Recent Developments in Indiana Regarding the Taxation of Church Property

An Indiana court ruled that a church-owned building was exempt from property taxation even though it was not currently being used for exempt purposes.

Church Law and Tax1999-03-01

Taxation-Church Property

Key point.. A building purchased by a church may be exempt from property taxation even though the church does not presently use the property for religious purposes.

An Indiana court ruled that a church-owned building was exempt from property taxation even though it was not currently being used for exempt purposes. A church purchased an adjacent building and parking lot for use as a community mental health center. While the building was structurally sound, it needed extensive interior renovations in order to be used as a mental health center. These renovations were in progress on the date the church filed an application to exempt the building and parking lot from property taxation. A state tax board granted an exemption for the parking lot, since it was being used by parishioners who attended the church. But the tax board denied the exemption for the building since it was “vacant and unoccupied” on the assessment date. The church appealed, and the state tax court ruled that the building was exempt. Indiana law exempts from taxation “all or part of a building [that is] owned, occupied, and used by a person for … religious or charitable purposes.” The court acknowledged that exemption statutes are “strictly construed against the person claiming the exemption.” But it insisted that “exemption provisions are not to be construed so narrowly that the legislature’s purpose in enacting it is defeated or frustrated.”

The “proper focus,” concluded the court, is “whether the use of the property furthers exempt purposes.” Such an approach is “consistent with the legislative purpose of rewarding charities for providing a public benefit.” The court noted that the building in question was undergoing extensive renovations on the tax assessment date (the date on which property tax exemptions are determined). The question to be decided “is whether preparing the building for future use in furtherance of exempt purposes qualifies the building for exemption.”

The court agreed that “mere ownership alone is insufficient to support an exemption and that the intent to use the property for an exempt purpose must be more than a mere dream.” It continued:

In this case, it is apparent that, on the assessment date [the church’s] intent to use the building in furtherance of exempt purposes was more than a dream, and that it did more than merely own the building. [It] had taken concrete steps at great expense to prepare the building for use as a community mental health center. This is more than enough objective evidence to support [the church’s] contention that, as of the assessment date, it held the building with an intention to use the building in the future for exempt purposes. It was therefore an abuse of discretion to deny [the building’s] exemption.

Application. This case is important for one reason-it illustrates that church-owned buildings may be exempt from taxation though they are not being used for religious or charitable purposes on the tax assessment date. So long as the church intends to use the building for exempt purposes in the future, and this intent is demonstrated by renovations or other actions, then the property may qualify for exemption. Many states, like Indiana, have statutes exempting property that is owned, occupied, and used for religious or charitable purposes. The fact that the court interpreted this language to apply to an unused building undergoing renovations for future use will be a helpful precedent for churches that own (or are considering the purchase of) a vacant building that is not currently being used for exempt purposes. The fact that the building is not currently being used for exempt purposes does not necessarily mean that it will not qualify for exemption-especially if the church can demonstrate by its actions that its intent to use the property in the future for exempt purposes is real. Trinity Episcopal Church v. Board of Tax Commissioners, 694 N.E.2d 816 (Ind. Tax 1998). [State Taxes]

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