Church Law and Tax 1993-03-01 Recent Developments

Taxation – Church Property

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

• Key point: Rental of a church’s property may adversely affect the property’s tax-exempt status.

• The Alabama Supreme Court ruled that the rental of a charitable organization’s property resulted in the loss of the property’s exemption from taxation, despite the fact that the rent was used for charitable purposes. A charity rented a portion of its facilities to various commercial organizations, and used all of the rental income (after expenses) for charitable purposes. A tax assessor determined that the property no longer was entitled to an exemption from tax, and the charity appealed to the courts. The state supreme court ruled that the property in question had lost its tax exemption due to the rental activity. To be exempt from tax, the property had to be used exclusively for charitable purposes. The court observed: “When a property owner allows another party to use his property for religious, educational, or charitable purposes, and the owner derives no income or benefit from the property, then the property is used exclusively for a religious, educational, or charitable use, and the property owner is entitled to an exemption. However, if the owner receives any income or benefit from the property, the property is not used exclusively for religious, educational, or charitable purposes, and the property owner is not entitled to an exemption.” The court further noted that exempt property must be used exclusively for religious, educational, or charitable purposes, and “exclusive” means that “the property must be used solely, only, or wholly for a religious, educational, or charitable purpose.” Finally, the court rejected the charity’s claim that its property was entitled to exemption because all of the rental income (after expenses) was used for charitable purposes. This case is important for a couple of reasons. First, it illustrates that the rental of a portion of a church’s facilities to commercial organizations may adversely affect the exemption of those facilities from property tax. Of course, this will depend on the wording of a state’s property tax exemption statute, and the interpretation of that statute by the courts of the state. Second, the case illustrates the general principle that it is the use of property that determines whether or not an exemption is available, and not the fact that the rental income is used for charitable purposes. Most Worshipful Grand Lodge v. Norred, 603 So.2d 996 (Ala. 1992).