifies as a "tax" for the purposes of the TIA is determined by the Court, without regard to the label affixed to it by the City Council. See Ben Oehrleins & Sons & Daughter, Inc. v. Hennepin County, 115 F.3d 1372, 1382 (8th Cir. 1997); see also Diginet, Inc. v. Western Union ATS, Inc., 958 F.2d 1388, 1399 (7th Cir. 1992). To make that determination, the Court examines how the money is used and "why it is taken." Hager v. City of West Peoria, 84 F.3d 865, 870-71 (7th Cir. 1996); see Diginet, 958 F.2d at 1399 (stating that a fee is "a reasonable estimate of the cost imposed by the person required to pay [it]" while a tax does not just recover costs but "generate[s] revenues that the municipality can use to offset unrelated costs or confer unrelated benefits"). The use analysis asks "whether [the purported tax] provides a general benefit to the public... or... provides more narrow benefits to regulated companies or defrays the agency's cost of regulation." Hager, 84 F.3d at 870 (quotation omitted). The purpose analysis considers the language and legislative purpose of the ordinance and the facts underlying its passage. Id. at 871-72.*fn5

All of these considerations lead to the conclusion that the Demolition Tax is, indeed, a tax. The language of the ordinance, which requires all demolition permit applicants, even those who exercise the Tax Deferral Option, to pay both the tax and a permit fee, shows that the Demolition Tax was not meant merely to defray administrative costs. Moreover, though revenue from the Demolition Tax is "placed in a special fund and used only for special purposes," such segregated assessments "are 'taxes' under the TIA if expended to provide ...

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