Court Splits the Baby in Case Involving Religious Exemption from Real Property Taxation
In Freeman v. St. Andrew Orthodox Church, Inc., 2007-SC-000640-DG (Ky. May 21, 2009), the Kentucky Supreme Court (“Court”) held that land owned and used by St. Andrew Orthodox Church (“St. Andrew”) for church purposes was exempt from property tax pursuant to Kentucky Constitution Section 170 (“Section 170”), which exempts real property from taxation if “owned and occupied” by “institutions of religion,” but accompanying houses were not exempt.
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 which 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 (“Board”), which sustained the BAA’s denial. St. Andrew then appealed to the Jessamine Circuit Court, which entered an Opinion affirming in part and reversing in part the Board’s decision. The Circuit Court affirmed the tax assessment on the two houses and their curtilage, but reversed the assessment for 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 of Appeals reversed in part, holding that the entire property should be exempt under Section 170.
The Court reviewed the decisions of the trial court and Court of Appeals de novo and stated that the only issue before the Court was whether the real property was “owned and occupied” within the provision of Section 170. The Court addressed the land and houses separately because of the “mixed use of the property.”
The Court, referring to the Circuit Court as “trial court,” upheld that the findings by same and the Court of Appeals that the land owned by St. Andrew and not occupied by the tenants, is “occupied” by the church for purposes of Section 170. The Court stated that “the evidence does not indicate a continuous use of these grounds by St. Andrew, [but] it does support the finding of the trial court as to periodic use….” The Court further recognized that churches are unique and are never “occupied” in a conventional sense. Thus, use for worship at “specified times and…remain vacant for substantial periods during the week” does not preclude same from being “occupied” under Section 170. The Court, in construing the meaning of “occupied,” limited its interpretation to Section 170.
As to the houses, the Court rejected Kentucky Attorney General Opinion 91-126 (“OAG”), relied upon by the Court of Appeals, which stated that the requirement for the church to “occupy” the property was neither strictly for religious purposes or exclusively by the church, but that future occupation of the property was satisfactory. The Court agreed with the Circuit Court and held that the houses were not “occupied” by the church, but rather, “the tenants who pay rent to the church.” The Court held that such houses could not be considered “occupied” by the church “simply because the rental monies go to its building fund.”
The authors’ law firm represents St. Andrew on a pro bono basis.
If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.