April 17, 2013
State Appeals Court: Church Should Pay Property Tax
Tennessee megachurch challenged decision affecting part of its property.
On the heels of last week's news regarding an Indiana study that showed one in four government leaders favored payments of some type by churches in exchange for their tax-exempt statuses comes this online column by Peter J. Reilly of Forbes.
Reilly recaps a recent Tennessee appellate court decision regarding property taxes assessed between 2004 and 2008 on a portion of property owned by Christ Church Pentecostal of Nashville. Tennessee's State Board of Equalization and its Assessment Appeals Commission contended the megachurch's bookstore and cafe did not qualify for property tax exemption, and its fitness center qualified for only a 50-percent exemption.
The reason: Assessors believed the bookstore and cafe went beyond religious purposes, while the fitness center, by offering memberships to the general public, went partially beyond those purposes. The church disagreed; in court documents, the church's senior pastor explained the crucial role the bookstore and cafe and fitness center played with creating what is known in architectural design circles as third place spaces for the surrounding community, particularly its immigrant and low-income populations.
Pastor Scott submitted that CCP's "'third space' facilities are natural outgrowths of our ancient faith" that have been "retooled ... for postmodern urban culture." He urged that the State should recognize third spaces as part of CCP's "stated purpose as a religious body" and that its third spaces should be exempt from taxation "in the same manner as its sanctuaries."
The assessors held firm, resulting in the taxation of 7 percent of the megachurch's property; in 2004, the real property and structures were worth an estimated $17 million combined.
The decision was challenged by lawsuit, but a trial court ruled in favor of the state. Last November, the state appellate court affirmed that decision.
The interests of municipalities and churches regularly bump into each other, especially when it comes to zoning laws, taxes, or the delivery of community services. Not all of these intersections are contentious, and many churches and municipalities have found ways to work together.
However, we also see situations like this one, where the matter ultimately ends up in court.
In the March/April 2012 edition of Church Law & Tax Report, Richard Hammar shares a 2011 ruling by the Ohio Supreme Court, which found that an entire 79-acre tract owned by a church qualified for exemption from property taxation. A local municipality had attempted to tax 21 acres of the church's tract because a city tax commission deemed it to be recreational property used by the public, not the church. The Ohio Supreme Court ruled the property was exempt because a state law exempted "property belonging to institutions that is used exclusively for charitable purposes." (The Chapel v. Testa, 950 N.E.2d 142 (Ohio 2011)).
In 2009, the Kentucky Supreme Court ruled that church-owned vacant land was still entitled to property tax exemption, despite infrequent use (Freeman v. St. Andrew Orthodox Church, Inc. 294 S.W.3d 425 (Ky. 2009)). In remarks from a 2011 Church Law & Tax Report by Hammar, he notes this observation from the Kentucky Supreme Court:
While the evidence does not indicate a continuous use of these grounds by [the church] it does support the finding of the trial court as to periodic use, such as horseshoe pitching, volleyball, softball, and tugs of war during the occasional outings by the church membership. There is also a portion used as a prayer and meditation area, including a bench and a large wooden cross. In essence, the congregation has used this property like a park, although not on either a daily or weekly basis. However, it would seem that it has been utilized by the church with the same frequency as many, if not most, churches use outdoor land that adjoins their main sanctuaries. Therefore, we find that substantial evidence supports the findings by the trial court that the land owned by the church, but not occupied by the tenants, is, in fact, occupied by the church for purposes of the Kentucky Constitution.
As the Ohio and Kentucky cases demonstrate, courts around the country have addressed this question from different angles. And how each state's laws are framed makes a significant difference. Whether the Tennessee appellate decision gets appealed to the state supreme court remains to be seen. (In an exchange with me through the "Comments" section of his column, Reilly indicates the church has since turned over its fitness center to a YMCA and revamped its bookstore and cafe to be exclusively focused on religious themes).
Church leaders who are involved with activities like fitness centers, bookstores, and cafes should note the possible property tax implications for their churches (and any possible unrelated business income tax implications). The consultation of a qualified professional attorney can help navigate inevitable questions and identify ways to make sure any ventures remain closely associated with the church's underlying purpose and mission. These resources also may help: