Rental of Minnesota Church Property.

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Rental of Minnesota Church Property

Minnesota Church Property Tax Exemption

In 1949, the Minnesota Supreme Court identified the basic eligibility requirement for a Minnesota real property tax exemption – which is required to be met with respect to the rental of Minnesota Church Property:

for an institution to qualify for a charitable tax exemption, there

“must be

  • a concurrence of ownership of the property by an institution of the type prescribed by the constitution and
  • a use of the property for the purpose for which such institution was organized.”

Christian Business Men’s Committee of Minneapolis v. State, 228 Minn. at 554, 38 N.W.2d 803, at 808 (MINN. 1949)

That language was simply a restatement of the long-standing principle that property owned by an exempt entity and leased to others for profit cannot be exempt.

Living Word Bible Camp v. County of Itasca, 829 N.W.2d 404, 413 Minn.,2013, citing:

 See, e.g., Willmar Hospital, 212 Minn. 38, 4142, 2 N.W.2d 564, 566

 (observing that “where the property claimed to be exempt is subject to private control and is devoted to substantial use for private profit, it is not exempt”);

 State v. St. Barnabas Hosp., 95 Minn. 489, 49192, 104 N.W. 551, 552 (1905)

 (holding that farm land owned by a nonprofit hospital and leased to others at a profit was not exempt).

In addition, the Minnesota Supreme Court has repeatedly held that:

All property is presumed taxable, and the taxpayer has the burden of proving entitlement to a specific exemption.

Living Word Bible Camp v. County of Itasca, 829 N.W.2d 404 [2], [3] (Minn. 2013), citing Under the Rainbow Child Care Center, Inc. v. City of Goodhue, 741 N.W.2d 880, 884 (Minn. 2007), and Camping and Educational Foundation v. State, 282 Minn. 245, 250, 164 N.W.2d 369, 372 (1969).

Minnesota Supreme Court – 1927 – Rental of Minnesota Church Property

In 1927, the Minnesota Supreme Court issued an opinion in a case addressing a church’s ownership and use with respect to the rental of Minnesota Church Property:

A lot and dwelling house, owned by a church corporation, and not used

  • as a residence for its minister or
  • in connection with its religious or charitable work or activities, 
  • but rented to others for dwelling purposes, and 
  • the rental [income] used by the church corporation in support of its religious exercises,

 are not exempt from taxes.

State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326, Minn. 1927

The term ‘church property,’ as used in the constitutional provision exempting from taxation ‘all churches, church property and houses of worship,’ has reference to

  • the use of the property and
  • its relation to the purposes and activities of the church organization,

and does not exempt real property not used by it for any purpose except to derive income therefrom.

State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326, Minn. 1927

Prior to 1906, the constitutional provision exempted from taxation

‘all churches, church property used for religious purposes, and  houses of worship.’

Under that provision it was held that a rectory or parsonage belonging to a church society and actually used as a residence for the priest or minister of the society was not exempt.

State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326, Minn. 1927, citing

County of Ramsey v. Church of Good Shepherd, 45 Minn. 229, 47 N. W. 783.

The Constitution was amended in 1906 so as to eliminate the words ‘used for religious purposes’ immediately following the words ‘church property.’

Then the question of the exemption of parsonages came again before this court, under the amended constitutional provision, in the case of State v. Church of Incarnation, 158 Minn. 48, 196 N. W. 802, and it was held that a parsonage,

  • owned by the church society, and
  • actually used and maintained by the society as a residence for its priest or minister, free of charge or rent,

 was exempt from taxes.

State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326, Minn. 1927

The case goes to that extent only, and does not decide the issue in the present case.

The court does, however, indicate the rule which is now to be applied in determining the extent of the exemption granted to church societies under the present wording of the Constitution.

The court states:

‘The words ‘used for religious purposes’ have been eliminated, so that the language relating to churches is now as broad as that relating to institutions of learning. * * *

We have no doubt that the purpose in eliminating those words was

  • to remove the restriction which they had been construed as placing on the exemption granted to churches, and
  • to make the rule applied in respect to the property of institutions of learning applicable in respect to the property of churches to the extent of exempting a parsonage owned and maintained by a church organization as a residence for its pastor.’ . . .

State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326, Minn. 1927, citing State v. Church of Incarnation, 158 Minn. 48, 196 N. W. 802 (Minn. 1924)

No hard and fast rule can properly be laid down to govern all cases.

Generally speaking, it may be said that the rule governing exemption from taxation as to the real property of educational institutions is that all property

  • reasonably necessary for, and
  • primarily used and devoted to,

the proper purposes of the institution, and so located with reference to the main buildings or activities of the institution as to be reasonably suitable for such purposes, is exempt from taxation.

A reasonable amount of property intended and reasonably necessary for such use in the near future, and suitably located, may also be exempt.

Applying the same rule to church societies,

  • a lot and dwelling house rented to others, and
  • not used in any way for religious or church purposes, and
  • not shown to be intended or necessary for such use in the future,

are not exempt. . . .

The general rule is that laws and constitutional provisions exempting property from taxation are to be strictly construed.

Such laws are to be given a reasonable and practical construction that will give effect to their manifest purpose, but will not be extended by construction or implication.

Unless clearly so expressed and intended, it is not to be assumed that the Legislature or the people intended to permit religious corporations and charitable and educational institutions

  • to hold tax free any amount of real estate they might be able to acquire,
  • without reference to the need or use thereof.

The evil of permitting any class of corporations or societies to become tax exempt proprietors and landlords on a large scale is too well known.

State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326, Minn. 1927

As said by Justice Holt in the Carleton College Case:

‘If the church could acquire and hold free from taxes property used in business enterprises,

  • she would depart from her true mission and become a competitor of other business concerns,
  • a field in which she is entitled to no advantage over them.’

The owning of city and village residence property for the purpose of renting the same and receiving income therefrom is a business enterprise engaged in by many corporations and individuals.

Without express provision to that effect, we are not willing to hold that by the constitutional provision in question, as amended, the Legislature or the people intended

  • to open wide the door of exemption and relieve from taxation all real estate owned by church corporations or religious societies,
  • irrespective of the use of such property.

State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326, Minn. 1927, citing State v. Carlton College, 154 Minn. 280, 191 N.W. 400 (Minn. 1923)

The Minnesota Tax Court – 1991 – Rental of Minnesota Church Property

(i)      Trinity Episcopal Church v. County of Sherburne

Bringing the rationale of the Supreme Court’s decision in State v. Union Congregational Church with respect to the rental of Minnesota Church Property down to more recent times, in 1991 the Minnesota Tax Court reviewed a case where:

The sole issue is whether the leasing of the subject property, which

  • formerly had been utilized as a parsonage and
  • is retained by the Church for future use as a parsonage,

destroys the exemption previously accorded the property when it was used as a parsonage. . . .

In this case

  • the tenants are not employed by the church,
  • nor is there any assertion that their occupancy is necessary for church purposes.

 . . . We have, however, two different issues:

          (1)     whether the property qualifies for exemption on the basis that the rent proceeds are utilized for church purposes;  and

          (2)     whether the temporary rental of a parsonage pending arrival of a new pastor destroys the tax exemption.

We will address these issues in that order.

(1)     Whether the use of the rents for church purposes qualifies the property for exemption.

The Minnesota Supreme Court faced the identical issue to that raised in this case in State v. Union Congregational Church, 173 Minn. 40, 216 N.W. 326 (1927).

In that case the Supreme Court stated:

[w]hen it

  • ceased to be occupied or used as a residence for the pastor of the society and
  • was rented to others for dwelling purposes

 it ceased

  • to be a parsonage or
  • to be used in any way for church or religious purposes.

It then ceased to be “church property” just as a house of worship ceases to be such if it is abandoned for that purpose and rented and used for business purposes.

No hard and fast rule can properly be laid down to govern all cases. . . .

 A reasonable amount of property intended and reasonably necessary for such use in the near future, and suitably located, may also be exempt.

. . . a lot and dwelling house rented to others and

  • not used in any way for religious or church purposes, and
  • not shown to be intended or necessary for such use in the future,

are not exempt.

Trinity Episcopal Church v. County of Sherburne, 1991 WL 95745 Minn.Tax,1991.

Minnesota Department of Revenue

The Minnesota Department of Revenue addressed the rental of Minnesota Church Property in its Minnesota Property Tax Administrator’s Manual Module #5 – Exempt Property by providing in part as follows:

All churches, church property, and houses of worship are exempt per Minnesota Statutes.

However, the Department of Revenue has consistently advised that

  • to be exempted,
  • the property must be used by the church for church purposes.

For example, the department has advised that vacant land purchased by a church but not used for any church purpose should not be granted an exemption.

Prior to 1906, the Minnesota Constitution read that

 “all churches, church property used for religious purposes, and houses of worship”

 were exempt. The constitution now states

  “churches, church property, and houses of worship.”

In State v. Board of Foreign Missions of Augustana Synod, 221, 1946 (Minn. 536, 22 N.W.2d 642), the court held that the elimination of the words

           “used for religious purposes”

was intended to extend the benefits of tax exemption to larger classifications of church property.

properties owned by religious corporations

used for religious purposes

In the case of properties owned by religious corporations used for religious purposes, exemption is also granted unless the property

  • is not being used for a church purpose; or
  • is being leased or used for profit.

For example, church property including the parsonage is not exempt

  • if it is rented out to private individuals or corporations, or
  • when the property is used for purposes other than those for which the church was established.

The Minnesota Supreme Court concurs that the test for determining entitlement of church owned property for a tax exemption is whether the property is

  • devoted to, and
  • reasonably necessary for

accomplishment of church purposes.

The Court has granted exemption in a case where a duplex located 30 feet from a church sanctuary and owned by the church, but occupied by

  • a part-time janitor in one unit and
  • the director of church music, the church liturgist, and the director of Christian education at the church occupied the other unit.

The exemption was granted in this case on the basis that the duplex was

  • devoted to, and
  • reasonably necessary for

accomplishment of church purposes.

(St. John’ s Lutheran Church v. County of Hennepin, 1985, 373 N.W.2d 281).

The Department of Revenue has issued numerous opinions on church-owned property.

Various court opinions have also outlined the importance of use in determining whether these properties should be granted exemption.

For example, in State vs. Second Church of Christ, Scientist (240 N.W. 532, Minn. 1932), the Supreme Court said that the test is the use to which the property is devoted or about to be devoted.

Other relevant court cases are noted in the “Applicable Court Cases” section of this manual.

Minnesota Statutes, Section 272.01 – Rental of Minnesota Church Property

M.S. Section 272.01, Subd. 2(a) identifies the imposition of a “use tax” on lessees of tax exempt real property involving the rental of Minnesota Church Property, by providing that:

When any real or personal property which is exempt from ad valorem taxes, and taxes in lieu thereof, is

  • leased,
  • loaned, or
  • otherwise made available and used by a private individual, association, or corporation in connection with a business conducted for profit,

there shall be imposed a tax, for the privilege of so using or possessing such real or personal property,

in the same amount and to the same extent as though the lessee or user was the owner of such property.

M.S. Section 272.01, Subd. 2(c) identifies the form and manner of collection of the tax:

Taxes imposed by this subdivision are payable as in the case of personal property taxes and

  • shall be assessed to the lessees or users of real or personal property in the same manner as taxes assessed to owners of real or personal property,
  • except that such taxes shall not become a lien against the property.

When due, the taxes

  • shall constitute a debt due from the lessee or user to the state, township, city, county, and school district for which the taxes were assessed and
  • shall be collected in the same manner as personal property taxes.

If property subject to the tax imposed by this subdivision is leased or used jointly by two or more persons, each lessee or user shall be jointly and severally liable for payment of the tax.

In 2013, the Minnesota Supreme Court interpreted the above provisions with respect to the rental of Minnesota Church Property as follows:

Under Minn.Stat. 272.01, subd. 2(a) (2012), property of a tax-exempt entity that is leased to a for-profit business is subject to a use tax determined as though it were owned by the lessee.

Living Word Bible Camp v. County of Itasca, 829 N.W.2d 404, 413 Minn.,2013.

Minnesota Statutes, Section 273.19 – Rental of Minnesota Church Property

As a complement to M.S. Section 272.01, Subd. 2(a), M.S. Section 273.19, Subd. 1 identifies a general rule applicable to the rental of Minnesota Church Property that:

  • lessees of tax exempt real property under leases of one year or more,
  • which are not subject to taxation under M.S. Section 272.01, Subd. 2,
  • shall be deemed to be the owner of the real property for property tax purposes:

Except as provided in subdivision 3 or 4, tax-exempt property held under a lease for a term of at least one year, and not taxable

  • under section 272.01, subdivision 2, [Exempt property used by private entity for profit] or
  • under a contract for the purchase thereof,

shall be considered, for all purposes of taxation, as the property of the person holding it.

In 2013, the Minnesota Supreme Court interpreted the above provision as follows:

. . . under Minn. Stat. 273.19, subd. 1 (2012),

  • property owned by a tax-exempt entity
  • that is leased to another and not taxable under section 272.01, subdivision 2,

is considered for tax purposes to be the property of the lessee; that is, if the property is leased to a tax-exempt entity, it remains exempt.

In 2014, the Minnesota Tax Court made reference to both of the above identified provisions with respect to the rental of Minnesota Church Property by providing as follows:

Under Minn.Stat. 273.19, subd. 1,

“tax-exempt property held under a lease for a term of at least one year . . . shall be considered, for all purposes of taxation, as the property of the person holding it.

In this subdivision, “tax-exempt property” means property owned by … any . . . benevolent . . . society or institution, incorporated or unincorporated.”

Inter-Faith care Center v. Carlton County, 2014 WL 1711798 (Minn.Tax Regular Div.)

Thus, Minn.Stat. 273.19, subd. 1, sets out two factors to consider with respect to the rental of Minnesota Church Property to establish whether a lessor or lessee is considered the owner of property for purposes of taxation:

(1)     the property in question must be “tax-exempt” as defined by Minn.Stat. 273.19, subd. 1,  and

(2)     the property must be held for a term of at least one year and not held under a contract for the purchase therefore.

Inter-Faith care Center v. Carlton County, 2014 WL 1711798 (Minn.Tax Regular Div.)

Minnesota Property Tax Exemption – Rental of Church Property

In order for church owned property to qualify for a real property tax exemption, there must be a concurrence of:

  • ownership of the property by the church,  and
  • a use of the property for the purpose for which the church was organized.

Property owned by a church and leased to others for profit will generally not be tax exempt.

For additional information on Minnesota Chapter 315 churches, see also Dahlelaw.com, or also https://dahlelawchurches.com/minnesota-chapter-315-churches/

For additional information on Minnesota Chapter 317A churches, see also Dahlelaw.com, or also https://dahlelawchurches.com/minnesota-chapter-317a-corporations/

Minnesota Church Attorney

If you or your church have certain issues requiring the assistance of a Minnesota Church Corporation Law attorney, including Minnesota tax exempt real property issues, please contact attorney Gary C. Dahle, at 763-780-8390, or [email protected].

Since 1992, Attorney Gary C. Dahle has represented a variety of Minnesota churches – Baptist, Evangelical, Lutheran, Pentecostal, Presbyterian, and independent churches, with respect to:

Attorney Gary C. Dahle has represented churches located in the Minnesota cities of Arden Hills, Blaine, Bloomington, Brooklyn Park, Burnsville, Chaska, Corcoran, Coon Rapids, Eden Prairie, Fridley, Glencoe, Minneapolis, Mounds View, Roseville, St. Louis Park, St. Paul and Wyoming.

Topics of Interest:

Copyright 2018

Gary C. Dahle – Attorney at Law

2704 Mounds View Blvd., Mounds View, MN 55112

Phone:  763-780-8390    Fax: 763-780-1735

[email protected]

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Related Topics:

For a discussion of Minnesota probate law, see https://dahlelawprobate.com/ and also http://www.dahlelawminnesota.com/ and also https://dahlelaw.com/minnesota-probate/

For information on North Dakota Probate law, see http://www.dahlelawnorthdakota.com/

For information on Minnesota Cemetery Law, see http//:www.dahlelawcemeteries.com

For information on North Dakota Transfer on Death Deeds, see http://northdakotatransferondeathdeeds.com/