An Episcopal church owned a parsonage that was occupied by its priest. The priest resigned in 1988, and a temporary replacement priest was appointed. However, the temporary replacement priest chose to live in a neighboring metropolitan area so as to qualify for the special educational needs of his son. Accordingly, the church rented the parsonage, and used the rental income to pay a housing allowance to its temporary priest.
The church intended to hire a permanent priest in the near future who would live in the parsonage. A local tax assessor claimed that the parsonage lost its tax exemption when it ceased to be used as a parsonage and was rented. The church disagreed, claiming that the parsonage should remain exempt so long as it was rented temporarily while the church sought a permanent priest.
The Minnesota appeals court noted that there were two issues: "(1) whether the property qualifies for exemption on the basis that the rent proceeds are utilized for church purposes; and (2) whether the temporary rental of a parsonage pending arrival of a new pastor destroys the tax exemption." The court rejected the view that the parsonage could retain its exemption on the ground that the rental income was used for church purposes.
It quoted from a 1927 decision of the state supreme court: "When it ceased to be occupied or used as a residence for the pastor of the society and was rented to others for dwelling purposes it ceased to be a parsonage or to be used in any way for church or religious purposes. It then ceased to be `church property' just as a house of worship ceases to be such if it is abandoned for that purpose and rented and used for business purposes."
The court further concluded that the temporary rental of the parsonage in this case pending arrival of the new priest destroyed the tax exemption of the property. It again relied on the earlier decision of the state supreme court:
No hard and fast rule can properly be laid down to govern all cases. Generally speaking, it may be said that the rule governing exemption from taxation as to the real property of [charitable] institutions is that all property reasonably necessary for and primarily used and devoted to the proper purposes of the institution and so located with reference to the main buildings or activities of the institution so as to be reasonably suitable for such purposes is exempt from taxation.
A reasonable amount of property intended and reasonably necessary for such use in the near future, and suitably located, may also be exempt. [Accordingly] a lot and dwelling house rented to others and not used in any way for religious or church purposes, and not shown to be intended or necessary for such use in the future, are not exempt.
The court concluded that priests were not required to live in the parsonage (the temporary priest had not done so), and accordingly the parsonage was not "reasonable necessary" for church use. On the other hand, the court acknowledged that "if a requirement existed that the priest must live in the parsonage, and the property was rented for a few months during a transition period between one priest and another priest, the exemption would continue. However, that is not the case here." Trinity Episcopal Church v. County of Sherburne, 1991 WL 95745 (Minn. Tax 1991 unpublished).
