July 30, 2019

Indiana Tax Case Study: Avoiding Procedural Pitfalls, Churches Attain Property Tax Exemptions

Indiana law provides several avenues to achieve property tax exemptions for property used to advance religious purposes. In June 2019, The Indiana Board of Tax Review approved application of property tax exemptions to a church and a family-life center. In both cases — New Testament Baptist Church v. Boone County Assessor and First Baptist Church of Lebanon Indiana, Inc. v. Boone County Assessor — a church indisputably owned and used the property to further a religious purpose. In the first case, the county assessor wrongly claimed the church needed proof of its nonprofit status from the Indiana Secretary of State. In the second case, the Indiana Board denied an exemption for one assessment date, as no application had been filed, but it applied exemptions to the two subsequent assessment dates.

The two rulings provide useful insights into Indiana property tax exemption law and application procedures, as well as other important details related to obtaining religious exemptions.

Exemptions are not automatic. Churches and religious organizations throughout Indiana may qualify for a complete or partial exemption of their real property (land, buildings and yard improvements) and their personal property (e.g., furniture and fixtures, computers, equipment). A taxpayer must timely apply for exempt status, complying with the proper procedural steps. The property tax assessment board of appeals for the county in which the property is located must approve the request.

April 1 is the annual filing deadline, though taxpayers do not necessarily have to file an application for property tax exemption (a Form 136) every year. Whether an application is required depends on the facts and the statute under which an exemption is sought or may have previously been granted. Missing an obligatory deadline risks waiving the exemption. Certain relief valves may apply to restore an exemption that has been lost or placed in jeopardy of being lost.

New Testament Baptist Church: Overview and Key Takeaways

Filing procedure was key to the Indiana Board’s decision in New Testament Baptist Church v. Boone County Assessor (June 18, 2019). In this appeal, New Testament and Assessor agreed the property, in fact, was used for religious purposes. Its by-laws identify New Testament as an “assembly” that is constituted for “the glory of God.” However, New Testament had never filed organizational documents with the Indiana Secretary of State.

Exemptions are not one-size-fits-all. Several statutes permit exemptions for property owned by churches and religious societies. The most widely relied upon provision, Ind. Code § 6-1.1-10-16 (Section 16), exempts improvements that are owned, occupied and used to further a religious purpose, as well as the land supporting the improvements. This was the statute at issue in the Board’s recent rulings.

Under this statute, the property’s religious use must be its predominant use to qualify. Indiana also authorizes exemptions for property used for worship and as a parsonage (Ind. Code § 6-1.1-10-21). College dormitories owned by churches also may qualify for exempt status (Ind. Code § 6-1.1-10-22). Indiana law exempts property owned by specific entities, including the Young Men’s and Women’s Christian Associations, the Knights of Columbus, and the Young Men’s Hebrew Association. (Ind. Code § 6-1.1-10-25). A church or religious society must predominantly use the property to further its religious purpose to qualify for the exemption. (Ind. Code § 6-1.1-10-36.3). Whether an exemption for a property should be granted will depend on whether its ownership and use meet the standards of the statute under which an exemption has been claimed.

Nonprofit ownership is not required under Section 16. The Form 136 exemption application requires attachment of a taxpayer’s articles of incorporation, by-laws and financials from the prior three years. It was unclear, the Indiana Board observed, whether New Testament was organized as a corporation or any other entity. There was no evidence indicating the property was owned or used for a profit-making motive.

Section 16 does not require a taxpayer to be organized as a nonprofit organization. The exemption statute’s language is “clear and unambiguous” on this point, and it “does not differentiate between entities that are not-for-profit and entities that operate for profit.” (quoting College Corner, L.P. v. Dep't of Loc. Gov't Fin., 840 N.E.2d 905, 911 (Ind. Tax Ct. 2006)). Consequently, New Testament’s failure to include documents showing its nonprofit status or filings with the Secretary of State did not disqualify the property from exemption.

First Baptist Church of Lebanon, Indiana: Overview and Key Takeaways

The Indiana Board simultaneously issued its final determination in First Baptist Church of Lebanon Indiana, Inc. v. Boone County Assessor (June 18, 2019). This appeal involved the January 1, 2017 to 2019 assessment dates. The property at issue was a family-life facility dubbed the Cedars Activity Center. First Baptist had failed to file a 2017 Form 136 exemption application for the partially constructed Center, and it belatedly filed a 2018 exemption application. Nevertheless, the Boone County Board issued rulings for both 2018 and 2019, finding that a) land rented to a farmer was 100% taxable and b) the remaining land, improvements and personal property was 50% exempt. These rulings included a note that the 2017 exemption was denied. First Baptists filed appeals for all three assessment dates to the Indiana Board.

Rental of church property for non-religious purposes did not negate the exemption. First Baptist, the Indiana Board explained, is a church whose mission is “to know God and to make him known.” The Cedars building measured more than 13,000 square feet and included a large multi-purpose gym with hardwood floors. It was designed to host Christian concerts and other youth events, and other church-related activities such as bible studies and church board and committee meetings. Eventually, all worship services will be moved to the Cedars building.

First Baptist rented space to third parties for events such as wedding receptions and baby showers. According to First Baptist, the rates for such events were “in the nature of recommended donations” and were based on the cost of running the events — and not structured to make a profit. First Baptist does not turn away people who cannot pay. Public use of the Cedars was considered part of First Baptist’s ministry.

First Baptist provided information showing that, during 2017 and 2018, the Cedars building was used a majority of the time for church activities. A portion of the land was rented to a farmer for raising crops, which First Baptist conceded was taxable.

No exemption applied for 2017, for which no exemption had been claimed. The Indiana Board first denied the 2017 appeal. Even if the County Board had ruled on 2017 (which was unclear), First Baptist had not filed a 2017 exemption application and the Cedars building, newly constructed in 2017, therefore had not previously been exempt in 2016. (A previously granted exemption may have salvaged the 2017 claim.)

Excluding the farmed land, a 100% exemption applied to 2018 and 2019. The Indiana Board first observed, “Indiana Code § 6-1.1-10-16(a) provides an exemption for all or part of a building that is owned, occupied, and exclusively or predominantly used for educational, literary, scientific, religious, or charitable purposes.” It further noted that the exemption “generally extends to land on which an exempt building is situated and personal property contained therein“ and that “property is totally exempt if a church, religious society, or nonprofit school predominantly uses it for exempt purposes.” (citing Ind. Code § 6-1.1-10-36.3(c)(2)).

Here, the parties agreed that the Cedars building was used partly for religious purposes. First Baptist claimed that the third-party rentals were part of its religious mission; the Assessor claimed the rentals were no different than services provided by similar commercial operators.

The Indiana Board, conversely, found that First Baptist “offered extensive evidence tying the rental activities to its religious mission.” The Indiana Board ruled that the Cedars building, the land (other than the farmed land), and the personal property were completely exempt. Whether the rental activities qualified as religious use did not matter (and the Board declined to answer that question), because “First Baptist’s usage logs and supporting testimony show that it used Cedars for religious, church-related activities more than half the time the facility was in use for the years ending on the [January 1] 2018 and 2019 assessment dates.” The unrebutted evidence showed that the property was predominantly used for religious purposes. The non-farmed property was therefore entitled to a 100% exemption as of both assessment dates.

The New Testament and First Baptists rulings illustrate the potential procedural pitfalls in claiming and receiving exemptions, but they further shed light on the opportunities for churches and religious societies to prove that their land, buildings and personal property should be exempt from property tax.

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