Issue

Many colleges are currently exempt from paying property taxes on the real property (land and buildings) of their campuses. What if that were to change?

Situation

Troas Bible College (TBC) is a public charity under I.R.C. section 501(c)(3) (and I.R.C. section 170(b)(1)(A)(ii)). At a business luncheon, they hear a speaker that talks about a movement in their county to do away with the property tax exemption for charities and ministries. It certainly gets their attention and they call us.
We reply that there is a lot going on in this arena and it would behoove them to do some “homework” and forecasting. We suggest that they estimate what their property tax liability might be if they were not exempt from paying those taxes.

“How?” They ask.

The process we have used with other organizations is as follows:

  1. Identify two or three businesses in your jurisdiction who have approximately the same amount of land and buildings as your campus.
  2. Go to your county’s (and/or city’s) property tax website (can be found via search engine). It may be the “Tax assessor” website for your jurisdiction.
  3. Find the webpages that allow you to search properties (usually by owner and/or address).
  4. See what they are paying in annual property taxes.
  5. Begin discussion with your finance and leadership team – “What if we had to add this amount to our annual budget”?

Rules

Property tax laws are a state and local tax issues. And, every jurisdiction is different. In most locales, Christian colleges many qualify for an exemption from property taxes.

One exception to the exemption may be for property that you are using for unrelated business income purposes. We are seeing more and more jurisdictions (generally counties and cities) coming to exam or audit colleges to try and ascertain whether the college should be taxed on a percentage of their property due to the conduct of unrelated business activities – even (sometimes) when those activities may be excluded from UBIT for federal tax purposes.

Other jurisdictions are making subtle attempts to do away with property tax exemptions for charities. They need revenue.

Finally, without trying to be alarmists, we all need to keep an eye on the “same sex” marriage rulings that are working their way through the U.S. courts.

From Capin Crouse’s “2016 Higher Education Tax Update”:
On June 26, 2015, the Supreme Court found that same-sex marriage was legal throughout the United States. Immediately, the issue was raised across the press, social media, and in private conversations as to whether this decision (Obergefell v. Hodges) would result in limits, censorships, and/or legal actions against Christian colleges, seminaries, and universities whose beliefs stood in contrast to the Supreme Court’s decisions and the resulting government mandates.

At the core of these speculations was the issue of whether religious organizations might lose their tax-exempt status. Might the IRS begin to revoke the exempt status of Christian higher education institutions? There appeared to be precedent for this action by the IRS and advocates of this position have been citing the Bob Jones University v. the U.S. racial discrimination case from the 1970’s. In fact, Justice Roberts, in his dissent in Obergefell, stated “Indeed, the Solicitor General candidly acknowledged that the tax exemptions of some religious institutions would be in question if they opposed same-sex marriage.”

Further, in the majority Supreme Court opinion of the Obergefell case, Justice Kennedy makes a strong “public policy” case for same-sex marriage. This is important because “public policy” is the litmus test the IRS has historically used as a guide to revoking organizations’ (e.g. Bob Jones University’s) exempt status.

With regard to loss of tax exemption by religious organizations due to the Obergefell decision, IRS Commissioner Koskinen testified before the Senate in July 2015 stating, “At this time, there is no basis for us [The IRS] to revisit tax-exempt status on that grounds.” Further, the Congressional Research Service, in an October 2015 report entitled, “Recognition of Same-Sex Marriage: Implications for Religious Objections”, emphasized that Koskinen, “stated that the IRS would not currently apply the doctrine to religious entities acting in opposition to same-sex marriage, but left open the possibility that the agency could change its position in response to future legal and policy developments.” Other IRS officials, when speaking about this issue and using Bob Jones as a precedent, have indicated that it generally takes time for Supreme Court decisions of this nature to become “public policy” – the apparent test for the IRS with respect to tax-exempt status revocation.

Before the IRS revoked tax-exempt status in Bob Jones, there was the Brown v. the Board of Education case, the U.S. Civil Rights legislation enacted by Congress in the 1960’s and several other decisions – along with repeated public outcry. When the issue had become “public policy,” the IRS acted in revoking the tax-exempt status of Bob Jones and others.

There will continue to be legal maneuvering, articles in the press, and passionate outcries on both sides of this issue. It is somewhat disconcerting for religious organizations that the issue is not settled with the IRS and that a small number of bureaucrats could ultimately decide to begin revoking the tax-exempt status of organizations when they see fit. It is probable that we will see several iterations of First Amendment rights cases in the near future that will ultimately hold the sway on “public policy” for this issue.

In the meantime, it would appear prudent for religious organizations to count the cost of their tax-exempt status. Wise management teams at churches, religious schools, and other organizations are looking at what impact the following might have on their operations:

  • Taxability of revenues
  • Potential decrease in contribution revenue
  • Loss of property tax exemptions
  • Loss of sales tax exemptions
  • Loss of unrelated business exclusions
  • Impacts of filing new federal and state tax forms
  • Affordable Care Act implications
  • Changes to other federal and state not-for-profit benefits

Bottom Line

A lot of this is “speculative” today. However, it is always wise to plan ahead and consider the cost. You should have a conversation with you trusted tax advisor about doing some “homework” as specified above.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.