Loading...The Kentucky Supreme Court last May reversed a decision by the Kentucky Court of Appeals and held that real property owned by a church but not used continuously for church purposes is subject to real property, ad valorem, taxes. As a result, recently the Diocese of Kentucky has had to agree that the rectory at Trinity Church in Fulton, which has been rented to a non church member, will be subject to state, local and school taxes beginning in 2010.
The full story follows:
In 1990 Kentucky’s voters approved an amendment to Section 170 of the Kentucky Constitution which, among other things, removes a restriction that the exemption from property taxes for churches was limited to one half acre in cities and two acres outside of cities. The revised wording of Section 170 now reads: “There shall be exempt from taxation . . . real property owned and occupied by, and personal property both tangible and intangible owned by, institutions of religion.” In May of 2009 the Kentucky Supreme Court reversed a decision by the Kentucky Court of Appeals and held that real property owned by a church but not used continuously for church purposes is subject to real property, ad valorem, taxes. As a result, recently the Diocese of Kentucky has had to agree that the rectory at Trinity Church in Fulton, which has been rented to a non church member, will be subject to state, local and school taxes beginning in 2010.
The case decided by the Kentucky Supreme Court involved St. Andrew Orthodox Church, a relatively small church in Fayette County. In 2002, St. Andrew purchased 10 acres of property in adjoining Jessamine County as part of a plan to build a new, larger sanctuary, an activity center and other related church facilities as soon as finances would allow. Two houses were located on the property, which the church, as new owner, rented out to members of the public. The balance of the property, which was not part of the residences, was used from time to time by the church for an annual church picnic and other recreation. The tenants were required by their leases to cut the grass around the homes but also allowed the church to store chairs, tables, signs and other items in the basement of each house. The church posted a sign on the property stating that it was the future home of the church and applied the rental income from the tenants’ use to promote the mission and ministry of the church.
The local taxing official, the county property valuation administrator, listed all of the Jessamine property for taxes. The church appealed through administrative procedures to no avail. The church appealed to the intermediate Court of Appeals, which reversed the local decision and held all of the property exempt in an opinion that, if it were the last word, would have been very favorable to all churches in the state. The property valuation administrator appealed to the Supreme Court, which reversed the Court of Appeals, in a unanimous decision.
The Supreme Court started its opinion by quoting from the King James version: “Render therefore unto Caesar the things which are Caesar’s; and unto God the things that are God’s.” Then it reviewed the wording of the current Section 170 of the Kentucky Constitution, stressing the words “owned and occupied by” a church. The Court stressed that when interpreting the Constitution, words must be given their “plain and ordinary meanings” regardless of what the legislators or the public may have wanted or expected the amendment to accomplish. The Court continued:
The mixed use of the subject property – private rentals and church use – precludes the treatment of it for tax purposes as being either all or nothing. The residences on the property are not being occupied by the church simply because the rental monies go to its building fund.
None of the tenants were members of St. Andrew. . . . It simply defies reality and the plain meaning of the constitutional provision to conclude that the church “occupied” the houses on the subject property. This property is occupied by tenants who pay rent to the church.
The Court found the appropriate tax treatment of the remaining acreage outside the two residential units “more problematic.” Evidence of periodic use, such as horseshoe pitching, volleyball, softball, and tugs of war during the occasional outing by the church membership, and a portion devoted to prayer and mediation, suggested that the church utilized the property “with the same frequency as many, if not most, churches use outdoor land that adjoins their main sanctuaries.” So, the Supreme Court referred the tax status of the open acreage back to the Jessamine Property Valuation Administrator for further consideration and determination. St. Andrew Church apparently decided not to seek an appeal to the United States Supreme Court based on the First Amendment to the United States Constitution.
The decision in this case will control the state and local property tax status of property that churches rent to members of the public. Rectories owned by parishes that are actually occupied by members of the clergy are not affected by this opinion. The opinion will, however, empower the local taxing authorities to negotiate with churches concerning to what extent adjoining land is, or is not, “occupied” by the church. The status, or use, of the property on January 1 of each year will determine its exempt or taxable status for the year.
