No tax exemption: Church property not used exclusively for worship

A trial court correctly refused to grant a tax exemption to a church for property it rented to a commercial tenant because it wasn’t used or occupied exclusively for religious worship, the Court of Appeals of Virginia has held.

The church relied on case law that predated Virginia’s adoption of a strict construction standard for tax exemption statutes.

Judge Stuart A. Raphael rejected the church’s arguments.

“In granting the City’s motion to strike, the trial court correctly determined that the Church failed to prove that it used the 214 Grove Avenue property ‘exclusively’ for religious worship purposes or for the residence of its minister under Code § 58.1-3606(A)(2),” he wrote.

Judges Clifford L. Athey Jr. and Frank K. Friedman joined Raphael in Emmanuel Worship Center, et al. v. The City of Petersburg (VLW 024-7-049).

Adjacent property

Emmanuel Worship Center in Petersburg purchased 214 Grove Avenue, a piece of property next to the church’s main worship center. At that time, the property was leased by Wooden Leg Van Shop, a window tinting business.

Wooden Leg continued its lease and paid the church a monthly rent of $500. The property also housed outbuildings used exclusively by Wooden Leg, which also parked vehicles in the gated lot.

The church used a brick building on the property for various purposes, such as bible study and Sunday school.

In 2019, the city obtained a decree ordering the sale of 214 Grove Avenue for delinquent taxes. Rather than appeal, the church paid the taxes under protest and later filed a bill of review.

After the trial court dismissed the bill of review, the Supreme Court of Virginia remanded the case for a determination of whether the property was used for religious worship and exempt from property taxes.

Granting the city’s motion to strike, the trial court found that the church failed to prove it used the property exclusively for worship or for the residence of clergy because portions of the property were leased to a commercial tenant.

Not exclusive

The church contended that the trial court misinterpreted the exclusivity requirement in Code § 58.1-3606(A)(2).

Under the Virginia Constitution of 1971, the legislature adopted Article X, §6(f), which “prescribes a rule of strict construction to apply prospectively to exemptions ‘established or authorized’ by the new constitution,” Raphael pointed out.

Doubts about whether an exemption applies must be resolved in the taxing authority’s favor; the taxpayer must show they are subject to the exemption.

Article X, Section 6(a)(2) created a baseline exemption by classification for religious-use properties, and Section 6(a)(6) conferred a broader exemption for religious and other nonprofit uses, the judge added.

While § 58.1-3606(A)(2) carries forward the exclusive-use language from Article X, Section 6(a)(2), Raphael said it “permits the exemption to extend to certain ‘adjacent’ or ‘ancillary and accessory’ properties that support the exclusive-use property.”

The judge said a church-owned parking lot used by parishioners to park their cars to attend worship services may qualify as “adjacent land reasonably necessary for the convenient use” of the church or “property used for ancillary and accessory purposes … the dominant purpose of which is to support or augment the principal religious worship use,” even if it wasn’t used exclusively for religious worship or housing the minister.

Raphael accepted that various aspects of the church’s activities at the property qualified as worship.

“Even so, the Church failed to satisfy the exclusivity test,” he wrote. “For it is undisputed that the Church has leased much if not most of the property to Wooden Leg, that Wooden Leg operates its commercial business there, and that Wooden Leg’s business is unrelated to the Church’s religious mission.”

The church didn’t persuade the court with its reliance on the permissive definition of exclusively from City of Richmond v. United Givers Fund of Richmond, Henrico & Chesterfield, Inc., a 1964 opinion of the Supreme Court of Virginia.

“That definition of exclusively … was based on the ‘liberal interpretation’ of exemption provisions required by the 1902 Constitution,” Raphael wrote, which the Supreme Court rejected in 1989’s Westminster-Canterbury of Hampton Roads, Inc. v. City of Virginia Beach.

The judge also rebuffed the church’s argument that 214 Grove Avenue was used for worship purposes because Wooden Leg’s rent money was used for church purposes.

Looking to Mariner’s Museum v. City of Newport News, Raphael explained that what determines if a property is exempt “is the use to which property is put, not the use to which profits that are realized from such property are put.”

“The Church’s argument, if accepted, would create an exception that would swallow the exclusive-use rule, enabling any religious entity to lease its land for commercial purposes to generate revenues to fund its operations,” Raphael added. “In such scenarios, however, the religious entity ‘no longer uses its leased property exclusively … for religious worship.’”

Nor was the property entitled to the exemption for adjacent, ancillary or accessory property. The church never made that claim, instead arguing the property was entitled to the exemption as a standalone property without regard to the adjacent worship center.

“As a standalone property, however, 214 Grove Avenue does not meet the terms of Code § 58.1-3606(A)(2) because the property itself is not used ‘exclusively’ for worship or the residence of a minister,” Raphael said.

Attorney fees

Relying on Article 4, Chapter 39, of Title 58.1, which governs bills in equity for delinquent tax land sales, the city claimed to be entitled to attorney fees for successfully defending against the church’s bill of review.

The church responded that those statutes contemplated the recovery of fees only through the stage of exercising the owner’s right of redemption, rather than proceedings afterward like defending an appeal or bill of review.

“Having reviewed all of Article 4, we find that the Church has the better of the arguments,” Raphael wrote. “Quite simply, there is no provision in that article entitling a locality to attorney fees for work performed after the taxpayer has exercised its right of redemption by paying all taxes, costs, and attorney fees then accumulated.”

Because Article 4 contemplates fees for work that ended upon either the sale of property to pay delinquent taxes or the taxpayer’s redemption, the judge affirmed the trial court’s refusal to award the city with attorney fees.

No guidance

Representing the church, Lenard Myers II of Fortress Proprietas asked during discovery for a reliable process the city uses to determine whether a property was exempt.

“It turns out there is no particular ordinance guiding the process,” he told Virginia Lawyers Weekly. “There’s been a high turnover with city administration over the last two decades and institutional knowledge changes. Where there was a mutual understanding with a prior individual, perhaps that wasn’t the case with another.”

The church hopes the adjacent property will be partially exempted because only a portion is used for commercial purposes, Myers said, adding that the church has moved the Court of Appeals of Virginia for panel or en banc reconsideration.

Christopher Jones, who represents the city, declined to comment on pending litigation.