• Key point. The operation of a child care program on church property may jeopardize the church's exemption from property taxes if the program is conducted by a for-profit corporation, or generates profits, even if the profits are turned over to the church.
* A Kansas court denied a property tax exemption to a church that allowed a for-profit corporation to conduct a child care program on church property even though all profits were donated to the church. A church wanted to operate a child care program after completing construction of a new worship facility, but was concerned about potential liability. As a result, it had two members of the congregation form a for-profit corporation to operate a child care program at the church. The members incorporated their ministry as a for-profit corporation. The child care was incorporated separately and distinctly from the church in order to shield the church from any liability associated with its operation. The church received $1,400 each month from the corporation to compensate it for utilities and use of the building.
Shortly after the child care program was launched, the church applied for a property tax exemption for its new worship facility. The Kansas property tax law exempts "all buildings used exclusively as places of public worship … if not leased or otherwise used for the realization of profit," and further provides that "any building, or portion thereof, used as a place of worship, together with the grounds upon which the building is located, shall be considered to be used exclusively for the religious purposes of this section when used as a not-for-profit day care center for children which is licensed [by the state]."
A local tax assessor denied the church's application of exemption, finding that it did not use the property exclusively as a place of public worship because the child care program paid monthly fees for its use of the property and so the building was "leased or otherwise used for the realization of profit." Exemption was denied for the entire church property.
On appeal, the church made three arguments. First, the child care program was not operated "for profit" despite the fact that it was incorporated as a for-profit corporation. It pointed out that the program had not realized any profits beyond those profits which it returned to the church. Second, the church claimed that it had planned on operating a child care program, but decided to have a for-profit corporation created to operate the program in order to shield the church from liability. Third, the church noted that the monthly payments it received did not generate any net income for the church since they were merely "partial reimbursements" for the "costs of ownership and maintenance."
A state appeals court rejected the church's arguments, and ruled that the church property was not entitled to exemption. The court based its decision on the following considerations:
1. The state property tax law permits exemption for any building used as a place of worship, "when used as a not-for-profit day care center for children." The child care program in this case "was incorporated by two individuals as a for-profit corporation and not as a not-for-profit corporation. Additionally, the corporation has realized profits in its operation although it does not actually show any profits because it donates its net profits to the church. Further, although the corporation voluntarily donates its profits to the church, it is not required to do so now or in the future. The plain language of the statute does not permit exemption for a for-profit corporation."
2. The court rejected the church's argument that the term "not for profit" should be interpreted to apply to a child care program organized "for profit" so long as it could establish that it donated any "profits" back to the church. Such a view was "contrary to the ordinary and plain meaning" of the property tax exemption statute.
3. The property tax law's exemption for buildings used exclusively as places of public worship only applies if they are "not leased or otherwise used for the realization of profit." The exemption was not available in this case because the child care program paid $1,400 each month to the church for use of the facility. The court concluded, "The $1,400 payment was referred to as rent by the church and the day care, although the church now contends it is more properly characterized as a reimbursement. Whatever the characterization, the payment of the monthly fee" prevented the exemption.
4. "Taxation is the rule, and exemption is the exception. It was the church's burden to establish that the exemption clearly applies. It has failed to meet that burden."
Application
. Many churches have separately incorporated a child care program in order to shield the church from liability. Church leaders should understand that doing so may have a negative impact on the church's property tax exemption. In this case, the entire church property was denied exemption. Further, separately incorporating a child care program does not necessarily shield the church from liability. Whether this goal is accomplished is a complex legal question that involves an analysis of several factors. In general, however, if a church continues to maintain full operational and administrative control over the child care program, the fact that the program is separately incorporated may do little to shield the church from liability. In the Matter of the Application of Fairhaven Christian Church, 2005 WL 1429875 (Kan. App. 2005).
