Fort Calhoun Church v. Washington County
| Decision Date | 23 January 2009 |
| Docket Number | No. S-08-108.,S-08-108. |
| Citation | 277 Neb. 25,759 N.W.2d 475 |
| Parties | FORT CALHOUN BAPTIST CHURCH, appellant, v. WASHINGTON COUNTY BOARD OF EQUALIZATION, appellee. |
| Court | Nebraska Supreme Court |
Milo Alexander and Kevin O'Connell, Senior Certified Law Student, of Abrahams Legal Clinic, Creighton University School of Law, and, on brief, Steven M. Virgil for appellant.
Edmond E. Talbot III, of Talbot & Truhlsen Law Offices, L.L.P., Blair, for appellee.
The Fort Calhoun Baptist Church (Church) leased part of its facilities to the Fort Calhoun Community School District (School). As a result of the lease, the Washington County Board of Equalization (Board) reduced the tax exemption on the Church's property from 100 percent to 80 percent. The Tax Equalization and Review Commission (TERC) affirmed the Board's action, and the Church appeals.
Appellate courts review decisions rendered by TERC for errors appearing on the record. Neb.Rev.Stat. § 77-5019(5) (Cum. Supp. 2006). See City of York v. York Cty. Bd. of Equal., 266 Neb. 297, 664 N.W.2d 445 (2003). When reviewing a judgment for errors appearing on the record, an appellate court's inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable. St. Monica's v. Lancaster Cty. Bd. of Equal., 275 Neb. 999, 751 N.W.2d 604 (2008). Questions of law arising during appellate review of TERC decisions are reviewed de novo on the record. City of York, supra.
The Church is a religious organization that meets the requirements to hold property exempt from property taxes. The Church owns real property in Fort Calhoun, Nebraska.
In February 2006, the School, also a tax-exempt organization, began looking for a space to use for a new special education program. At that time, the School's special education students were receiving services in Omaha, Nebraska, and the School sought to provide these services in Fort Calhoun. The School's goals were to meet the educational needs of the students and to save costs associated with contract services and transporting the children to Omaha.
The School researched market rental rates in Fort Calhoun and Blair, Nebraska. The investigation of potential sites revealed there were few suitable facilities in Fort Calhoun. The School identified two potential sites: the Church and St. John's Catholic Church. The School contacted both churches about leasing classroom space. One reason the School was interested in the Church was its proximity to the Fort Calhoun high school. St. John's Catholic Church ultimately determined its facility would not be available for school use.
The Church was reluctant to enter into a lease, and it proposed that the School make a charitable donation to the Church to offset the increase in costs associated with the School's presence. Because the School required a contract, the Church asked the School to make an offer. The Church provided the School with financial statements from the past 3 years to assist the School in setting an amount. In negotiating a contract and monthly rent, the Church's objectives were to ensure the Church did not incur a financial loss as a result of the lease and to demonstrate to the community that it was not "overly benefiting" from the contract with the School.
The Church and the School entered into a facilities use agreement on July 31, 2006, for $1,325 per month including utilities, for 10 months each year for the 2006-07 and 2007-08 school years. After 2 years, the contract was to automatically renew for another school year unless otherwise agreed.
Included in the $1,325 rent were prorated physical upgrade costs. Approximately $5,000 to $7,000 in modifications for handicapped access and fire safety was necessary for the space to meet the fire marshal's requirements. The Church agreed to complete the upgrades, bear the upfront cost of the materials, and donate the pastor's carpentry skills and labor, charging the School a total of $6,000 to be paid in 20 monthly installments of $300. The parties anticipated that the physical modifications to the Church would remain in place after the termination of the lease and that these physical modifications would also benefit the Church.
The Church applied for a 100-percent tax exemption on its real property on November 20, 2006. The Washington County assessor subsequently recommended an 80-percent exemption. The Board concurred with the assessor's recommendation and notified the Church of the valuation change designating 20 percent of the property as taxable. The Church timely protested the valuation, and TERC scheduled a hearing.
At the hearing, the Church presented evidence of rental values for property in Fort Calhoun. It excluded properties that did not include utilities and a warehouse property as not comparable. The properties varied in size, and most were less than 1,000 square feet. The Church identified four comparable properties, added the monthly rents together, divided that number by the total square footage, and multiplied by 71 percent to account for the fact that the School used the property only 5 out of 7 days each week. It calculated a market value of 54.9 cents per square foot.
A representative for the Church stated that in Fort Calhoun, there was a premium on rent for properties over "a certain size." The Church determined that the School rented 2,243 square feet. Using $1,025 as the figure for rent, the Church calculated the rental rate at 45.7 cents per square foot, which it claimed was 9.2 cents below market value.
In its opinion, TERC assigned $1,325 as the rental amount for 3,200 square feet. It calculated the amount of time the School used the property and concluded the actual rental rate was 57.8 cents per square foot. TERC determined market rental values by identifying two properties and calculating the rental price per square foot. One property rented for 45 cents per square foot ($360 ÷ 800 square feet), and the other rented for 66.7 cents per square foot ($1,600 ÷ 2,400 square feet). The 800-square-foot property with a rental value of 45 cents per square foot per month did not include utilities.
TERC found that the evidence did not support a finding that the Church had leased the property to the School at a below-market rate. As such, it determined that the Church had not met its burden of proving its eligibility for an exemption, because it "failed to demonstrate that the lease of the subject property to the School was for less than market value or that its lease of the subject property to the School represents a contribution of any manner in aid of a charitable, religious or educational use by the School." It concluded the Church had not proved by clear and convincing evidence that the Board's decision was unreasonable or arbitrary, and it affirmed the Board's recommendation of an 80-percent exemption. The Church appeals.
The Church claims that TERC erred by not considering the School's educational use of the property in determining whether the property was used for an exempt purpose and that TERC incorrectly determined the lease was for a business purpose.
The issue is whether the property leased by the Church to the School was used exclusively for educational, religious, or charitable purposes and, therefore, was exempt from taxation pursuant to Neb.Rev. Stat. § 77-202 (Cum. Supp. 2006).
Neb. Const. art. VIII, § 2, states in pertinent part: "[T]he Legislature by general law may classify and exempt from taxation property owned by and used exclusively for ... educational, religious, charitable, or cemetery purposes, when such property is not owned or used for financial gain or profit to either the owner or user." Section 77-202 provides:
(1) The following property shall be exempt from property taxes:
. . . .
(d) Property owned by educational, religious, charitable, or cemetery organizations, or any organization for the exclusive benefit of any such educational, religious, charitable, or cemetery organization, and used exclusively for educational, religious, charitable, or cemetery purposes, when such property is not (i) owned or used for financial gain or profit to either the owner or user, (ii) used for the sale of alcoholic liquors for more than twenty hours per week, or (iii) owned or used by an organization which discriminates in membership or employment based on race, color, or national origin. For purposes of this subdivision, educational organization means (A) an institution operated exclusively for the purpose of offering regular courses with systematic instruction in academic, vocational, or technical subjects or assisting students through services relating to the origination, processing, or guarantying of federally reinsured student loans for higher education.
Statutes exempting property from taxation are to be strictly construed, and the burden of proving the right to exemption is upon the claimant. United Way v. Douglas Co. Bd. of Equal., 215 Neb. 1, 337 N.W.2d 103 (1983).
TERC relied upon United Way in affirming the Board's decision. TERC examined whether the lease to the School was a qualified charitable use by the Church. It found that the leased property was used by the Church for religious purposes on weekends, Wednesday evenings, and other times when necessary. TERC found there was no evidence that the School used the property for religious purposes or that the Church made any educational use of the leased premises except in conjunction with its religious use. Because this property was used a significant amount of time by the School for educational purposes, TERC concluded that the Church did not use the property exclusively for a religious use.
Next, TERC examined the amount of rent charged by the Church to determine whether the lease evidenced a...
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