Property Tax Exemption and Rental of Church Facilities

Church facilities are tax exempt when rented to another nonprofit corporation, court rules.

Church Law and Tax 1992-05-01 Recent Developments

Taxation – Church Property

Does a church-owned building lose its property tax exemption when it is rented to another charitable organization? No, concluded an Illinois appeals court. A Lutheran church owned a 3-story building that no longer was used for religious purposes. The church chose to rent the building rather than sell it, since it hoped to utilize the property for religious purposes in the future. Accordingly, it rented the building to a nonprofit dance school that conducted dance lessons and performances. The church received $14,400 in rent in 1986. A tax assessor claimed that the building was no entitled to an exemption from property taxation. A trial court rejected the assessor’s position, and the case was appealed. The appeals court acknowledged that the “burden of proving the right to an exemption is upon the person seeking it,” and that “in determining whether property is included within the scope of an exemption, all facts are to be construed and all debatable questions resolved in favor of taxation. Nevertheless, the court concluded that the building was entitled to exemption under a state law that exempted “all property of institutions of public charity … when such property is actually and exclusively used for such charitable and beneficent purposes, and not leased or otherwise used with a view to profit.” The court relied on a 6-factor test announced in an earlier decision by the Illinois Supreme Court for determining whether a particular property is entitled to a charitable exemption. The supreme court previously ruled that a property is entitled to exemption if the property owner can prove each of the following 6 factors:

(1) The benefits derived are for an indefinite number of persons; (2) the organization has no capital, capital stock, or shareholders, and does not profit from the enterprise; (3) funds are derived mainly from private and public charity, and are held in trust for the objects and purposes expressed in its charter; (4) charity is dispensed to all who need and apply for it; (5) no obstacles are placed in the way of those seeking the benefits; Nd (6) the primary use of the property is for the charitable purposes.

The tax assessor conceded that the first 3 factors were satisfied, but it claimed that the last 3 were not. The appeals court disagreed, noting that “a charitable institution does not lose its tax-exempt status merely because persons who are unable to pay for its services are required to do so, as long as the institution makes no profit and all the funds are used to further the organization’s charitable goals.” The court emphasized that the amounts charged by the dance studio for instruction “were substantially less than enough to cover regular, operating expenses.” It concluded: “Property satisfies the exclusive use requirement of the property tax exemption statutes if it is primarily used for the exempted purpose, even though it is also used for a secondary, or incidental purpose …. The test is ‘whether the primary purpose of the institution is charitable, or whether its primary purpose is the making of a profit and the devoting of these profits to charitable purposes.” Resurrection Lutheran Church v. Department of Revenue, 571 N.E.2d 989 (Ill. App. 1991).

See Also: Property Taxes

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