Court Ruling Exposes Limitations of Church Audit Procedures Act

This ruling means churches cannot assume their records are immune to IRS summons, including those held by banks and other third parties.

Richard R. Hammar, Attorney, CPA

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State: Kansas
Categories: Tax Exemption

A federal district court in Kansas ruled that the protections of the Church Audit Procedures Act did not apply to an Internal Revenue Service (IRS) summons seeking access to a church’s financial records maintained by its bank.

The backstory

A church founded in 2009 by a married couple (the pastor and his spouse) “self-declares” as a church rather than filing an application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code (IRS Form 1023).

This church operates a thrift store that accepts donated goods and sells them to the public, and has a small space in its thrift store set up as a coffee shop.

In February 2021, the IRS assigned an agent to determine whether the church engaged in prohibited political campaign intervention, and if a “church tax inquiry” was warranted.

The assignment covered the period of January 1, 2019, through December 31, 2020.

In June2021, the Commissioner of the Tax Exempt and Government Entities Division approved the agent’s request to open an inquiry.

The agent issued a Notice of Church Tax Inquiry (“NCTI”) informing the church there were concerns the church:

was operating as a thrift shop, rather than as a church;
may have engaged in prohibited political campaign intervention in 2020;
may be liable for unrelated business income tax (“UBIT”) from the operation of a coffee shop in 2019 and 2020; and
may be liable for additional Form 941 employment taxes for wages paid to the founding couple in 2019 and 2020.

The NCTI included a list of questions for the church from the IRS, but it did not request any documents.

In July 2021, the church responded with answers to the questions, and it provided copies of various documents.

After reviewing the church’s response, the agent still had concerns about the church’s tax-exempt status as a church, possible liability for UBIT, and liability for additional taxes under the Internal Revenue Code.

The agent then sought and received approval to begin a church tax examination, which was approved by the Commissioner in September 2021. The agent issued a Notice of Church Tax Examination (“NCTE”) to the church on September 7, 2021. It informed the church that the IRS continued to have concerns. The NCTE also included, among other things, a description of the church records and activities that might need to be examined and an offer of a pre-examination conference.

On October 14, 2021, the agent and his group manager conducted a pre-examination conference with the church’s authorized representative. The pre-examination conference did not resolve the IRS’s concerns, so it notified the church’s representative that the IRS would be moving forward with the examination.

Later that month, the agent issued an Information Document Request (“IDR”) to the church seeking a number of things, including copies of the church’s bank statements from January 1, 2019, to December 31, 2020.

The church responded that the request was overly broad and objected to producing the bank statements.

In December 2021, the agent sent IRS Letter 3164-E to the church advising of the IRS’s intent to contact third parties during a contact period spanning January 22, 2022, to January 22, 2023, as part of the IRS’s examination. The letter informed the church of its right to request a list of people contacted.

On December 22, 2022, the agent sent a letter to the church indicating the documents requested in the IDR, including bank statements, were delinquent, and issued a second IDR seeking the church’s bank statements.

In February 2022, the agent issued a summons to the church’s bank seeking 14 separate categories of the bank’s records from all accounts in the church’s name for the period of January 1, 2019, through December 31, 2020. Specifically, the summons requested:

(1) Monthly statements;

(2) Deposit offsets (front and back);

(3) Deposit tickets;

(4) Cancelled checks (front and back);

(5) Signature cards;

(6) Debit and credit memos;

(7) Loan applications, including lines of credit, and all documents related to loan(s);

(8) Financial statements;

(9) Safe deposit box entry cards;

(10) Cashier’s checks and applications;

(11) Money orders;

(12) Foreign and domestic letters of credit and wires of funds along with related documents disclosing source of funds and, for wires of funds, the destination of the funds along with any related correspondence;

(13) Agency agreements and correspondence; and

(14) Closing transaction on the account (check, wire transfer, and so on, regardless of amount).

In March 2022, a representative of the church’s bank informed the agent that the bank had collected documents as directed by the summons, but those documents were being held pending resolution of the church’s petition to “quash” the summons (in other words, have it voided through a legal process).

General principles regarding IRS summons

Section 7602 of the tax code authorizes the IRS to summons a witness to testify and to produce books, papers, records, or other data that may be relevant or material to an investigation. Section 7602 also identifies the purposes for which the IRS may issue summonses. The purposes are:

To ascertain the correctness of any return;

To prepare a return where none has been made;

To determine the liability of a person for any internal revenue tax;

To determine the liability at law or in equity of a transferee or fiduciary of a person in respect of any internal revenue tax;

To collect any internal revenue tax liability; or,

To inquire into any offense (civil or criminal) connected with the administration or enforcement of the internal revenue laws.

Meanwhile, section 7609 of the tax code authorizes the IRS to issue a summons seeking specified records of a third party, such as a taxpayer’s bank.

The IRS explains: “A third-party summons is a summons directed to a person other than the person with respect to whose liability or return the summons is issued, or any officer or employee of such person.” (Internal Revenue Manual 25.5.6.3.1)

In issuing a summons, the IRS must act “in good faith.” The IRS demonstrates it issued a summons in good faith by establishing:

the investigation will be conducted pursuant to a legitimate purpose,

that the inquiry may be relevant to the purpose,

that the information sought is not already within the [IRS’s] possession, and

that the administrative steps required by the [Internal Revenue Code] have been followed—in particular, that the Secretary or his delegate, after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect.

These four requirements are known as the “Powell factors” (named after a federal appeals court decision that first articulated them).

The IRS can demonstrate good faith by submitting an affidavit from the investigating agent.

The taxpayer, however, has an opportunity to challenge that affidavit, and to urge the court to quash the summons “on any appropriate ground.” Grounds can include an improper purpose.

Impact of the Church Audit Procedures Act (Tax Code Section 7611)

The church argued that the Church Audit Procedures Act applied to the third-party record keeper summons that the IRS served upon its bank and placed limits on the IRS’s examination of the records sought by the summons.

Church tax inquiries

The Church Audit Procedures Act restricts the IRS when conducting church tax inquiries and church tax examinations. It provides, in pertinent part, that the IRS may begin a “church tax inquiry” only if it meets reasonable belief and notice requirements:

The reasonable belief requirement is met if “an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church–(A) may not be exempt, by reason of its status as a church, from tax or may be carrying on an unrelated trade or business … or otherwise engaged in activities subject to taxation … .”

The notice requirement is met if, before beginning such inquiry, the Secretary of the Treasury Department provides written notice to the church of the beginning of such inquiry, and an explanation of the concerns which gave rise to such inquiry, and the general subject matter of such inquiry, and a general explanation of the applicable administrative and constitutional provisions with respect to such inquiry (including the right to a conference with the Secretary before any examination of church records), and provisions of this title which authorize such inquiry or which may be otherwise involved in such inquiry.

Church tax examinations

A “church tax examination” is any examination, for purposes of making a church tax inquiry, of church records at the request of the IRS, or the religious activities of any church. The Church Audit Procedures Act restricts the IRS with respect to church tax examinations. It provides a church tax examination by the IRS may be made only:

in the case of church records, to the extent necessary to determine the liability for, and the amount of, any tax imposed, and
in the case of religious activities, to the extent necessary to determine whether an organization claiming to be a church is in fact a church for any period.

The Church Audit Procedures Act defines “church records” to mean “all corporate and financial records regularly kept by a church, including corporate minute books and lists of members and contributors.” And, it exempts from the definition of “church records” any records acquired pursuant to a third party summons. IRC 7611(h)(4)(B)(i).

Deciding the church’s request to quash

The court concluded that the third-party summons seeking the church’s banking and financial records “fell squarely” within this exception to the definition of church records, meaning that the church’s objection to the summons of its bank records was unfounded.

Enforcement of the IRS’s third-party summons to the church’s bank “is therefore governed by section 7609 through application of the Powell factors [see above] and is not subject to the additional restrictions on church tax examinations set forth in section 7611 of the Church Audit Procedures Act, notwithstanding the summons was issued in conjunction with a church tax inquiry and examination.”

Notably, “the plain language of [the Act] expressly excludes records obtained from third-party record keepers—such as banks—from the definition of ‘church records’.”

The tax regulations provide that “records held by a third-party record keeper bank are not ‘church records,’ and access to such records is permitted through a third-party summons under section 7609, without complying with the procedures in section 7611” pertaining to the Church Audit Procedure Act.

Therefore, the Internal Revenue Service may request a church to provide information necessary to locate third-party records (for instance, bank records), including information regarding the church’s chartered name, state and year of incorporation, and location of checking and savings accounts, without application of the procedures of section 7611. . . .

Records (for instance, cancelled checks or other records in the possession of a bank) held by third party record keepers, as defined in section 7609, are not considered church records. Thus, subject to the provisions set forth in section 7609 regarding third party summonses, access is permitted to such records without regard to the requirements of the procedures set forth in section 7611.

Having made this determination, the court then addressed whether the IRS had demonstrated that the summons was issued in good faith under the four-factor test articulated in Powell.

The first Powell factor requires that the IRS show “the investigation will be conducted pursuant to a legitimate purpose,” and the second Powell factor requires the IRS show “the inquiry may be relevant to the purpose.” The IRS asserted that the “books, papers, records, and other data sought by the summons may be relevant” to the following purposes:

Determine whether [the Church] was operating as a thrift shop rather than as a church or whether [the Church] may have unrelated business income and therefore may be liable for UBIT. Further, the information may be relevant to identify bank accounts used by [the Church]. Identifying bank accounts used by [the Church] in turn may also be relevant to determine whether [the Church] may have engaged in prohibited political campaign intervention in 2020, may have unrelated business income and therefore may be liable for UBIT from the operation of a coffee shop in 2019 and 2020, and may be liable for additional Form 941 employment taxes for wages paid to [the pastor and his wife] in 2019 and 2020.

The court concluded that “the IRS’s stated purposes … are clearly consistent with the IRS’s duty and authority to make the inquiries, determinations, and assessments of all taxes … imposed by [the Internal Revenue Code]. The IRS has satisfied its initial burden to show it is conducting its investigation pursuant to a legitimate purpose or purposes under the first Powell factor and the inquiry may be relevant to those purposes under the second Powell factor.”

The court found that the records sought by the IRS summons also satisfied the third and fourth Powell factors (the information sought by the IRS is not already within its possession, and the administrative steps required by the tax code have been followed).

What this means for churches

This case illustrates the authority of the IRS to seek records from third parties (including banks) pertaining to a church’s tax status and liabilities. This authority is not affected by the fact that a summons seeking third-party records was issued in conjunction with a church tax inquiry and examination.

The case also is helpful because it is one of the few federal court rulings to address the meaning and application of the Church Audit Procedures Act.

Church v. United States, 2022 WL 17830849 (D. Kan. 2022).

Legal Developments

Court Rejects Ministry’s Claim That It Is Exempt from All Taxes and Regulation

Attempts to become a “508(c)(1)(A)” church to avoid taxation and IRS scrutiny could have serious consequences.

Richard R. Hammar, Attorney, CPA

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State: California
Categories: Tax Exemption

A federal court in California rejected as “frivolous” a religious ministry’s claim that it was exempt from all taxes and regulation because it was a”508(c)(1)(A)” church.

Background

The Internal Revenue Service (IRS) issued a subpoena to a Christian ministry in California as part of its investigation into the activities of the ministry. The ministry attempted to quash the subpoena on the ground that the IRS has no authority to investigate an “unregistered Private Ministry/Church,” which it claimed was exempt not only from filing requirements and taxation, but also from IRS scrutiny or inquiry.

In support of its position, the ministry referenced section 508(c)(1)(A) of the federal tax code among other provisions, which it claimed prevents the IRS from inquiring into its finances.

Court: The religious organization is not “exempt from investigation”

A federal district court summarily rejected the ministry’s position. It noted:

[Section 508(c)(1)(A) of the federal tax code] merely exempts churches and certain other religious bodies from the necessity of applying for recognition of their exempt status under § 501(c)(3) and from requirements that they file tax returns. Nothing in [the] statute suggests that a bank’s financial records concerning the financial activity of a religious organization are exempt from investigation.

The court concluded:

The I.R.S. has broad investigative authority, including the authority to examine records or witnesses in order to determine whether tax liability exists or to make a return where none has been made.

In short, [the ministry’s] arguments have no basis in law, and are frivolous (italics added for emphasis).

What this means for churches

Some religious leaders claim that churches can avoid any taxes, regulation, or liability by reclassifying themselves as a “section 508(c)(1)(A)” church.

This is a flawed interpretation of federal tax law. The fact is, churches are automatically 501(c)(3) organizations. There is nothing they need to do to acquire this status. So, it is not clear how they would renounce their 501(c)(3) status.

A church theoretically could become a for-profit entity, but this would have destructive consequences, including:

The church’s net income would be subject to federal income taxation.
The church’s net income would be subject to income taxation in many states.
Donors no longer could deduct charitable contributions they make to the church.
The church would be ineligible to establish or maintain 403(b) tax-sheltered annuities.
The church could lose its property tax exemption under state law.
The church could lose its sales tax exemption under state law.
The church could lose its exemption from unemployment tax under state and federal law.
The church’s status under local zoning law may be affected.
The church could lose its preferential mailing rates.
The church could lose its exemption from registration of securities under state law.
Nondiscrimination rules pertaining to various fringe benefits would apply.
In some cases, a minister’s housing allowance may be affected.
In some cases, the exempt status of ministers who opted out of Social Security may be affected.
The significant protections available to a church under the Church Audit Procedures Act would not apply.
The exemption of the church under the state charitable solicitation laws may be affected.
The exemption of the church from the ban on religious discrimination under various federal and state employment discrimination laws may be affected.
The exemption of the church from the public accommodation provisions of the Americans with Disabilities Act (ADA) may be affected.

Clearly, any activity that jeopardizes a church’s exemption from federal income taxation is something that must be taken seriously. And churches should not pursue the dubious “section 508(c)(1)(A)” church status, which the federal court in this case considered “frivolous,” without the counsel of an experienced tax attorney or CPA. Steeves v. IRS, 2020 WL 5943543 (S.D.C. 2020).

Legal Developments

Court Ruled That a Virginia Law Exempting Church-Operated Childcare Facilities from State Licensing Did Not Violate the Nonestablishment of Religion Clause

A federal appeals court ruled that a Virginia law exempting church-operated childcare facilities from state

Richard R. Hammar, Attorney, CPA

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State: Federal
Categories: Freedom of Religion, Tax Exemption

A federal appeals court ruled that a Virginia law exempting church-operated childcare facilities from state licensing did not violate the constitution's nonestablishment of religion clause. The law was enacted in response to the contentions of several churches that their religious beliefs would not permit them to apply for or accept a state license to carry out a function that they considered to be an integral part of their religious ministry.

A group of childcare providers without religious affiliation challenged the law in court on the ground that it placed them at an unfair competitive disadvantage. The appeals court upheld the validity of the Virginia exemption largely on the basis of the United States Supreme Court's decision (in Amos v. Presiding Bishop) upholding the exemption of churches from the prohibition of religious-based discrimination in employment.

The court quoted from the Amos decision: "A law is not unconstitutional simply because it allows churches to advance religion, which is their very purpose. For a law to [violate the nonestablishment clause] it must be fair to say that the government itself has advanced religion through its own activities and influence." The Virginia law, concluded the appeals court, did not amount to an impermissible advancement of religion by the state. Rather, it was a permissible "accommodation of the exercise of religion."

The court, in rejecting the contention that a single exemption of church-operated facilities rendered the law invalid, again quoted from the Amos decision: "Where, as here, government acts with the proper purpose of lifting a regulation that burdens the exercise of religion, we see no need to require that the exemption comes packaged with benefits to secular entities."

The court also noted that "absent the exemption, some church leaders would immediately be forced to violate their convictions against submitting aspects of their ministries to state licensing, or face legal action by the state. This would be an unseemly clash of church and state which the legislature might well wish to avoid."

Finally, the court emphasized that the civil courts are not equipped to determine whether the operation of childcare facilities by a church is a secular or religious activity, and therefore they cannot reject a church's claim that such facilities promote its religious purposes. Forest Hills Early Learning Center v. Grace Baptist Church, 846 F.2d 260 (4th Cir. 1988)

Legal Developments

Court Ruled That a Salvation Army Thrift Store Was Not Exempt From State Property Taxation

An Illinois state appeals court ruled that a Salvation Army thrift store was not exempt

Richard R. Hammar, Attorney, CPA

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State: Illinois
Categories: Tax Exemption, Taxation - Church Property

An Illinois state appeals court ruled that a Salvation Army thrift store was not exempt from state property taxation under a state law exempting property used exclusively for religious or charitable purposes.

The court observed that "whether the thrift store is exempt depends solely upon whether the property is primarily used for charitable purposes." It concluded that the thrift store was not exempt, since the primary purpose of the store (according to the testimony of Salvation Army officers) was to generate income to fund adult rehabilitation activities. The fact that income "is ultimately put to charitable uses … does not entitle the property to a charitable use exemption, as it has long been held that the use to which property is devoted is decisive rather than the use to which the income derived from the property is employed."

The court distinguished an earlier Illinois appeals court decision upholding the tax-exempt status of a Catholic thrift store, on the ground that the primary purpose of the Catholic facility was "to provide means for persons to donate goods for the needy, and to allow for a networking or centralization of these activities. No profit was generated as a result of the thrift store's activities, and thus, generating income was not the primary goal of the thrift store."

Salvation Army v. Department of Revenue, 524 N.E.2d 628 (Ill. App. 2nd Dist. 1988)

Legal Developments

Court Struck Down a County “Occupational Tax” That Was Applied to a Catholic Priest

The Pennsylvania supreme court ruled that government may properly tax the income of a minister,

Richard R. Hammar, Attorney, CPA

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State: Pennsylvania
Categories: Income Taxes - Clergy, Tax Exemption

The Pennsylvania supreme court ruled that government may properly tax the income of a minister, but it may not tax the occupation of a minister. The court relied in part on the following language in a 1943 ruling of the United States Supreme Court: "It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax from him for the privilege of delivering a sermon …. A state may not impose a charge for the enjoyment of a right granted by the federal constitution."

Stajkowski v. Carbon County Board of Tax Assessment, 541 A.2d 1384 (Pa. 1988)

Legal Developments

Court Ruled That an Undeveloped Tract of Church-Owned Property Was Exempt from Property Taxation

The Tax Court of Indiana ruled that an undeveloped tract of church-owned property was exempt

Richard R. Hammar, Attorney, CPA

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State: Indiana
Categories: Tax Exemption, Taxation - Church Property

The Tax Court of Indiana ruled that an undeveloped tract of church-owned property was exempt from property taxation under Indiana law.

The land had been purchased by the church under a "land sales contract" providing for the transfer of title to the church only after payment of the full purchase price over a term of two years. The church claimed that the property was exempt from taxation under a state law exempting "land … purchased for the purpose of erecting a building which is to be owned, occupied, and used" for exempt purposes.

The state board of tax commissioners rejected the church's claim of exemption, arguing that the church could not be considered to have "purchased" property that it held under a land sales contract. The tax court upheld the church's claim of exemption, noting that the church planned to erect a new sanctuary on the property and that it satisfied the definition of a "purchaser" when it entered into the land sales contract.

Community Christian Church, Inc. v. Board of Tax Commissioners, 523 N.E.2d 462 (Ind. T.C. 1988)

Legal Developments

Court Upheld the Property Tax Exemption of “Young Life” on the Ground That Its Property Is Owned and Used Solely for Religious Worship

A Colorado state appeals court upheld the property tax exemption of "Young Life" on the

Richard R. Hammar, Attorney, CPA

Bio

State: Colorado
Categories: Church Property, Tax Exemption

A Colorado state appeals court upheld the property tax exemption of "Young Life" on the ground that its property is owned and used solely for religious worship and not for private or corporate profit.

The court also ruled that the state property tax administrator was without standing, under Colorado law, to challenge the decision of the state board of assessment appeals recognizing the exempt status of the property in question. Maurer v. Young Life, 751 P.2d 653 (Colo. App. 1988)

Legal Developments

Court Ruled That an Apartment Building Operated by a Lutheran Agency Was Exempt From Property Taxation

A Pennsylania state appeals court ruled that a 96-unit apartment building located on a 40-acre

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Church Property, Tax Exemption, Taxation - Church Property

A Pennsylania state appeals court ruled that a 96-unit apartment building located on a 40-acre retirement community operated by an agency of the Lutheran Church in America was exempt from property taxation.

The court concluded that the apartments qualified for exemption under a state law exempting "institutions of benevolence or charity … founded, endowed, and maintained by public or private charity," since the facility "charges monthly apartment fees that are by no means exorbitant and that are below actual operating cost; it does not request or receive financial information from apartment applicants before admission, and it routinely grants exonerations from payment of a portion of the monthly fee to residents who later demonstrate financial need."

However, the court ruled that 81 cottage units located on the same property were not exempt since the cottage operation consistently realized a substantial profit, and only a few residents were receiving a subsidy on the payment of fees. Appeal of Lutheran Social Services, 539 A.2d 895 (Pa. Common. 1988)

Legal Developments

Court Ruled That a Nursing Home Operated by the Baptist Health Care Corporation Was Exempt from Real Estate Taxes

In a property tax case, the Oklahoma Supreme Court ruled that a nursing home operated

Richard R. Hammar, Attorney, CPA

Bio

State: Oklahoma
Categories: Tax Exemption

In a property tax case, the Oklahoma Supreme Court ruled that a nursing home operated by the Baptist Health Care Corporation was exempt from county real estate taxes. The facility was built and is operated as a statewide ministry to the elderly. Revenues from residents do not cover expenses incurred in operating the facility, and contributions from Baptist churches are used to cover the deficit.

The court applied a 7-part test in determining whether a retirement facility qualifies for property tax exemption as a charitable institution: (1) whether rent receipts are applied to upkeep, maintenance and equipment of the institution or are otherwise applied; (2) whether residents receive the same treatment regardless of their ability to pay; (3) whether the facilities are open to all, regardless of their ability to pay; (3) whether the facilities are open to all, regardless of race, creed, color, religion or ability to pay; (4) whether charges are made to all patients and, if made, are lesser charges made to the poor or are any charges made to the indigent; (5) whether there is a charitable trust fund created by benevolent and charitably minded persons for the needy or are donations made for the use of such persons; (6) whether the institution operated without a profit or private advantage to its founders and officials in charge; (7) whether the articles or bylaws of the corporation make provision for the disposition of surplus assets upon dissolution.

The court concluded that the facility in question met all seven criteria, and accordingly was exempt. Baptist Health Care Corporation v. Okmulgee County Board of Equalization, 750 P.2d 127 (Okla. 1988)

Legal Developments

Court Addressed Religious Organization’s Eligibility for Exemption from State Sales Taxes

The Arkansas Supreme Court addressed the issue of a religious organization's eligibility for exemption from

Richard R. Hammar, Attorney, CPA

Bio

State: Arkansas
Categories: Tax Exemption

The Arkansas Supreme Court addressed the issue of a religious organization's eligibility for exemption from state sales taxes. A religious organization operated a variety of retail businesses, including a restaurant, grocery store, two service stations, a clothing store, and an auto repair shop. Members of the organization performed services for these businesses without compensation other than the receipt of food, shelter, and clothing at no cost.

A state agency determined that the organization's provision of food and clothing to its members, in exchange for their services, constituted "sales" subject to the state sales tax. A trial court upheld the assessment of the sales tax, and the organization appealed.

The state supreme court agreed that the transfers of food and clothing were sales subject to tax, since they were "transfers for valuable consideration." The court rejected the organization's argument that its constitutional right of religious freedom was being abridged, since "religious organizations entering the commercial and secular world necessarily do so with the understanding that they no longer enjoy the constitutional protections afforded religious organizations.

There are no shields once they cross the line that separates church and state. They are no longer considered a church or religious organization, because they are not acting like one …. The [organization] elected to operate retail businesses for profit and, having made that choice, it must abide by the same rules under which all secular businesses operate, including taxation." This reasoning is clearly flawed, since churches and religious organizations are perfectly free to engage in commercial endeavors without "loss of the constitutional protections afforded religious organizations"—so long as those endeavors are insubstantial.

The Internal Revenue Code recognizes this principle by preserving the exempt status of churches that are engaged in insubstantial commercial activities, while at the same time subjecting some of those activities to the tax on unrelated business income. To say that such churches have ceased to be churches, or that they have lost the constitutional protections afforded religious organizations, is incorrect. Tony & Susan Alamo Foundation v. Ragland, 746 S.W.2d 45 (Ark. 1988)

Legal Developments

Court Upheld State’s Position, Rejecting Church’s Contention That Each Exempt Building Was Entitled to an Exemption of 50 Acres of Land

An Indiana court addressed the issue of the exemption of church camps from real estate

Richard R. Hammar, Attorney, CPA

Bio

State: Indiana
Categories: Church Property, Tax Exemption, Taxation - Church Property

An Indiana court addressed the issue of the exemption of church camps from real estate taxes. The camp in question, which is owned and operated by the Indiana Association of Seventh Day Adventists, consists of 175 acres containing a staff lodge, 14 sleeping cabins, a dining hall, an assembly hall, a craft building, and a caretaker's house. It is used primarily as a summer church camp, a retreat, and a weekend meeting place for teachers, ministers, and other church personnel.

Prior to 1983, all of the camp's real estate and improvements were exempt from taxation. In 1983, however, the state denied the exemption for the caretaker's house and all land in excess of 50 acres, relying in part on the wording of the exemption statute which exempts a tract of land if a building situated on the property is exempt and if "the tract does not exceed 50 acres."

The court upheld the state's position, rejecting the church's contention that each exempt building was entitled to an exemption of 50 acres of land. It defined a "tract" as "any area of land that is under common ownership and is contained within a continuous border." Finally, the court rejected the church's claim that the exemption statute unconstitutionally exempted the property of certain organizations (e.g., YMCA, YWCA, Salvation Army, Boy Scouts, Girl Scouts) from property taxation without any acreage limitation, while imposing the acreage limitation on other organizations. Indiana Association of Seventh Day Adventists v. State Board of Tax Commissioners, 519 N.E.2d 772 (Ind. Tax Court 1988)

Legal Developments

Court Ruled That a Vacant Property Owned by a Religious Organization Did Not Qualify for Exemption from Real Estate Taxes

Does property vacated but still owned by a religious organization continue to qualify for exemption

Richard R. Hammar, Attorney, CPA

Bio

State: Wisconsin
Categories: Church Property, Tax Exemption

Does property vacated but still owned by a religious organization continue to qualify for exemption from real estate taxes under a Wisconsin law exempting "property owned and used exclusively by … a religious association"? No, concluded a state appeals court.

A Catholic order operated a convent on the property from 1953 through 1983, when it moved its members to new facilities in another state. The Wisconsin property was listed for sale, but did not sell for two years. A local tax assessor, finding the property to be vacant and listed for sale, determined that it was not exempt from real estate taxes for 1984 or 1985.

The Catholic order argued that the property continued to qualify for exemption even after it was vacated, since (1) it stored some maintenance tools and lawn implements there; (2) it retained a groundskeeper to maintain the property; (3) it had the property listed for sale; and (4) it maintained a mortgage on the property and used some of the proceeds to acquire its new quarters in another state.

The appeals court, in denying the order's claim of exemption, emphasized that the state law exempted only property owned and used exclusively by a religious association. "Exclusive use," observed the court, means the "physical use of the property" in connection with the "regular activities" of a religious organization. The mere maintenance and repair of the vacated property, and listing it for sale, did not amount to an "exclusive use" of the property by the order, since the property "was not being used for any of the order's regular activities or benevolent purposes." The Dominican Nuns v. City of LaCrosse, 419 N.W.2d 270 (Wisc. App. 1987)

Legal Developments

Apartment Building Owned by Missions Organization Was Exempt from Property Taxation

Church Property

Richard R. Hammar, Attorney, CPA

Bio

State: Illinois
Categories: Church Property, Tax Exemption

An Illinois state appeals court ruled that a three-story, 16-unit apartment building owned by a missions organization and rented to missionaries temporarily home on furlough was exempt from property taxation under a state law exempting "all property used exclusively for religious purposes … including all property owned by churches or religious institutions or denominations and used in conjunction therewith as parsonages or other housing facilities provided for ministers …." Evangelical Alliance Mission v. Department of Revenue, 517 N.E.2d 1178 (Ill. App. 1987)

Legal Developments

Court Ruled Church-Operated Nursing Home Was Exempt from Property Taxation

Can a church-operated nursing home be exempt from property taxation? Yes, concluded a Texas appeals

Richard R. Hammar, Attorney, CPA

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State: Texas
Categories: Church Property, Tax Exemption

Can a church-operated nursing home be exempt from property taxation? Yes, concluded a Texas appeals court.

The nursing facility, which was operated by a Christian Science church as part of its religious and charitable purposes, admitted persons without regard to their religious faith. However, all patients had to agree to rely entirely upon the Christian Science method of healing (the sole method practiced at the facility), and all were expected and encouraged to study Christian Science literature.

The facility charged a fee for its services, but did not turn away patients unable to pay. Its total operating revenue generally was well below its operating expenses. Such facts, concluded the court, clearly established the facility's exemption under a state law exempting from property taxation any facility organized exclusively for religious or charitable purposes that was engaged exclusively in providing support or housing to elderly persons without regard to their ability to pay.

The court rejected the state's contention that the facility's discrimination against non-Christian Scientists prevented its property from being exempt from taxation: "As long as a nursing home provides care to persons who would otherwise become burdens upon the state, it meets the requirement that its services benefit the general public, regardless of the religious motivations of its operators." Dallas County Appraisal District v. The Leaves, Inc., 742 S.W.2d 424 (Tex. App. 1987)

Legal Developments

Court Ruled Church-Owned Apartment Building Used as Subsidized Housing for Elderly and Handicapped Tenants Was Exempt from Property Tax

The Missouri Supreme Court ruled that a church-owned apartment building used as subsidized housing for

Richard R. Hammar, Attorney, CPA

Bio

State: Missouri
Categories: Church Property, Tax Exemption

The Missouri Supreme Court ruled that a church-owned apartment building used as subsidized housing for elderly and handicapped tenants was exempt from property taxation under a state law exempting property "actually and regularly used exclusively for purposes purely charitable and not held for private or corporate profit." Pentecostal Church of God v. Hughlett, 737 S.W.2d 728 (Mo. 1987)

Legal Developments

Court Ruled Church’s Unimproved Lot Was Exempt from Real Estate Taxes

A Florida state court ruled that a church-owned unimproved lot was exempt from real estate

Richard R. Hammar, Attorney, CPA

Bio

State: Florida
Categories: Church Property, Tax Exemption

A Florida state court ruled that a church-owned unimproved lot was exempt from real estate taxes.

The court observed that "while the land was substantially vacant and unimproved and was not used by the church continuously, nevertheless, the land was being actually and presently used by the church for religious purposes sporadically and improvements and greater physical use were planned.

The church's present religious use of the property, while not evidenced by improvements and not continuous, was exclusive of any other use and was not incidental to any nonexempt use." Hausman v. First Baptist Church, 513 So.2d 767 (Fla. App. 1987)

Legal Developments

Court Rejected Truck Driver’s Claim that His Earnings Were Exempt Because He Was a Church

A federal district court in Pennsylvania rejected a truck driver's contention that his earnings were

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Tax Exemption

A federal district court in Pennsylvania rejected a truck driver's contention that his earnings were exempt from federal taxes because he was a church.

The taxpayer had established a church (that had been denied tax-exempt status by the IRS), and signed a vow of poverty which provided "I hereby make an irrevocable gift of all my possessions … and all my income whatsoever, regardless of the form of the income, to the church. Outside employment income is not personal income, but rather gift income to the church, and not of the individual."

The taxpayer established a checking account in the church's name into which all his secular earnings were deposited. Checks thereafter were drawn on the church account to pay for the personal expenses of the taxpayer. No taxable income was reported and no tax returns were filed.

In rejecting the taxpayer's claim, the court reaffirmed the "basic rule of tax law that an assignment of income by a taxpayer of compensation for services is ineffectual to relieve the taxpayer of tax liability regardless of the motivation behind the assignment." In addition, the alleged "vow of poverty" did not relieve the taxpayer of tax liability since "the manner in which he conducted his financial affairs was the same as it was before he was ordained."

The court also rejected the taxpayer's argument that subjecting him to income taxes violated his right to exercise his religion. The taxpayer, noted the court, was still free to operate his church and deposit his secular earnings in the church account. He simply could not avoid taxes through such a scheme. The court found the taxpayer guilty of three counts of income tax evasion. U.S. v. Washington, 672 F. Supp. 167 (M.D. Pa. 1987)

Legal Developments

Court Ruled building Owned by Franciscan Friars Used as Missionary Headquarters Qualified for Property Tax Exemption

Does a building owned by the Order of Franciscan Friars and used as a missionary

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Church Property, Tax Exemption

Does a building owned by the Order of Franciscan Friars and used as a missionary headquarters qualify for a property tax exemption under Pennsylvania law? Yes, concluded a Pennsylvania state court.

Noting that Pennsylvania law exempts from tax all properties used for purely charitable purposes, the court concluded that a building used as a missionary headquarters is charitable in nature. It defined "charity" to include an organization "designed to benefit an indefinite number of people from a religious standpoint" even though the organization performs no "non-religious charitable work."

This conclusion was not affected by the fact that eight priests used the property as a residence, since "the provision of living quarters is not inconsistent with a purely public charity." Order of Franciscan Fathers v. Board of Property Assessment, 534 A.2d 568 (Pa. Common. 1987)

Legal Developments

Court Ruled Land Owned by a Synagogue Was Exempt from Real Estate Taxes

In a significant decision, the Supreme Court of Ohio ruled that a three-acre tract of

Richard R. Hammar, Attorney, CPA

Bio

State: Ohio
Categories: Tax Exemption, Taxation - Church Property

In a significant decision, the Supreme Court of Ohio ruled that a three-acre tract of undeveloped land owned by a synagogue and located on its premises was properly exempt from real estate taxes. Ohio law exempts "houses used exclusively for religious worship … and the grounds attached to such buildings necessary for the proper occupancy, use, and enjoyment thereof, and not leased or otherwise used with a view to profit."

The synagogue in question owned fourteen acres, eleven of which consisted of the synagogue building, a parking lot, and a landscaped lawn area. The additional three acres were a largely undeveloped "grove of trees." The tax commissioner ruled that the three acres tract was not exempt from real estate taxes since it was "not necessary for the proper occupancy, use and enjoyment of the synagogue."

This determination was reversed by the state board of tax appeals, and an appeal was taken to the Ohio Supreme Court. The court, in upholding the exemption, observed that "the land added aesthetic qualities to the existing site. It also served as a sound barrier as well as providing a wooded backdrop for outdoor services and congregational activities." The court added that "for outdoor services to be appreciated, it is certainly important to hear them." Accordingly, the use of a grove of trees "as a sound barrier to the noise of traffic travelling by the property" was a necessary means of enabling the congregation to enjoy its property.

While property tax exemptions vary from state to state, an important lesson can be learned from this ruling—churches owning undeveloped tracts of land can enhance (although not guarantee) the exempt status of such property by integrating it into the church's activities. The congregation in the Ohio case used its land as a sound barrier. Other examples of functional use would be sporting activities, outdoor services, parking, and youth activities. Congregation Brith Emeth v. Limbach, 514 N.E.2d 874 (Ohio 1987)

Legal Developments

Scripture Union Not Exempt from State Real Estate Taxes

Church Property

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Tax Exemption

A Pennsylvania state court ruled that Scripture Union was not exempt from state real estate taxes.

Scripture Union is a non-profit organization that distributes bi-monthly publications including a daily guided reading program and commentary on the scriptures. It is not associated with any organized religion. The court concluded that the organization was not eligible for exemption under a state law exempting "purely public charities," since there was no evidence that it provided any of its services gratuitously. Scripture Union v. Deith, 531 A.2d 64 (Pa. Cmwlth. 1987)