August 24, 2009
Churches and Property Tax Exemptions
While many of us that work in the nonprofit/tax-exempt world focus on federal tax exemption policy under I.R.C. Section 501(c)(3), we shouldn't forget that a major part of the "law" on tax exemption occurs at the state and local level in cases dealing with state property tax exemption. In fact, when it comes to the exempt status of nonprofit hospitals, states generally have been in the forefront of these issues, beginning with the famous Utah County v. Intermountain Health Care case decided by the Utah Supreme Court back in the mid-1980's and continuing today with the Provena Covenant case in Illinois.
An interesting story from the Rochester, NY, Democrat and Chronicle illustrates this "law on the ground" (both literally and figuratively) with respect to the difficulty local property tax assessors and review boards have with implementing property tax exemption for churches. As the story notes, determining when real estate is used for religious purposes (and therefore exempt) is a very blurry line. Particularly difficult are the cases that deal with undeveloped real estate which does not have any current religious use, but may (or may not) be used in the future for religious purposes.
I have my doubts that churches should get a general property or income tax exemption at all. They are, at their core, more or less clubs for believers, and their income and assets overwhelmingly are directed toward benefiting church members, rather than the community (or nation) as a whole. I think there is much to recommend an approach, which has been suggested by Rich Schmalbeck at Duke, that would limit exemption to money spent/property used for purposes OTHER THAN the congregation itself - such as helping the poor. Nevertheless, as long as we continue to have laws that exempt religious organizations per se, understanding the difficulties facing local tax officials in dealing with exemption reality is worthwhile.
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In my clinical practice with North Carolina nonprofits I find that property tax exemption is a quagmire. The state property tax statute is vague, rambling, and internally inconsistent. Counties that make front line property tax exemption determinations are understandably reluctant to allow property to escape the rolls but they end up issuing silly decisions. I have found in recent years that entrepreneurial nonprofits are particularly hard hit: if the local officials get a whiff of commercial activity, they deny the exemption. The typical pattern is that the nonprofit appeals the denial and loses at all the administrative levels, then arrives at the NC Court of Appeals and prevails. Many organizations simply pay the tax because they do not understand the legal process or cannot afford legal counsel.
Posted by: Thomas Kelley | Aug 26, 2009 8:32:50 AM