Church Law and Tax 1993-11-01 Recent Developments

Taxation – Church Property

Richard R. Hammar, J.D., LL.M., CPA

• Key point: Property that is leased but not owned by a church and used for religious purposes does not qualify for exemption from property taxes in some states.

• An Illinois appeals court ruled that property owned by a for-profit corporation and leased to a church for religious purposes did not qualify for exemption from property taxation under Illinois law. The leased property included a large building, a smaller building, and a parking lot. These properties were leased to a church for $3,200 each month, with the church being given an option to purchase the property. The church used the larger building for religious activities (including worship services, Sunday School, and religious counseling). The smaller building was used by the church for storage. Church members parked in the parking lot while attending religious activities on the property. The owner’s application for a property tax exemption was denied by a local tax commission. This decision was appealed to a trial court which concluded that the property was exempt. A state appeals court reversed this decision. The court noted that state law exempted parking lots only if they are owned by a religious organization, and accordingly a parking lot leased by a church can never be exempt. However, the court acknowledged that the property tax exemption law was not so clear with respect to the buildings leased by the church. It noted that the exemption law “provides an exemption for `all property used exclusively for religious purposes’ and makes no mention of the ownership of the property. Arguably, therefore, property which is used for religious purposes but which is owned by a for-profit entity could qualify under this exemption.” However, the court pointed out that to be exempt, the property must not be “leased or otherwise used with a view toward profit.” In this case, the owner of the buildings leased them to the church for a profit. The fact that the church used the buildings for religious purposes, and intended some day to exercise its option to purchase, “does not alter the fact that the owner of the property leased the property for a profit.” As a result, the neither the buildings nor the parking lot were exempt from taxation. The most significant aspect of this case is the court’s acknowledgement that property used exclusively by a church for religious purposes in some cases may be exempt from taxation even though the church leases rather than owns the property. Of course, this result would not apply in states with property tax exemption statutes that specifically require church ownership. American National Bank and Trust Company v. Department of Revenue, 611 N.E.2d 32 (Ill. App. 1993).