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Court of appeals holds church property exempt from tax

08.15.2007

In St. Andrew Orthodox Church, Inc. v. Thompson, Nos. 2006-CA-000305-MR & 2006-CA-000458-MR (Ky. App. Aug. 10, 2007), the Kentucky Court of Appeals (“Court”) in an Opinion designated to be published, held that real property owned and used by St. Andrew Orthodox Church (“St. Andrew”) for church purposes was exempt from property tax pursuant to Kentucky Constitution Section 170, which exempts real property from taxation if “owned and occupied” by “institutions of religion.”

St. Andrew purchased two five-acre lots, each with a single-family house on it located in Jessamine County, Kentucky. St. Andrew plans to build a new, larger church on the property to replace its current smaller church located in Lexington, Kentucky. To help pay the mortgage on the property, St. Andrew leased the houses to various individuals. All of the rental payments were used to pay the mortgage on the property in question. Although the lease agreements provided that the tenants should maintain the properties, church members often did so. Further, St. Andrew used some of the property for outdoor games such as volleyball, soccer, horseshoes, and softball. St. Andrew set aside a portion of one lot for a prayer and meditation area. That area included a prayer bench and large wooden cross. St. Andrew also stored some equipment in the basement of one of the houses, and conducted various church activities, including picnics, on the property. Although no development has yet begun on the property, there is a large sign on the property announcing St. Andrew’s plans to build a church.

The Jessamine County Property Valuation Administrator (“PVA”) assessed real property tax on St. Andrew’s property for the 2003 and 2004 tax years. St. Andrew sought an exemption from tax under Section 170, because it was a religious institution that owned and occupied the property and because it was a purely public charity. However, the Board of Assessment Appeals (“BAA”) denied both requests. St. Andrew appealed to the Kentucky Board of Tax Appeals (“KBTA”), which sustained the BAA’s denial of the exemption. St. Andrew then appealed to the Jessamine Circuit Court, which entered an Opinion affirming in part and reversing in part the KBTA decision. The Circuit Court affirmed the tax assessment on the two houses and their curtilage, but reversed the assessment on the remainder of the church property, and held that that portion of the property was exempt from tax because it was owned and occupied by a religious institution.

The Court reviewed the case de novo as it involved pure issues of law, and there were no factual issues in dispute. The Court first observed that in 1990, Section 170 was amended to exempt “real property owned and occupied by…institutions of religion.” The Court then noted that prior to the 1990 amendment, “use” rather than “ownership” was the controlling factor.

The Court then observed that in 1991, the Kentucky Attorney General opined that “a proper interpretation [of Section 170] should reject the imposition of conditions such as the requirement that the property be used for religious purposes, or that the property be occupied exclusively by the institution of religion, or that the institution of religion be in current rather than future occupation.” (citing Ky. OAG 91-216). The Court held that it may give “great weight” to the reasoning expressed in an Opinion of the Attorney General.

The Court held that “Section 170, as amended in 1990, clearly broadens the class of properties which may be held by a religious institution and not subject to an ad valoremtax. By narrowly construing the words ‘owned and occupied,’ the KBTA and circuit court have thwarted the intentions of the people as well as the drafters of the amendment to Section 170.” The Court then cited Black’s Law Dictionary and observed that the “definition of ‘occupancy’ or ‘to occupy’ is much broader than found by the KBTA.”

The Court recited the traditional rule that tax exemptions are strictly construed against the taxpayer, and are generally disfavored in the law. However, the Court held that it was apparent that St. Andrew intended to use all of the property for a future church, and that it used the property for prayer, meditation, family, social and related church activities. Further, the Court observed that “the attempt to fashion different degrees of occupancy would create a Gordian knot…[and s]uch a system would actually rewrite Section 170 to the extent that former acreage restrictions would be revived.”

The Court concluded that the KBTA Order was without substantial evidence on the whole record because there was no evidence that St. Andrew intended to use the property for investment purposes or to construct anything other than a church, and that the KBTA’s interpretation of “occupied” was contrary to the intent of Section 170. Because the Court ruled in St. Andrew’s favor on the religious institution exemption, it did not reach its argument that it was exempt because it was a purely public charity. It is anticipated that the Kentucky Department of Revenue, who has litigated this case on behalf of the PVA, will seek discretionary review of the Court’s decision with the Supreme Court of Kentucky. The authors’ law firm represents St. Andrew on a pro bono basis.

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