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.