Clerical Errors Cost Church Its Tax Exemption

As this Oregon case shows, even the smallest clerical errors can derail a church’s tax status.

Key point. Clerical errors can derail a church’s tax exemption and application and since most states do not automatically exempt from churches from property taxation, an error-free and timely application is crucial for getting and keeping that tax-free status.

Summary: The Oregon Tax Court ruled that a church’s property did not qualify for exemption from tax because of defects in the church’s application for exemption.

Church had two chances to retain tax exemption

A church failed to timely respond to a county tax assessor’s multiple, written requests for information related to the church’s March 2020 application for a property tax exemption on its leased space.

After sending two letters regarding the incomplete application, the tax assessor sent another letter on November 24, 2020, asking the church:

  • To clarify the years for which the application was being sought.
  • To provide square footage of the church’s lease.
  • To provide a contact email address for the church.

The assessor gave the church a final deadline of December 9, 2020, to respond. The church failed to do so, and the county denied the church’s application on December 22, 2020.

The church appealed the denial to the Oregon Tax Court, claiming that church services, postal mail activities, and email communications all were affected by the COVID-19 pandemic during 2020.



Clerical errors derailed the process

The Oregon Tax Court began its opinion by recognizing the exemption from property taxation available to religious organizations in the state. The court also noted the application process a religious organization must follow to receive an exemption.

The court then noted that properties that are leased can be eligible for an exemption if certain requirements are met:

The application for exemption must provide … a complete description of the property claimed exempt; facts regarding the use of the property proving exempt purposes; a copy of the lease; and “any other information required by the claim form.” The claim form asks the question ‘is any portion of the property you lease used by others?” Next, the form asks, “if yes, what is the square footage of the area used by others?” Only the portion of the property which is “exclusively occupied and used” for an exempt purpose is eligible for exemption. … A county may request additional documentation or information if a taxpayer’s application is incomplete (emphasis added).

Clerical errors could have been ‘easily fixed’

The court concluded:

The court understands the hardships surrounding COVID-19 during 2020.

Employees in many businesses, as well as this court and many county offices, were limited in working from the office during 2020.

This likely was the cause of the county’s delay in asking the church for more information.

However [the pastor] received actual notice of the county’s request for information to correct the application’s defects in November 2020 … . The application could have been easily fixed, but for unknown reasons, the church did not do so.



Even still, the church could have filed a late application for exemption until December 31, 2020, and did not do so. The result here is unfortunate, but it is correct under the law… (emphasis added).

[The pastor] filed a timely application for a property tax exemption. The application was defective, and the county gave proper notice of the defects and requested [the church] to provide missing information. The church did not provide the missing information, and thus the county was correct in denying the exemption for the 2020-21 tax year.

What this means for churches

There are many reasons why church property may not qualify for exemption under state law, including:

  • Failure to file an application. State law requires churches to file an application for exemption. Churches should not assume they are automatically exempt.
  • Defects in a church’s application for exemption.
  • A church’s property does not satisfy all the conditions for exemption.
  • A church lost its property tax exemption because of commercial or rental activities.
  • Failure to renew the exemption if required by state law.

Church leaders should not assume that church property is exempt from tax, but instead should periodically confirm the exemption. This is a simple task that can be performed in a few minutes online.

Bible Believers Church v. Washington County Assessor, 2022 WL 1447388 (Or. App. 2022).

Church Property Held in New Jersey Bishop’s Name Still Tax-Exempt

Church’s constitution and bylaws played a key role in court’s decision.

Key point. Church property generally must be held in the name of the church for it to qualify for exemption from taxation. However, in some cases, this requirement is not applied if there are sufficient safeguards recognizing the church’s ownership of the property.

A New Jersey court ruled that a church’s property was exempt from taxation even though the title to the property was held in the name of the bishop rather than the church.

Church’s governing documents explain property ownership

A church (the “Church”) in Camden City, New Jersey, was first incorporated on June 20, 1927. In 1964, the Internal Revenue Service (the “IRS”) recognized the Church as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code.

In its articles of incorporation, the Church’s stated purpose is to “establish, maintain and perpetuate the doctrine of Christianity and the Apostolic Faith throughout the world among all people, to erect and maintain houses of prayer and worship where all people may gather for prayer and to worship the Almighty God in Spirit and in Truth, irrespective of denomination or creed, and to maintain the Apostolic Faith of the Lord and Savior, Jesus Christ.”

Tip: The 2023 Church and Clergy Tax Guide is out. If you’re an Advantage Member, there’s nothing to do – it’ll come to you. If you’re not, visit Church Law & Tax’s store to pick up your guide (available in hard copy or .pdf) today.

The Church’s constitution and bylaws were originally adopted on July 1, 1929, and were amended from time to time.

Article VII, Section 5, of the church’s constitution and bylaws provides that, “the Bishop shall hold the property of all of the congregations of the organization as Trustee for the use and benefit of such congregations. The Bishop may rent, lease, dispose of or retain such property, for the use and benefit of the organization.”

Further, Article XI, Section 1 provides that “property purchased by any minister or other persons belonging to this organization for the purpose of assembly of a congregation of this organization shall belong to this organization irrespective of in whose name title thereto is taken.

The Church acquired property (the “Property”) in 1969. The deed by which title was obtained stated that the grantee was the bishop (“Bishop 1”).

In 1992, a deed for the Property was executed by another bishop (“Bishop 2”). This deed, recorded with the Clerk of Camden County, was intended to reflect the succession of Bishop 2 to the leadership of the Church.

In 1993, a deed transferring title from Bishop 2 to “his successor Trustees” was executed and recorded in the Camden County Clerk’s records. This deed was recorded to eliminate the need to record new deeds each time a new bishop was elected.

After falling into disrepair, use of the Property for church purposes was discontinued for some time. During the years of nonuse, the Property was not exempt from real property tax.

Local assessor: no exemption allowed

In 2019, the Church began renovating and rededicating the Property. It reopened in June of 2020.

Church operations have been conducted there ever since. It is used exclusively for church purposes. No one lives there and it is not rented to any third parties.

In late September of 2020, the Church submitted an application seeking exempt status for the Property.

The local assessor denied the exemption, telling the Church in January of 2021 that:

The deed [to the Property] dated 8-3-1992 lists the ownership as (Bishop 2), Successor Trustee, for (the Church). Based on the ownership listed in this 1992 deed the Property does not meet the eligibility requirement for the tax exemption. The Bishop is not permitted to have an ownership interest in the property.

The Church appealed the denial to the Camden County Board of Taxation, which affirmed the assessor’s denial.

Church turns to court for help

On August 12, 2021, the Church filed a complaint with the local circuit court appealing the judgment of the Camden County Board of Taxation. The court noted that the issue before it was “whether the manner in which title is held bars a property tax exemption for the Property.”

The court began its opinion by noting that to establish a right to an exemption a property owner “must show that: (1) it is organized exclusively for a charitable purpose; (2) its property is actually used for such a charitable purpose; and (3) its use and operation of the property is not for profit.”

The court added that:

a state statute stipulates that this exemption applies only “where the association, corporation or institution claiming the exemption owns the property in question and is incorporated or organized under the laws of this State and authorized to carry out the purposes on account of which the exemption is claimed.”

The assessor conceded that the Church met the second and third elements, but claimed that ownership of the Property by “(Bishop 2), Trustee and his successor Trustees, as Trustee for (the Church)” is not ownership by an “exempt organization organized exclusively for a charitable purpose” and that Church fails to satisfy the exemption statute (quoted above) that specifies that the exemption applies only “where the association, corporation or institution claiming the exemption owns the property in question.”

The Church insisted that the Property was exempt since the Church’s constitution and bylaws specified that “property purchased by any minister or other persons belonging to this organization for the purpose of assembly of a congregation of this organization shall belong to this organization irrespective of in whose name title thereto is taken.

The court agreed with the Church and ruled that the property was exempt from taxation.

What this means for churches

Church property generally must be held in the name of the church in order for it to qualify for exemption from taxation. However, in some cases, this requirement is not applied if there are sufficient safeguards in a church’s governing documents recognizing the church as the de facto owner of the property.

United House of Prayer v. Camden City, 2022 WL 1492867 (N.J. App. 2022)

Court Sides with Church in Tax Delinquency Case

But the case underscores the importance of knowing—and abiding by—state-specific tax exemption laws

Key point. In some states, exemption of church property from taxation is automatic and there is nothing that a church is required to do for the exemption to apply. In other states, however, the exemption is not automatic, and churches are required to formally apply for and receive notice of exemption from a government agency.

The Virginia Supreme Court ruled that a church’s property was exempt from taxation even though the church never filed an application for exemption.

A six-figure city tax bill

In August 2018, the City of Petersburg (“the City”) brought a complaint against a church (the “Church”) and its trustees for delinquent property taxes. The City asked the court to authorize a sale of the church property to pay the delinquent taxes. The trial court found that, as of April 15, 2019, the Church owed the City $114,059 in delinquent real estate taxes due through June 30, 2015, plus penalties and interest through April 15, 2019.

On appeal to the Virginia Supreme Court, the Church argued that it was exempt from paying real estate taxes under Article X of the Constitution of Virginia because the property at issue was owned and used exclusively for religious purposes. The Church claimed that this tax exemption was self-executing and therefore the church was not required to apply for exemption.

The City claimed that the property was not “automatically exempted” from taxation. Rather, the Church was required to apply to the city assessor for a determination regarding whether it was entitled to an exemption.

The court noted that Article X of the Constitution of Virginia provides that “property owned and exclusively occupied or used by churches or religious bodies for religious worship” shall be exempt from state or local taxation. The court agreed with the Church that “any properties used for religious worship in the City that qualified for tax-exempt status under Article X . . . were automatically exempt from taxation during the years in question.”

City claims church raised challenges too late

The City argued that even if the Church property was exempt from taxation, the Church failed to challenge the tax assessment within the three-year limitations period provided by state law.

The Court disagreed:

[The Church] does not dispute that more than three years have passed since the assessments in question were issued. Under Virginia Code § 58.1-3984, the Church would be barred by the three-year statute of limitations from bringing an action against the City to challenge the validity of the assessments. However, the Church’s inability to initiate a legal challenge under this statute does not end the inquiry. Despite the City’s argument to the contrary, just because the Church can no longer initiate a lawsuit against the City does not mean it cannot raise the self-executing tax exemption as a defense to the City’s attempt to sell the property in a tax sale.

City looks to tax “learning annex” on church property

The City claimed that a “learning annex” on the Church’s property did not qualify for exemption from taxation since it was not used for worship. The court disagreed, concluding that the exemption in question extended to “property used for ancillary and accessory purposes” that “support[s] or augments the principal religious worship use . …”

What this means for churches

This case is important for two reasons.

1. Property tax exemptions. It demonstrates the importance of being familiar with any conditions that must be met in order for church property to be exempt from taxation.

In some states, exemptions of church property are automatic. But in many states a church must apply for and receive recognition of exemption—and a failure to do so can result in unexpected tax liability. Note the following important points:

Church leaders should pay special attention to property tax exemption requirements when purchasing a building or land, even from another church or charity. Here are some important tips:

  • Church leaders should contact the local assessor’s office to determine if property tax exemptions for churches are automatic or if formal application for exemption is required.
  • When purchasing property, be sure your church’s mailing address is correctly listed on the deed, since this is the address typically used by the assessor’s office. Also take the extra step of confirming the assessor’s office has the church’s correct address.

And perhaps just as importantly, be sure the assessor’s office has the correct name of the church. It is common for churches to change their name from time to time, and this can result in confusion when important notices are received at the church’s correct address, but to an addressee whose name is unfamiliar to the person opening mail in the church office.

  • If you do not hear from the assessor’s office within a reasonable time after acquiring property, this may indicate a problem with the property’s tax exemption that should be addressed promptly.
  • Find out what requirements must be met in order for newly acquired church property to become exempt from property taxes. Go to the assessor’s office and obtain the necessary forms.
  • Periodically contact the assessor’s office to confirm the exempt status of church property as well as the church’s name and address.
  • The services of an attorney can be helpful in obtaining and maintaining a church’s exemption from property taxes.

2. Ancillary uses. In most states, a church’s property tax exemption extends to “ancillary uses” of property that are necessary for a church to engage in exempt activities. As an example, church parking lots typically are exempt from taxation though little, if any, religious worship is conducted in the parking lot.

Emmanuel Worship Center v. City of Petersburg, 867 S.E.2d 291 (Va. 2022).

Church Forced to Pay Taxes for Converted Building Due to Assessment Date

The tax-exempt status of church property generally is determined by the actual use of the property on the “tax assessment” date.

Key point. The tax-exempt status of church property generally is determined by the actual use of the property on the “tax assessment” date.

A New Jersey court ruled that a commercial building purchased by a church as the site of a new sanctuary was not entitled to exemption from property taxation since the property was in the process of being renovated on the tax assessment date.

A church and parking lot were exempt from local property tax. However, as the congregation grew, it sought opportunities to expand its facilities. In September 2009, the church purchased property (the “adjoining property”). Prior to the sale, the adjoining property was improved with a commercial warehouse.

Sometime between 2009 and 2012, the church filed an application for local property tax exemption for the adjoining property. The city denied the application, and the church did not appeal the denial.

The church claimed that from 2009 through 2011, it used the property in furtherance of its work, including an “extension of its regular religious activities,” including for “ceremonial activities, religious services during mild weather months, youth rallies, women’s rallies, fundraising activities, fairs and storage of various items associated with church functions.”

Beginning in late 2011, the church began a series of significant renovations and improvements to the property to convert it from a commercial warehouse into a large sanctuary, offices, and meeting space. Building permits were issued for the interior construction and renovation, including building, framing, electrical, plumbing, mechanical (installation of heating, ventilation, and air conditioning systems), and installation of fire protection apparatus. Soon thereafter, construction of the renovations and improvements to the subject property began.

In 2012, the church applied for local property tax exemption for the adjacent property for the 2013 tax year. The city denied the application. The plaintiff appealed the denial, as well as the reasonableness of the 2013 tax year assessment of $213,000.

The church asked a court to rule that the property was exempt from local property tax for 2013. The New Jersey Tax Court began its opinion by noting that “in addressing a tax exemption based on construction of a new building for a property not previously tax-exempt, the courts have principally focused on whether as of the assessing date, the property was in actual use, or was a fully functional establishment prepared to offer its charitable services to the public … . Stated differently, the inquiry is whether the property was, as of the assessing date, a fully operating institution, ready and waiting to expend its charitable endeavors on those who might apply for them.” The court noted:

As of the October 1, 2012 assessing date, plaintiff was making limited use of the partially renovated structure on the subject property by conducting daily 20-minute morning prayer services. However, these prayer services were incidental to the prayer services, offered by the church, in its adjacent building, and were limited to church members, who were part of the construction team, offering inspirational blessings as they began their workday to renovate the subject property. These prayer services were not available to the public and do not constitute actual use, as contemplated under [the exemption] … .

Moreover, the church’s minister readily acknowledged that “formal religious services commenced around the time of Thanksgiving 2012,” some six to seven weeks after the October 1, 2012 assessing date. Significantly, a temporary certificate of occupancy, lawfully permitting the subject property to be occupied and used by the public for its intended religious purpose, was not issued until April 15, 2013, some six months after the assessing date. The record before the court further discloses that construction on the subject property continued after the October 1, 2012 assessing date, with interior finish work being performed, and building construction code inspections for the fire alarm system, interior building finishes, mechanical systems, building, and electrical systems, being conducted on November 30, 2012, December 30, 2012, January 3, 2013, July 1, 2013, and July 23, 2013.

The court concluded that the church was not in a position to provide its services or benefits to the public, as of the October 1, 2012, assessment date. As a result of ongoing construction and renovations, the structure was not available, nor was it ready to be occupied and used by the public for religious or charitable activities until sometime following the October 1, 2012, assessment date. Thus, as of the assessing date, the only recipients of the plaintiff’s religious services on the subject property were the parishioners and their spouses, who were part of the construction team, dedicated to renovating the structure. Neither the public, nor the vast majority of the plaintiff’s congregation derived any benefit from the partially completed structure as of the October 1, 2012, assessing date. Thus, no quid pro quo was offered by the plaintiff thereby entitling it to tax exemption for the subject property.

What this means for churches

The tax-exempt status of church property generally is determined by the actual use of the property on the “tax assessment” date. This often creates confusion as to the tax status of property purchased by a church and in the process of renovation on the assessment date. The exempt status of church property that is under significant renovation on the assessment date, and not fully functioning as a church, is in doubt. Christian Mission v. Passaic City, 30 N.J.Tax 357 (2018).

Property Tax Exemption Does Not Apply to Municipal Special Assessment

Court ruled that the exemption of church property from taxation did not bar cities from requiring churches to share in the costs of public improvements, such as street resurfacing, that directly benefited them

Key point. Churches are exempt from property or ad valorem taxes in every state, but this exemption does not necessarily apply to special assessments that require landowners to pay for improvements that directly benefit them.

A Minnesota appeals court ruled that a city’s imposition of a special assessment on abutting landowners to cover the costs of street resurfacing could be applied to churches.

In 2016, a city imposed a special assessment of $31,191.30 against a church related to a street resurfacing project. The church was informed that it was required to pay off the amount in five annual principal installments beginning in 2017. The church challenged the assessment, claiming that it violated a provision in the state constitution exempting from taxation “public burying grounds, public school houses, public hospitals, academies, colleges, universities, all seminaries of learning, all churches, church property, houses of worship, institutions of purely public charity, and public property used exclusively for any public purpose … except as provided in this section.” The constitution goes on to provide that “the legislature may authorize municipal corporations to levy and collect assessments for local improvements upon property benefited thereby without regard to cash valuation.”

A state appeals court ruled that the exemption of church property from taxation did not bar cities from requiring churches to share in the costs of public improvements, such as street resurfacing, that directly benefited them:

A municipality’s taxing authority is conferred by the legislature. Entities exempt from taxation under … the Minnesota Constitution (such as all churches, church property, and houses of worship) must still pay special assessments for local improvements. This is because the underlying idea of all such assessments is that the payers of the assessment constitute a portion of the community … specially benefited in the enhancement of property peculiarly situated… .

What this means for churches

This case demonstrates that while church property is exempt from taxation in every state, this exemption does not necessarily apply to municipal special assessments that apportion the cost of improvements to those property owners, including churches, that are directly benefited by them. Bryant Avenue Church v. City of Minneapolis, 892 N.W.2d 852 (Minn. App. 2017).

New York Court Rules Tax Exemption in Favor of Catholic Diocese

Closed churches’ occasional use for religious purposes is enough to exempt them from property taxes.


Key point. Church property may be exempt from taxation though it is only used infrequently for religious purposes, so long as it is not used for any other purpose.

A New York court ruled that two churches that had been closed by a Catholic Diocese remained exempt from property taxes even though regular worship services no longer were conducted, since the properties were occasionally used for religious purposes (including monthly religious services) and this was their only use. A Catholic Diocese announced plans to permanently close two churches (the "petitioners"). Thereafter, canonical "decrees of suppression" were issued for the two churches that in effect transferred the property and care of the two churches to other parishes. The local tax assessor informed the diocese that the closed churches no longer qualified for exemption from property tax, and that both church properties had been placed on the tax rolls.

The petitioners asked a court to reinstate the exempt status of both properties. The court noted that "while the burden of proof in tax exemption matters ordinarily lies with the party seeking an exemption, a municipality seeking to withdraw an existing exemption bears the burden of proving that the real property in question has become subject to taxation."

[The assessor] contends that the properties are not entitled to tax exemptions because they are no longer "used primarily for the furtherance of [religious] purposes." To meet their burden in this regard, respondents contend that statements made by the Diocese establish that the properties no longer function as churches, that regular worship services and religious activities that were formerly conducted on the properties now take place elsewhere, and that the parcels are now investment properties being marketed for sale for the non-exempt purpose of generating income.

In rebuttal, petitioners submitted the affidavit of a Roman Catholic priest and canon lawyer stating that the canonical decree of suppression did not preclude the continued use of the properties for religious purposes, and that both properties continue to be "sacred space" within the meaning of the Code of Canon Law. Petitioners further submitted affidavits from church officials stating that both properties continue to be used for religious services conducted to serve the spiritual needs of the parish faithful, in the form of monthly morning prayers on one of the properties and periodic prayer services that include scripture readings and communion services on the other. The court concluded:

Contrary to [the assessor's] contention that such occasional or periodic use cannot be deemed to be primary, it is the actual or physical use of the property that determines whether it is exempt from real property taxation. Here, the record reveals that petitioners' only actual or physical use of their properties is for religious purposes. Absent any showing by [the assessor] that the properties are used for anything other than the religious purposes for which petitioners were organized, the mere fact that this use is now less frequent does not alter the properties' tax-exempt status. Further [the assessor] did not show that petitioners currently derive rental income or any other such financial benefit from the properties, and we find no basis upon which to conclude that the efforts to sell the properties renders use that is otherwise exclusively religious insufficient to meet the requirements of [exemption]. Accordingly, [the assessor] did not meet his burden to prove that the properties were subject to taxation, and … petitioners are entitled to summary judgment restoring the properties to tax-exempt status.

The court also noted that the properties were used to store religious artifacts and fixtures.

What This Means For Churches:

This case is important because it demonstrates a church property may qualify for exemption from tax even it is only used infrequently for religious purposes, so long as it is not used for any other purposes. This conclusion is reinforced by a 2012 ruling by the United States Supreme Court. Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012). In a ringing endorsement of religious liberty, the Supreme Court unanimously affirmed the so-called "ministerial exception" barring civil court review of employment disputes between churches and ministers. The case involved a claim by a "called" teacher at a church-related school in Michigan that the school committed unlawful disability discrimination in terminating her employment. The Court concluded that the ministerial exception applied to a called teacher in a parochial school despite the fact that she only devoted a few minutes each school day to religious activities. The Court concluded that a finding of ministerial status cannot be based solely on the amount of time a person spends on religious functions.

In rejecting a federal appeals court's conclusion that the ministerial exception did not apply because of the limited time the teacher devoted to religious tasks, the Court observed: "The issue before us, however, is not one that can be resolved by a stopwatch. The amount of time an employee spends on particular activities is relevant in assessing that employee's status, but that factor cannot be considered in isolation, without regard to the nature of the religious functions performed."

The Court acknowledged that the teacher's religious duties "consumed only 45 minutes of each workday, and that the rest of her day was devoted to teaching secular subjects." However, the Court noted that it was unsure whether any church employees devoted all their time to religious tasks: "The heads of congregations themselves often have a mix of duties, including secular ones such as helping to manage the congregation's finances, supervising purely secular personnel, and overseeing the upkeep of facilities."

The Court's ruling has potential significance to church property tax exemptions, since it suggests that church property may be entitled to exemption based on exclusive use, even though only used infrequently for overtly religious purposes. St. William's Church of Troy, N.Y. v. Dimitriadis, 981 N.Y.S.2d 837 (N.Y.A.D. 2014).

The IRS Addresses the “Neighborhood Land Rule”

What a church must know about income from unused property.

IRS Letter Ruling 201206018

Background. Many churches rent some or all of their property. For example, a church purchases several homes adjacent to its property to facilitate future expansion. The church has no immediate plans to expand its facilities, so it rents the homes. One issue that arises in such cases is the application of the federal unrelated business income tax, which is a tax on the net income generated by a church or other public charity from an unrelated trade or business.

In general, rental income received by a church is exempt from the unrelated business income tax, but an exception applies with debt-financed property. Section 514 of the tax code states that income from dividends, interest, annuities, royalties, rents, and capital gains and losses must be included in the definition of unrelated business taxable income to the extent it derives from debt-financed property. The amount of income included is proportional to the debt on the property. Debt-financed property is any property held to produce income and that is subject to an "acquisition indebtedness," such as a mortgage, at any time during the tax year.

The "neighborhood land rule." The tax code specifies that if an exempt organization acquires real property mainly to use for exempt purposes within ten years, it will not be treated as debt-financed property if it is in the neighborhood of other property that the organization uses for exempt purposes and if the intent to use the property for exempt purposes within ten years is not abandoned. This exception to the definition of debt-financed property is referred to as the "neighborhood land rule."

The neighborhood land rule does not apply to property ten years after its acquisition. Further, the rule applies after the first five years only if the organization satisfies the IRS that the use of the land for exempt purposes is reasonably certain before the ten-year period expires. The organization need not show binding contracts to satisfy this requirement; but it must have a definite plan detailing a specific improvement and a completion date, and it must show some affirmative action toward the fulfillment of the plan. This information should be forwarded to the following address for a ruling at least ninety days before the end of the fifth year after acquisition of the land:

Internal Revenue Service
Commissioner, TE/GE
Attention: T:EO:RA
P .O. Box 120, Ben Franklin Station
Washington, DC 20044

The income tax regulations authorize the IRS to grant a reasonable extension of time for requesting the ruling if the organization can show good cause. If the neighborhood land rule does not apply because the acquired land is not in the neighborhood of other land used for an organization's exempt purposes, or because the organization fails to establish after the first five years of the ten-year period that the property will be used for exempt purposes, but the land is used eventually by the organization for its exempt purposes within the ten-year period, the property is not treated as debt-financed property for any period before the conversion.

The neighborhood land rule—application to churches. The neighborhood land rule applies to churches, but with two important differences:

  • the period during which the church must demonstrate the intent to use the acquired property for exempt purposes is increased from ten to fifteen years, and
  • the land need not be in the same "neighborhood" as the church.

As a result, if a church acquires land, and plans to use it for exempt purposes within fifteen years after the time of acquisition, the property is not treated as debt-financed property—so long as the church does not abandon its intent to use the land in this manner within those fifteen years.

This exception for churches does not apply to any property after the fifteen-year period expires. Further, this rule will apply after the first five years of the fifteen-year period only if the church establishes, to the satisfaction of the IRS, that the use of the acquired land in furtherance of its exempt purposes is reasonably certain before the fifteen-year period expires. Relevant information should be sent to the IRS at the above-referenced address.

If a church (for the period after the first five years of the fifteen-year period) cannot establish, to the satisfaction of the IRS, that the use of acquired property for its exempt purpose is reasonably certain within the fifteen-year period, but the land is, in fact, converted to an exempt use within the fifteen-year period, the land is not treated as debt-financed property for any period before the conversion.

The same rule for demolition or removal of structures (discussed below) applies to a church.

A recent case. A church purchased land through the use of debt financing in the neighborhood of its existing facility in order to build a larger facility. The land consists of several acres of undeveloped land with the exception of two small buildings. The church borrowed funds to buy the land. It rented a portion of the property for cattle grazing, and also received royalty payments from a lease of mineral rights to an oil company.

The church asked the IRS for a ruling that the neighborhood land rule applied, and therefore the rental and royalty income the church received from its debt- financed property was not subject to the unrelated business income tax.

The IRS began its ruling by noting: "You purchased land on which to build a new, larger church campus. You acquired the land subject to acquisition indebtedness. You did not immediately use substantially all of the property for an exempt purpose related to your exempt function. Thus, the land is considered to be debt-financed property."

In general, the IRS continued, "any income derived from rents or royalties from debt-financed property … would be treated as unrelated business taxable income." However, the IRS noted that there are exceptions to the general rule. For example, "when land is acquired for exempt use within 10 years (extended to 15 years for churches), it is not treated as unrelated business taxable income. This exception is commonly referred to as the neighborhood land rule."

Under the neighborhood land rule, "an organization may acquire land adjacent to or within one mile of the organization's present location and convert the land to exempt purpose use within 10 years of acquisition. Any structure on the land when acquired by the organization must be demolished or removed. For churches [the tax code] provides special rules. The land must be converted to exempt use within 15 years of acquisition and the neighborhood test of proximity to an existing location is not applied."

To use the neighborhood land rule, "an organization must apply after the first five years and establish to the satisfaction of the [IRS] that it is reasonably certain that the land will be used [for exempt purposes] within the required time period."

The IRS noted that the church had submitted its ruling request in a timely manner, at least ninety days prior to five years after the date of acquisition of the land at issue. It further noted that "within the required period, you have taken steps to convert the land to your exempt use. You have demolished structures that existed on the land at the time of acquisition. You have constructed a new church campus of buildings and put it into use for your congregation. You have put your former location up for sale. While the property allows room for future growth, your church campus is substantially complete and converted to exempt use within 15 years of the land acquisition. Thus, your property will not be treated as debt-financed land … because you qualify for the exception under the neighborhood land special rule for churches …."

Since the church's property is not treated as debt-financed land for fifteen years from the date of acquisition, "any rents or royalties received during that time period will not be treated as unrelated business taxable income" and it is "not subject to imposition of tax on unrelated business income for such rents or royalties for the stated period."

The IRS concluded: "Based on the information you have submitted, it is reasonably certain that the debt-financed land will be used for an exempt church purpose within 15 years of its acquisition. Therefore, the property is exempt from the debt-financed property unrelated business taxable income provisions of [the tax code] as a result of the neighborhood land rule exception … for 15 years beginning on the date the land was acquired."

Relevance to church leaders. Before renting property, or negotiating for mineral royalties, church leaders should be familiar with:

  • the debt-financed property exception to the exemption of rental income from the unrelated business income tax;
  • the eligibility requirements for application of the neighborhood land rule; and
  • the demolition rule. The services of a tax attorney will be invaluable to ensure full compliance with the law.

Applying the Neighborhood Land Rule to Churches

Section 514 of the tax code contains a special "neighborhood land rule" that exempts rents from debt-financed church property from the unrelated business income tax so long as a church:

  • has a definite plan to use the land for exempt purposes within fifteen years, including a "specific improvement and a completion date, and some affirmative action toward the fulfillment of such a plan";
  • informs the IRS of its plan at least ninety days before the end of the fifth year after acquiring the land, and requests a ruling;
  • does not abandon its intent during the fifteen years following acquisition; and
  • demolishes any structures on the property as part of its plans to use the property for exempt purposes.

The Demolition Rule

The neighborhood land rule applies to any structure on the land when acquired, only so long as the intended future use of the land in furtherance of the organization's exempt purpose requires that the structure be demolished or removed in order to use the land in this manner. As a result, during the first five years after acquisition (and for later years if there is a favorable ruling), improved property is not debt-financed so long as the organization does not abandon its intent to demolish the existing structures and use the land in furtherance of its exempt purpose. If an actual demolition of these structures occurs, the use made of the land need not be the one originally intended as long as its use furthers the organization's exempt purpose.

The neighborhood land rule does not apply to structures erected on land after its acquisition. When the neighborhood land rule does not initially apply, but the land is used eventually for exempt purposes, a refund or credit of any overpaid taxes will be allowed for a prior tax year. A claim must be filed within one year after the close of the tax year in which the property is actually used for exempt purposes.

Failure to File for Property Tax Exemption

Property tax exemptions can’t be granted retroactively.

Church Law & Tax Report

Failure to File for Property Tax Exemption

Property tax exemptions can’t be granted retroactively.

Key point. Failure to comply with the legal requirements for obtaining a tax exemption for newly acquired church property may lead to loss of exemption.

An Oregon court ruled that a church was not entitled to a property tax exemption because of its failure to file a timely exemption application, despite the fact that its failure to file was due to the fact that the assessor sent the application to the wrong address. In 2007 a church sold its property to another church (the “church”). The warranty deed, which was prepared by the title company, incorrectly listed the church’s address. When the property was conveyed in 2007, it was exempt from taxation based on the prior owner’s use of the property. The church failed to file an exemption application at the time of the change of ownership in 2007. The use of the property did not change when ownership changed; the property was used for religious services by both the old and the new owners.

On November 20, 2007, the tax assessor mailed a “Notification of Status Change” to the church for the 2008-09 tax year, which was sent to the incorrect address listed on the warranty deed. The notice stated: “An application is enclosed with this notice for you to file for a tax exemption on the above referenced location.” The church did not receive the November 20, 2007, notice. The notice was returned unopened to the assessor by the post office with the notation “NMR,” (no mail receptacle) on the envelope. The assessor put the unopened notice in the church’s file, and did not search its records or other sources to locate a different address for the church.

On December 3, 2010, the church filed an application for property tax exemption for the subject property for tax years 2008- 09 and 2009-10. The assessor denied this application for both tax years because it was not timely filed. The 2008-09 and 2009-10 tax statements for the property were also sent to the church at the address listed on the warranty deed. The church did not receive those tax statements. The 2008-09 and 2009-10 statements were returned unopened to the assessor by the post office. No payments were made when the taxes became due.

In November 2010, the church discovered that the property was being taxed. The pastor spoke with the assessor’s office regarding the exemption application and was “instructed by the assessor’s office to file two separate requests for exemption for late filing’.” The church immediately filed applications for exemption. Its application for a property tax exemption was granted for tax year 2010-11 and for future years, but its applications for tax years 2008-09 and 2009-10 were denied on the basis that they were not timely filed. The church appealed.

A state court began its opinion by quoting the exemption statute: “Before any real or personal property may be exempted from taxation … for any tax year, the institution or organization claiming the exemption shall file with the county assessor, on or before April 1 of the assessment year, a statement … listing all real or personal property claimed to be exempt and showing the purpose for which such property is used.”

An exemption application may be filed as late as December 31 of the assessment year for which an exemption is desired upon payment of a late filing fee. The exemption statute does not permit an exemption to be retroactively granted, subject to one exception: “The only time an exemption may be retroactively granted is when there is an addition or new improvements to an already exempt property.” The court reasoned that “had the legislature chosen to make exemption requests retroactive it would have expressly stated its intent as it did in [the case of additions and new improvements].”

The court concluded that the last date for filing an exemption application for the 2008-09 tax year was December 31, 2008, and December 31, 2009, for the 2009- 10 tax year. “The church did not file an application for exemption for tax years 2008-09 and 2009-10 until December 3, 2010. Accordingly, it failed to timely file exemption applications for those years.”

Improper Address

The church asserted that it did not receive notice of the exemption status change or the tax statements because the assessor sent those notices to an incorrect address, and accordingly it did not discover that the property was being taxed until November or early December 2010. The church argued that the assessor was obligated to determine its true and correct address through a search of its internal records or of other available sources (including the Internet), once it was put on notice that the church’s address of record was incorrect. The church sought a property tax exemption based on the assessor’s failure to send notices to the correct address.

“The only time an exemption may be retroactively granted is when there is an addition or new improvements to an already exempt property.”

In rejecting the church’s entitlement to exemption based on the assessor’s use of an incorrect address, the court observed:

While it is definitely a good idea for the assessor to examine its returned mail, arguing about whether the assessor might have found the [taxpayer] earlier overlooks the point that the assessor ought not to have had to look for the [taxpayer] at all. It is not the assessor’s obligation to search for the taxpayer. Instead, it is the taxpayer’s responsibility to make sure [the assessor’s] records are correct. The legislature has placed the burden on taxpayers to notify county assessors of their true and correct address. The assessor did not have a duty to locate any other address for the church either by searching its internal records or by searching some other source.

Due Process

The church also argued that the imposition of tax violated the constitutional requirement of due process because it was not aware that it needed to file for an exemption as it assumed that the exempt status of the subject property would continue because the use did not change. The court disagreed: “[The statute] states that the tax is valid even if the taxpayer does not receive the tax statement. The church assumed that the exempt status would continue because the use of the subject property did not change. However, it was required by [law] to file an exemption application when the ownership of the subject property changed; when no application was filed, the property became taxable. The court is without authority to waive the church’s property taxes based on its lack of knowledge of the application requirement.”

The court concluded:

[The property tax exemption statute] requires that an application for exemption be filed when the ownership of exempt property changes. The exemption application may be filed as late as December 31 of the assessment year. The church’s 2008-09 and 2009-10 exemption applications were not filed until December 3, 2010, and were not, therefore, timely filed. The church claims that, had it known the property was subject to taxation, it would have quickly remedied the situation, as it did for the 2010-11 tax year when it discovered that an exemption application had not been filed. Typically, the error would be revealed upon receipt of a tax statement in the fall. Unfortunately, the church never received the tax statements for the 2008-09 and 2009-10 tax years. The situation is unfortunate and regrettable.

What This Means For Churches:

This case illustrates an important point. Whenever a church acquires property it should review the applicable requirements under state law for obtaining a property tax exemption, be sure that it strictly complies with these requirements, and ensure that the warranty deed and assessor’s office records contain the correct address for the church. Byzantine Catholic Bishop v. Assessor, 2011 WL 4444186 (Or. Tax 2011).

This Recent Development first appeared in Church Law and Tax Report, March/April 2012.

Tax Exemption for Church-Owned Land

Land that is used for recreational activities may qualify for exemption from taxation.

Church Law & Tax Report

Tax Exemption for Church-Owned Land

Land that is used for recreational activities may qualify for exemption from taxation.

Key point. Church-owned land that is used for recreational activities may qualify for exemption from taxation as either a religious or charitable use.

The Ohio Supreme Court ruled that an entire 79-acre tract owned by a church qualified for exemption from property taxation. After many years of expansion, a church decided to open a second church. It acquired 79 acres on which it constructed a large church building with classrooms. The property includes two softball diamonds, a soccer field, and a jogging path that follows the circumference of the property. The church views itself as conducting a sports ministry in connection with the recreational portions of the property and conducts fourteen events, including church-sponsored soccer teams and flag football games. Most of the participants in those events are community members who are not congregants of the church. The city also has sports leagues that use the property. During the summer months, the church stages a day camp for children ages six through eighth grade with several hundred participants. The jogging path is used by the general public without restriction. An estimated 3,000 people utilize the property each year, most of whom were not congregants of the church.

The church paid all costs to develop and maintain the property but does not charge the public to use the recreational facilities. The property does not generate income for the church. The mayor of the city testified that the city itself benefited because the church developed and made the property available for public use, thereby providing public recreational facilities that the city would otherwise have to pay for itself.

The church filed an application that sought to exempt the property from taxation. The application asked for an exemption of 58 acres as land associated with a house of public worship and sought exemption for another 21 acres as land used exclusively for a charitable use. A city tax commission ruled that the 21 acres, which were used exclusively for recreational purposes, did not qualify for exemption as land devoted to a charitable use. The commission concluded that the recreational property was used by the public, not the church, and therefore it was not eligible for exemption. The church appealed.

The Ohio Supreme Court ruled that the disputed 21 acres were exempt from taxation under a state law that exempted ‘property belonging to institutions that is used exclusively for charitable purposes.’

The Ohio Supreme Court ruled that the disputed 21 acres were exempt from taxation under a state law that exempted “property belonging to institutions that is used exclusively for charitable purposes.” It rejected the commission’s argument that “merely holding the property open to the public and allowing various third parties to use it” is not a charitable use and “does not qualify [the property] for exemption.” It also rejected the argument that church-owned property cannot qualify for a charitable exemption, noting that “any institution, irrespective of its charitable or noncharitable character, may take advantage of a tax exemption if it is making exclusive charitable use of the property.”

What This Means For Churches:

This case is a useful precedent for any church that owns land that is used for recreational purposes. While not binding in any state other than Ohio, the case can be cited as persuasive authority for the proposition that land owned by a church and used for recreational purposes qualifies for exemption from taxation. The Chapel v. Testa, 950 N.E.2d 142 (Ohio 2011).

This Recent Development first appeared in Church Law and Tax Report, March/April 2012.

Related Topics:

Tax Exemptions for Infrequently Used Property

Court rules that church-owned vacant land is eligible for property tax exemption.

Church Law & Tax Report

Tax Exemptions for Infrequently Used Property

Court rules that church-owned vacant land is eligible for property tax exemption.

Key point. Undeveloped church-owned property generally is not exempt from property taxation. However, some courts have ruled that such property may be exempt from taxation if its sole, though infrequent, use is for religious purposes.

The Kentucky Supreme Court ruled that church-owned vacant land was entitled to a property tax exemption despite infrequent religious use. The Kentucky Supreme Court ruled that a 10-acre tract of largely vacant property that a church had acquired for future expansion was exempt from property taxation due to its occasional use for church purposes. A church purchased ten acres of land, including two houses. The acreage was divided into two parcels, each consisting of approximately five acres, with a single family dwelling located on each parcel. It was the stated purpose of the church to build a new, larger facility on this property, as well as to provide for an activity center and other related church facilities as soon as finances allowed. The two houses were rented to individuals for residential purposes, with the rental income being used by the church building fund to service a mortgage on the property. The field on the side of these houses is used by the church for recreational purposes about once a year. On two occasions, the church has held an annual church picnic on the property. And while there have been no improvements or permanent structures erected by the church, a cross and bench were erected on a small portion of the property with permission of the tenants. This area is used for meditation by some of the parishioners.

The tax assessor determined that the property was subject to taxation. The church appealed to the state supreme court, claiming that the property was exempt on the basis of a provision in the state constitution exempting from taxation “property owned and occupied by … institutions of religion.” The court, in concluding that the property was entitled to exemption, observed:

While the evidence does not indicate a continuous use of these grounds by [the church] it does support the finding of the trial court as to periodic use, such as horseshoe pitching, volleyball, softball, and tugs of war during the occasional outings by the church membership. There is also a portion used as a prayer and meditation area, including a bench and a large wooden cross. In essence, the congregation has used this property like a park, although not on either a daily or weekly basis. However, it would seem that it has been utilized by the church with the same frequency as many, if not most, churches use outdoor land that adjoins their main sanctuaries. Therefore, we find that substantial evidence supports the findings by the trial court that the land owned by the church, but not occupied by the tenants, is, in fact, occupied by the church for purposes of the Kentucky Constitution.

The court then made the following significant comment:

We recognize that churches are unique. For the most part, they are never “occupied” in the conventional sense. A vast majority of properties owned by “institutions of religion” such as churches, mosques, tabernacles, temples, and the like, are used for places of worship at specified times and may remain vacant for substantial periods during the week. We further recognize that adjacent facilities, such as activity buildings, gymnasiums, even shelters, may be owned by religious institutions, but perhaps utilized irregularly on an as needed basis. School buildings owned by religious institutions may, in fact, sit idle for a great deal of time. This would not preclude these buildings from being “occupied” … It is precisely for these reasons that we find that the trial court’s findings were supported substantially by the evidence in this case as to the property not being rented out as residences. Freeman v. St. Andrew Orthodox Church, Inc. 294 S.W.3d 425 (Ky. 2009).

This Recent Development first appeared in Church Law & Tax Report, January/February 2011.

Related Topics:

Property Tax Exemption for Leased Facilities

Church property leased to another nonprofit organization may still be tax exempt.

Church Law & Tax Report

Property Tax Exemption for Leased Facilities

Church property leased to another nonprofit organization may still be tax exempt.

Key point. The fact that church property is being used for another exempt purpose, such as education, does not necessarily prevent it from being exempt from property taxation.

The Nebraska Supreme Court ruled that a portion of a church’s property that it leased to a public school was entitled to exemption from property taxes. A public school began looking for a space to use for a new special education program. At that time, the school’s special education students were receiving services in another city and the school sought to provide these services locally. The school identified a local church as the optimal site for its special education program, and the parties entered into a facilities use agreement for $1,325 per month including utilities, for 10 months each year for the next two school years.

The church applied for a 100 percent tax exemption on its real property. The local tax assessor recommended an 80 percent exemption on the ground that the school would be using 20 percent of the church’s property and this was not an exempt use of the property. The church protested the valuation, but a state board of tax appeals affirmed the partial exemption, noting that the church had not leased the property to the school at a below-market rate, and the school used the church’s property for educational rather than religious purposes and therefore the church’s exemption from property taxes did not apply to the school’s use of its property. The church appealed to the state supreme court.

The court’s ruling

A Nebraska statute exempts the following properties from taxation:

Property owned by educational, religious, charitable, or cemetery organizations, or any organization for the exclusive benefit of any such educational, religious, charitable, or cemetery organization, and used exclusively for educational, religious, charitable, or cemetery purposes, when such property is not (i) owned or used for financial gain or profit to either the owner or user, (ii) used for the sale of alcoholic liquors for more than twenty hours per week, or (iii) owned or used by an organization which discriminates in membership or employment based on race, color, or national origin.

The court stressed that “although ownership and use of the property may be by different entities, exclusive use of the property for exempt purposes is required.” It continued:

It is the exclusive use of the property that determines the exempt status. The Constitution and the statutes do not require that the ownership and use must be by the same entity. Ownership and use may be by separate entities. For property to be exempt from taxation, a claimant must prove (1) that the subject property is owned by a charitable, educational, religious, or cemetery organization; (2) that the subject property is not being used for financial gain or profit to the owner or user; and (3) that the subject property is being used exclusively for charitable, educational, religious, or cemetery purposes …. Exemption is available only if property is used exclusively for religious, educational, charitable, or cemetery purposes. The property need not be used solely for one of the four categories of exempt use, but may be used for a combination of the exempt uses …. The use of the property establishes whether it is exempt.

The court concluded:

In this case, the property was being used exclusively for religious or educational purposes. We conclude that the property owned by the church was used exclusively for religious and educational purposes. The school used the fellowship hall, restrooms, and areas for ingress and egress Monday through Friday during school hours, unless the use would interfere with a wedding, funeral, or election. This use was educational and was an exempt use. The remainder of the time, the church used the property for religious purposes, which was also an exempt use.

The lease of the property by the church to the school did not create a taxable use. Both of the uses were exempt. The property was used for a combination of exempt uses …. The lease by the church to the school did not create a nonexempt use of the property. The property continued to be used exclusively for religious and educational purposes.

Application. Many churches allow their property to be used by other nonprofit organizations. In some cases a lease agreement is signed that calls for the payment of rent to the church. Few courts have addressed the impact of such lease arrangements on a church’s exemption from property taxation. The Nebraska Supreme Court’s decision suggests that church property that is used by a nonreligious charity may still be exempt from property taxation. There is no requirement that the property be used or operated by another religious charity. This case will be a useful, though not binding, precedent in other jurisdictions. Fort Calhoun Baptist Church v. Washington County Board of Equalization, 759 N.W.2d 475 (Neb. 2009).

This Recent Development first appeared in Church Law & Tax Report, November/December 2009.

Rental of Church Property

Are churches’ tax exemptions affected by lessees’ debts on rented property?

Background

Many churches rent a portion of their property to outside groups. Is rental income generated by such arrangements subject to the unrelated business income tax (UBIT)? We have addressed this question in a number of articles in this newsletter. In general, rental income received by a church is not subject to UBIT so long as the property that is rented is not subject to any indebtedness. A recent IRS ruling addresses a unique question—what if a charity rents property that it owns debt-free to another organization that incurs debt in developing the property? Does the debt incurred by the lessee affect the charity's exemption from UBIT?

Facts of the case

A charity acquired property consisting of land and a building, and later acquired additional land adjacent to the building. All the property was acquired for cash and none of the property was ever subject to debt. The charity decided to "develop" the property through a lease arrangement to protect its investment, maximize its rate of return, and ensure that office space on the property would be up to market standards. In 1996, it entered into negotiations with another organization for a 97-year lease that would allow the lessee to develop the property, constructing a multi-story office tower and cinema. The charity and lessee proposed to sign a lease agreement calling for the lessee to pay the charity "base monthly rent" plus "additional" rent payments based on the greater of a fixed amount or a percentage of gross receipts received by the lessee.

The charity owns the property, and the property is not currently subject to debt. Further, the charity has no plans to incur indebtedness in connection with the construction of the improvements by the lessee. On the contrary, all financing for the project will be secured by the building to be constructed by the lessee. In the event that the lessee defaults on the construction or permanent loan, the lease provides that the charity has certain rights and remedies to preserve its interest in the land, and that among these rights is the right to be indemnified against loss of the land through foreclosure.

The charity asked the IRS if rental income generated by the lease would generate taxable unrelated business income.

What the IRS said

The IRS began its ruling by noting that the tax code excludes "rents" from the definition of unrelated business taxable income. This exemption does not apply, however, "if the determination of the amount of rent depends in whole or in part on the income or profits derived by any person from the property leased (other than an amount based on a fixed percentage or percentages of receipts or sales)." Further, the exemption of rental income for the definition of unrelated business taxable income does not apply to rental income derived from debt-financed property.

The IRS noted that rental income payable under the lease in question are fixed amounts "and will not be related to income or profits derived from the property." All of the payments "will be therefore classified as rents from real property within the meaning of the regulations." The IRS continued:

Because none of the property was subject to debt, and because [the charity] has taken all steps to ensure that it is not obligated in any manner on the debt incurred by [the lessee], the subsequent financing by [the lessee] of improvements to the property do not cause property owned by [the charity] to be debt-financed …."

Relevance to church treasurers

This ruling illustrates a number of important points:

  • General rule. Rental income received by a church is exempt from the tax on unrelated business income.
  • Rents based on lessee's profits. The tax code specifies that the exemption of rental income from the unrelated business income tax does not apply if the rental income is determined in whole or in part based upon the income or profits derived by the lessee from the leased property—other than an amount based upon a fixed percentage of the gross receipts or sales. If you rent property, and rental income is based on the lessee's income or profits, have your lease agreement reviewed by a tax attorney or CPA to be sure that you do not inadvertently trigger the unrelated business income tax.
  • Debt-financed property. The exemption of rental income from the definition of unrelated business taxable income does not apply to the extent that the leased property is subject to an "acquisition indebtedness." However, this ruling illustrates that a church that rents debt-free property to another organization will not lose the exemption of rental income from UBIT because the lessee incurs debt in developing the property. However, the IRS stressed that the charity took steps, in the lease agreement, "to ensure that it is not obligated in any manner on the debt incurred by [the lessee]." This is an important point. If your church leases property to another organization that will develop the property, and it will incur debt doing so, then you should have a tax attorney draft your lease to be sure that you will not be obligated in any way for the lessee's debts. IRS Letter Ruling 9845020.


Tip. Even if the property your church rents is debt-financed, the rental income may be exempt from UBIT on the basis of other exceptions.

Religious Organization Owes Taxes from Publishing Business

IRS determines revenue is unrelated business income

Key point. Federal law imposes a tax on the unrelated business income of churches and other tax—exempt organizations. There are some exceptions to this tax, including the sale of books that directly promote a church's tenets. But if the activity is primarily commercial, the tax on unrelated business income may be due.

The IRS concluded that a religious organization had to pay unrelated business income tax on net earnings from its publishing activities. The organization was established to conduct an institution of learning for the general education of students. The charter further provides that the organization is authorized to engage in all matters incidental to these purposes, including the publishing and dissemination of textbooks, curriculum, and other materials related to schools of Christian training. The organization has no affiliation with a particular church or religion, and describes its materials as promoting a Christian—based philosophy. Books published by the organization are instructional in nature with a Christian perspective. The organization began publishing textbooks for a school it established, but in time many other private Christian schools expressed an interest in these materials and wanted to buy them. By 1973, the organization had set up a separate publishing division which began to write and publish Christian textbooks for its students. These materials were also sold to other Christian schools. The market for these materials has increased significantly over the years. Today, the publications are sold in all 50 states as well as in a number of foreign countries. As of 1989, the organization sold its textbooks to over 17,000 Christian schools throughout the world. The organization estimates that 600,000 elementary and secondary school students are educated using its materials. It now offers video instructional materials for home or classroom use and also operates a correspondence school. As a result of the profits generated by its publishing division, the organization has been able to expand its operations in a number of other areas.

The publishing division markets its textbooks throughout the world. It advertises its textbooks and curricula in Christian magazines, in Christian newspapers, at Christian trade shows and, most importantly, through a program of direct mailing of catalogs and brochures. It maintains a sales force of 40 people, who receive a base salary plus bonuses and commissions based on sales volume. It also employs from 24 to 59 individuals to handle its toll—free phone bank.

The IRS audited the organization, and while it determined that the publishing activities did not affect the organization's tax—exempt status, it concluded that these activities did generate unrelated business taxable income. The IRS noted that section 512(a)(1) of the Code defines the term "unrelated business taxable income" as the gross income derived by any organization from any unrelated trade or business regularly carried on by it, less allowable deductions. Section 513(a) of the Code defines the term "unrelated trade or business" as any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function forming the basis for its exemption. Section 513(c) of the Code provides that the term "trade or business" includes any activity which is carried on for the production of income from the sale of goods or the performance of services. Section 1.513—1(d)(2) of the regulations provides that a trade or business is "related" to exempt purposes only where the conduct of the business activities has a direct relationship to the achievement of exempt purposes (other than through the production of income) and is "substantially related" only where the direct relationship is a substantial one. In other words, the production of goods or the performance of services from which gross income is derived must contribute importantly to the accomplishment of the organization's exempt purposes. Section 1.513—1(d)(3) of the regulations provides that in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function which they purport to serve. Where income is realized by an exempt organization from activities which are in part related to the performance of its exempt functions, but which are conducted on a larger scale than is reasonably necessary for the performance of such functions, the gross income attributable to that portion of the activities in excess of the needs of exempt functions constitutes gross income from the conduct of unrelated trade or business.

The IRS concluded that the publishing activity did not result in the loss of the organization's exempt status since "there is no evidence that any of the funds generated by M were not properly used to further the organization's educational purposes in some manner." However, the IRS concluded that the net earnings from the publishing activity were subject to the unrelated business income tax. It observed

It has been noted that [the publishing division] customarily has profits as high as 75% of gross receipts. The organization acknowledges that its pricing of materials is probably comparable to ordinary commercial prices, but states that it has never done a comparison study on this point ….

In this case, the organization's sales activity … constitutes an activity carried on for the production of income from the sale of goods. All of the relevant information indisputably establishes that the sales of textbooks, curricula and other materials are carried on in a manner consistent with a profit motive …. The subject organization's sales activities are carried on with the dominant hope and intent of realizing a profit and otherwise possess the characteristics of a trade or business. In viewing the overall operation, we can only conclude that [the organization's] activities are indistinguishable from those of a commercial religious publisher. Therefore, it is our conclusion that the organization's operation of [the publishing division] constitutes a trade or business within the meaning of section 513 of the Code.

The methods used in selling the textbooks are indistinguishable from ordinary commercial sales practices. The commission method of remuneration of sales personnel, the use of extensive direct mail and magazine and newspaper advertising, and the toll free telephone order operation would bear this out. Remuneration paid to key individuals within the organization, while in earlier years quite modest, is now comparable to remuneration that might be found in the for—profit sector. Although such compensation appears to be reasonable for purposes of section 501(c)(3) of the Code, it is obvious that amounts of compensation have increased and parallel increasing profits in recent years.

The IRS further concluded that "in general the organization's educational purposes are furthered by [its] sales only through the provision of income to support the other activities of the organization. Thus, it cannot be said that the production and sale of the items in question contribute importantly to the organization's exempt purposes. Accordingly, the substantial causal relationship required by section 1.513—1(d)(2) of the regulations is not present."

The IRS reviewed a number of previous cases and rulings addressing the tax consequences of religious publishing:

Presbyterian and Reformed Publishing Company v. Commissioner, 743 F.2d 148 (3rd Cir. 1984). A federal appeals court held that the accumulation of capital for physical expansion and the increased profit due to unexpected increases in popularity of one of the publisher's authors did not show a substantial non—exempt purpose. That organization was affiliated with a branch of the Presbyterian Church and generally espoused tenets of that branch. The court concluded that the organization met the requirements for exemption under section 501(c)(3) of the Code.

Incorporated Trustees of the Gospel Worker Society v. United States, 510 F. Supp. 374 (D.D.C. 1981). A federal court determined that an organization that published religious literature of a non—denominational nature as its exclusive activity did not qualify for exemption under section 501(c)(3) of the Code. The organization paid its top personnel large salaries, accumulated substantial profits, and was in direct competition with a number of commercial publishers.

Pulpit Resource v. Commissioner, 70 T.C. 594 (1979). The Tax Court held that where an organization published religious literature to promote its beliefs, the activity may be religious in character even though that activity produces an operating profit. The organization's purpose was to assist ministers of all persuasions in improving their sermon writing abilities. The court noted that the activity was unique, and so not in competition with commercial entities.

Fides Publishers Association v. United States, 263 F. Supp. 924 (N.D. Ind. 1967). A federal court determined that a religious publishing house operated in a commercial manner which was independent of any religious body or organization and carried on no other activities, was not qualified for exemption under section 501(c)(3). The court acknowledged that its operations furthered the exempt purpose of educating individuals in a given area, but concluded that there was a substantial non—exempt purpose present-the publication and sale of religious literature at a profit. The organization in question generated consistent operating profits and employed a commercial pricing pattern.

Scripture Press Foundation v. United States, 285 F.2d 800 (Ct. Cl. 1961). A man and his wife, deeply interested in religion, formed a corporation devoted to the publication and sale of religious literature designed to upgrade the quality of existing teaching materials for Bible instruction and Sunday schools. The publications enjoyed increasing sales and returned rising profits. The government argued that the organization was not exclusively organized and operated for religious purposes because the sale of religious literature was not an activity qualified for tax exemption. The government asserted, and the court agreed, that large profits by an organization claiming exemption are some evidence indicative of a commercial character. The court phrased the proper test as follows: "was the sale of religious literature by the plaintiff in this case incidental to the plaintiff's religious purposes or were plaintiff's religious objectives incidental to the sale of religious literature?" Although Scripture Press asserted that its religious instructional activities were more important to it than its selling activities, that the people in charge of its activities were devout and of intense religious conviction, and that the evidence supported such assertions, the court stated:

the intensity of the religious convictions of the plaintiff's members and officers cannot operate to exempt them from the tax laws if the activities of the plaintiff cannot in themselves satisfy such an exemption. Piety is no defense to the assessment of the tax collector.

The court concluded, on the basis of a comparison of the funds accumulated by the Scripture Press as the result of its sale of religious literature and the funds expended for religious instructional activities, that the sale of religious literature was its primary activity to which the instructional phase of Scripture Press was incidental and that, consequently, the organization did not qualify for exemption under section 501(c)(3) of the Code. IRS Letter Ruling 9636001. [ Federal Taxation of Unrelated Business Income of Churches]

Sales of Church Property

The IRS issues an important ruling.

Letter Ruling 9651014

Background. Many churches have received gifts of land that they later would like to sell. Does the sale of such property jeopardize the church's tax-exempt status? Must the church pay the federal "unrelated business income tax" on the sales proceeds? These are important questions that were addressed by the IRS in a recent ruling.

The IRS ruling. A school was given 7 acres of land by a donor with the understanding that the school would use the land for school purposes and not sell it unless absolutely necessary. The school attempted to lease the property for many years, but the school's trustees eventually decided that the land had to be sold. The school asked the IRS if its tax-exempt status would be affected by the sale, and if the sales proceeds would be subject to the unrelated business income tax.

The IRS ruled that the school's exempt status would not be affected by the sale, since: (1) the sale would be an "insubstantial part" of the school's overall activities, and (2) the school would continue to be operated exclusively for exempt purposes.

The IRS also ruled that the sale of the land would not trigger the tax on unrelated business income. This tax is imposed on earnings generated by exempt organizations from an "unrelated trade or business" that is regularly carried on. There are a number of exceptions. For example, the tax code specifically exempts from this tax "all gains from the sale of property" other than "property held primarily for sale to customers in the ordinary course of the trade or business." The IRS referred to a Supreme Court ruling addressing the question of when property is held "primarily" for sale to customers in the ordinary course of business. The Court interpreted the word "primarily" to mean "of first importance" or "principally." The IRS concluded that "by this standard, ordinary income would not result unless a sales purpose is dominant." The IRS concluded that this standard had not been met in this case because of the following factors:

• the land was held for "a significant period of time" before it was sold (contrary to the "short turn around period experienced by a typical buyer and seller of property")

• the school did not "regularly sell real estate"

• the school's "management activities with respect to the property have been minimal," and have consisted of collecting rents and providing routine maintenance and repairs

• the school had not been "involved in any way with improving the land or providing services to tenants"

The IRS concluded that "these facts distinguish [this sale] from the sale of property held primarily for sale to customers in the ordinary course of business." Therefore "income from the sale of this property is excluded from the computation of unrelated business taxable income."

Relevance to church treasurers. Church treasurers often wonder if gains realized from the sale of church property are taxable. This ruling illustrates an important point—any gain realized by a tax-exempt organization from the sale of property is not taxable as unrelated business income unless the gain is from the sale of property "held primarily for sale to customers in the ordinary course of the trade or business."

Churches that realize gain from an occasional sale of donated property, or from the sale of current property as part of a relocation, ordinarily will not be subject to the tax on unrelated business income since the property in such cases is not "held primarily for sale to customers in the ordinary course of the trade or business."


Key point. The factors identified by the IRS in this ruling will be a helpful yardstick that church treasurers can use to evaluate whether a sale of property may be subject to the unrelated business income tax.

There are situations in which a church could be subject to the tax on unrelated business income as a result of gains realized from the sale of property. For example, assume that a church receives a large tract of donated property and subdivides it into individual lots that it attempts to market as a revenue-making project. It is likely that any gains realized from the sale of the lots would be taxable since the property in such a case could be viewed as "held primarily for sale to customers in the ordinary course of the [church's] trade or business."


Recommendation. If you have any question regarding the application of the unrelated business income tax to a particular transaction, consult with a tax attorney or CPA.

Profits from the Sale of Donated Land

IRS rules that these profits are not taxable.

Many churches have realized a gain from the sale of property. In some cases, the church is selling property that it purchased in the past. In other cases the church is selling property that it received as a gift. Are these gains taxable to the church? That was the issue addressed by the IRS in a recent private letter ruling.

The case

An owner of timberland proposed to donate portions of the property to a charity over a number of years. The charity's board of directors wanted to sell the timberland upon receipt in order to satisfy its fiduciary duty under state law to avoid speculative and nonproductive investments.

The board planned to use real estate brokers to sell the donated land in parcels at a price sufficient to satisfy the board's fiduciary duty. The board was concerned that gains realized from the sale of donated timberland would be taxable to the charity. As a result, the board asked the IRS if the gains would be taxable.

IRS ruling

The IRS ruled (Letter Ruling9412039) that any gain realized by the charity from the sale of donated timberland would not be taxable. The IRS noted that federal law imposes a tax on the "unrelated business income" of tax-exempt organizations (including churches). However, "all gains or losses from the sale, exchange, or other disposition of property" are excluded from this tax, other than gains from the sale of property "held primarily for sale to customers in the ordinary course of the trade or business."

The IRS referred to a Supreme Court ruling addressing the standard to be applied in determining whether property is held "primarily" for sale to customers in the ordinary course of business. The Court interpreted the word "primarily" to mean "of first importance" or "principally." The IRS concluded that "by this standard, ordinary income would not result unless a sales purpose is dominant." The IRS concluded:

[Y]ou have determined that it is in your best interest to sell the land …. You will engage an independent broker to liquidate the assets of timberlands. You will retain oversight control; however, you will not perform any activities relating to the advertising or liquidation of the tracts. Neither you nor the timber management company will perform any development activity. Based on the fair market value estimate, the broker will set a minimum price and will request bids for all tracts in a single transaction.

Although a sale of the parcels in a single transaction is not assured, you will instruct the broker to sell the timberlands in as few parcels as possible at a price consistent with the prudence standards of [your] state law. You believe that the compensation arrangement with the broker will provide an incentive to the broker to sell the timberlands in a few large transactions rather than many small transactions.

These facts distinguish the proposed transaction from the sale of property held primarily for sale to customers in the ordinary course of business. Utilizing the services of a real estate broker in the manner described is not a determinative factor …. [W]e have concluded that this transaction does not involve property held primarily for sale to customers in the ordinary course of business. Therefore, income from the sale of this property is excluded from the computation of unrelated business taxable income ….

Relevance to church leaders

Church treasurers often wonder if gains realized from the sale of church property are taxable. This ruling illustrates an important point—any gain realized by a tax-exempt organization from the sale of property is not taxable as unrelated business income unless the gain is from the sale of property "held primarily for sale to customers in the ordinary course of the trade or business."

Churches that realize gain from an occasional sale of donated property, or from the sale of current property as part of a relocation, ordinarily will not be subject to the tax on unrelated business income since the property in such cases is not "held primarily for sale to customers in the ordinary course of the trade or business."

There are situations in which a church could be subject to the tax on unrelated business income as a result of gains realized from the sale of property. For example, assume that a church receives a large tract of donated property and subdivides it into individual lots that it attempts to market as a revenue-making project. It is likely that any gains realized from the sale of the lots would be taxable since the property in such a case could be viewed as "held primarily for sale to customers in the ordinary course of the [church's] trade or business."

Recommendation. If you have any questions regarding the application of the unrelated business income tax to a particular transaction, consult with a tax attorney or CPA.

Property Tax Exemption for Parsonages

The definition of a “parsonage” is limited in some states.

Key point: Some states exempt parsonages from property taxes, but the definition of a "parsonage" is limited in some states to homes owned by churches and occupied by clergy who serve a local church.

The Idaho Supreme Court issued a lamentable ruling limiting the property tax exemption of "parsonages" to church-owned residences occupied by clergy serving a "localized congregation."

Idaho law exempts parsonages from property taxes. For many years, a home owned by the Mormon church and occupied by the president of the Idaho mission was considered to be exempt from property taxes as a parsonage. The president is an ordained minister who devotes his full time to overseeing the spiritual and physical needs of 157 lay missionaries in his jurisdiction. The president conducts weekly religious services for the missionaries, and visits each one at least monthly.

The president's home is used not only as a residence for the president, but also as a short-term residence for missionaries who are just beginning or ending their assignments. A county tax assessor's office determined in 1987 that the president's home did not qualify for exemption as a parsonage. A trial court later ruled that the home was exempt, and the case was appealed to the state supreme court.

The supreme court agreed with the tax assessor that the home was not exempt. The court quoted the definitions of the term "parsonage" in several dictionaries, concluding that "it is evident that all of the dictionaries refer to a residence occupied by the incumbent minister having ecclesiastical domain over a contained body of parishioners or church members, formally referred to as a congregation …. It is not clear that the legislature intended to extend the word 'parsonage' … to include any property housing any minister."

The court concluded: "We hold that a parsonage is not merely a residence owned by a religious organization in which an ordained member of that organization resides. The definition of 'parsonage' as employed by [state law] is a building owned by a religious organization occupied as a residence by a designated minister who ministers to a specific localized congregation that gathers to worship at frequent and regular intervals."

The court pointed to rulings in several other states that reached a similar conclusion (Maryland, Massachusetts, Michigan, New Jersey, Tennessee, Washington, Wisconsin), and to a statute in another state (Illinois) that specifically broadens the property tax exemption of parsonages to include housing occupied by clergy whether or not they serve a specific local congregation. In defending its conclusion, the court noted, "the localized congregation requirement is based on sound policy that, since the … tax burden of exempted property will be shifted onto the people of the county, those people should receive something in return—a place to worship in the community and a minister to conduct the services."

It was a dissenting Justice who reached the correct conclusion: "I would [recognize] that both 'parson' and 'parsonage' are archaic terms from an earlier era" and that the term parsonage "is nothing more than a clergyman's house." Corporation of Presiding Bishop v. Ada County, 849 P.2d 83 (Idaho 1993). See also Ada County v. Roman Catholic Diocese, 849 P.2d 98 (Idaho 1993).

Church Parking Lots Tax Exempt

Decision made even though lots were rented to other businesses for majority of week.

Key point: In some states, church-owned parking lots will be exempt from property taxation under a state law exempting properties used primarily for religious worship.

In an important ruling, the Texas Supreme Court concluded that a church's parking lots were exempt from property taxation, despite the fact that they were rented for most of the week to a neighboring business.

An inner-city church owned two parking lots (consisting of 407 parking spaces) that it leased to a neighboring business from 7:30 a.m. to 5:00 p.m., Monday through Friday. The church received annual rent of $111,000 from the lease of its parking lots. A local tax assessor determined that the parking lots were not exempt from property taxes since they were rented to a neighboring business, and the church appealed this decision in court.

A trial court concluded that the lots were exempt, but a state appeals court disagreed. The church appealed the case to the state supreme court, which agreed with the trial court that the lots were exempt. The court began its opinion by quoting the Texas property tax exemption statute, which exempts "property that is owned by the religious organization, is used primarily as a place of regular religious worship, and is reasonably necessary for engaging in religious worship."

The statute further specifies that if church property satisfies this test, its use "for occasional secular purposes other than religious worship does not result in loss of the exemption if the primary use of the property is for religious worship and all income from the other use is devoted exclusively to the maintenance and development of the property as a place of religious worship."

The court concluded that the church's parking lots were exempt under this statute. It noted that "for purposes of the tax exemption, a place of religious worship includes not only the sanctuary, but also those grounds and structures surrounding the sanctuary which are necessary for the use and enjoyment of the church. Thus, a parking lot may qualify as a place of religious worship." In concluding that the parking lots in this case satisfied the requirements for exemption, the court observed:

In ascertaining whether there is any evidence that the parking lots were primarily used for religious purposes, we look beyond a mere mathematical calculation of the number of hours the church and its members physically occupied the parking lots versus the number of hours [the company that rented the lots] physically occupied the parking lots. While the "actual use" of the property is an important factor in determining primary use, it is not the sole consideration. Instead, the use of the church property must be examined qualitatively. Thus, the primary use of church parking lots may not be determined by simply adding up the number of hours that church members actually park their cars on the lots.

The court noted that the parking lots were purchased by the church to provide adequate parking for church members attending church activities. The lots were regularly used by church members attending worship services on Sunday mornings and on Sunday and Wednesday evenings. They were also used by members attending special events and activities at the church. This evidence convinced the court that the lots were "used primarily for religious purposes."

This ruling will be of enormous assistance to churches facing a challenge to the exempt status of their parking lots (and some other kinds of property). The Texas Supreme Court insisted that the exemption of church property must be analyzed both quantitatively and qualitatively. That is, the test for exemption is not a "mere mathematical calculation" of the number of hours that a church and its members physically occupy the parking lots or other church property.

While such an analysis is important, it is not the sole tests for evaluating the exempt status of church property. The courts also must consider the "qualitative" use of the property. That is, how significant is the use of the property in terms of the church's mission? Clearly, most churches could not exist without parking lots, and therefore such lots are entitled to exemption even though they may be used only a few hours each week by church members. The Texas Supreme Court reasoned that this conclusion is not affected by the fact that a church rents its parking lots to a neighboring business during the week when the lots are not used for church purposes. First Baptist Church v. Bexar County, 833 S.W.2d 108 (Tex. 1992).

Court Concluded That a Church’s Religious Freedom Claim Was Outweighed by a Compelling State Interest—the “Broad Public Interest in Maintaining a Sound Tax System”

Is property acquired by a church after the "tax assessment date," and used exclusively for

Is property acquired by a church after the "tax assessment date," and used exclusively for religious purposes, subject to local property taxes?That was the question before a New Jersey state appeals court.

Under New Jersey law, the taxable or exempt status of any tract of property is determined as of the tax assessment date (October 1 of the preceding calendar year). A church purchased property on December 12, 1983, and used it immediately for exclusively religious purposes. The church applied for a tax exemption, but was informed that no exemption would be available for calendar year 1984 since the property was not owned by the church as of October 1, 1983.

The church claimed that it was doctrinally opposed, on the basis of biblical passages, to paying taxes with funds obtained from tithes and contributions, and accordingly, that requiring the church to pay property taxes for 1984 would violate the constitutional guaranty of religious freedom. The court acknowledged that "the free exercise of religious beliefs can be crushed and closed out by the sheer weight of the tribute which is exacted." However, it also noted that "it is equally well-settled that religious groups are not free from all financial burdens of government" and that "not all burdens on religion are unconstitutional."

A state may "justify a limitation on religious liberty by showing that it is essential to accomplish an overriding governmental interest" and there exists "no less restrictive means" of achieving the state's interest. The court emphasized that the issue was not the tax-exempt status of church property—since New Jersey law clearly exempted such properties from tax. Rather, the issue was whether or not the constitutional guaranty of religious freedom requires church-owned property to be exempt from taxation the moment it is acquired.

The court concluded that the church's religious freedom claim was outweighed by a compelling state interest—the "broad public interest in maintaining a sound tax system." Specifically, the court observed that "mid-year cancellation of tax liability by reason of a property so listed becoming exempt during the year would result in major dislocation and an unfair burden to the remaining taxpayers." Further, "a requirement imposed by the [courts] mandating that property acquired by an exempt owner must receive an exemption at the exact time of its acquisition would severely impair the ability of the tax authorities to predict revenues for the tax year."

In conclusion, the court observed that the maintenance of "an organized society that guarantees religious freedom to a great variety of faiths requires that some religious practices yield to the common good."

Bethany Baptist Church v. Deptford Township, 542 A.2d 505 (N.J. Super. 1988)

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

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)

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

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)

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