Through nearly 20 years of law practice–15 of which have been focused on the representation of tax-exempt organizations–this writer has been involved in numerous seemingly simple–and some cutting edge–applications for exemption from Texas property taxes for religious organizations. In most instances, the organization is advised in advance to revise governing documents, develop program descriptions, or to engage in other effort to place the organization in a best-case scenario to receive favorable tax exemption from the local property tax authorities.
This Freeman Law blog provides an overview of why that front-end due diligence is critical to ensuring that an application for exemption from Texas property tax is favorably received by the local taxing authorities.
Texas Nonprofits, Overview
A Texas nonprofit corporation may be entitled to exemption from Texas property tax. However, not all nonprofit corporations—even those that enjoy exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code—are entitled to an exemption from state property taxes. See, e.g., Tex. Tax Code § 11.18(a)-(a)(1)(B) (providing for property tax exemption for qualified “charitable organizations”).
The Texas Tax Code sets forth various statutory regimes for exemption that may be available for a Texas nonprofit organization, depending on the purposes for which the organization is formed or organized and the manner in which it is operated. However, the organization must apply for and receive an exemption. That process is usually performed by use of forms promulgated by the Texas Comptroller or local tax appraisal district.
There are numerous categories and subcategories of organizational and operational types that may qualify for an exemption, and these statutes are contained, primarily, in Chapter 11 of the Texas Tax Code. Some of those statutes set forth a complex, yet precise framework for determining whether or not a tax exemption may be available. See, e.g., Tex. Tax Code §§ 11.18 (charitable organizations), 11.19 (youth spiritual, mental, and physical development associations), 11.20 (religious organizations), 11.21 (schools).
The Texas Constitution
All property that the State of Texas has jurisdiction to tax is taxable unless exempt by law. See Tex. Const. art. VIII, § 2(a). The state has jurisdiction to tax (1) real property if located in Texas and (2) tangible personal property if the property is: (a) located in Texas for longer than a temporary period; (a) temporarily located outside Texas and the owner resides in Texas; or (3) used continually, whether regularly or irregularly, in Texas. See Tex. Tax Code § 11.01(a)-(d).
“Property” means any matter or thing capable of private ownership. Id. at § 1.04(1). The term “real property” includes land and improvements. Id. at § 1.04(2)-(2)(B). “Tangible personal property” means “personal property that can be seen, weighed, measured, felt, or otherwise perceived by the senses, but does not include a document or other perceptible object that constitutes evidence of a valuable interest, claim, or right and has negligible or no intrinsic value.” Id. at § 1.04(5).
The legislature may, by general laws, exempt from taxation actual places of religious worship, clergy residences, property used by charitable institutions, and other. See Tex. Const. art. VIII, § 2(a). All statutes for the exemption of property from taxation are strictly construed against the exemption and in favor of the state and taxation. Davies v. Meyer, 541 S.W.2d 827, 828 (Tex. 1976).
Section 11.20, Texas Tax Code – Religious Organizations Property Tax Exemption
Pursuant to the Texas Constitution, article VIII, section 2(a), the Texas Legislature enacted Texas Tax Code section 11.20(a), exempting real and tangible personal property if it is (1) owned by a religious organization, (2) used primarily as, or at, a place of regular religious worship, and (3) is reasonably necessary for engaging in religious worship. See Earle v. Program Centers of Grace Union Presbytery, Inc., 670 S.W.2d 777, 781 (Tex. App.—Fort Worth 1984, no writ) (“To qualify for exemption under sec. 11.20, the property in question must be owned by a religious organization.”).
Specifically, section 11.20 provides as follows:
“An organization that qualifies as a religious organization as provided in Subsection 11.20(c) is entitled to an exemption from taxation of:
- the real property that is owned by the religious organization, is used primarily as a place of regular religious worship, and is reasonably necessary for engaging in religious worship;
- the tangible personal property that is owned by the religious organization and is reasonably necessary for engaging in worship at the place of worship specified in Subdivision (1).”
Tex. Tax Code § 11.20(a)-(a)(2) (emphasis added).
Pursuant to subsection 11.20(a)(1), the real property must be: A. owned by the religious organization, B. used primarily as a place of regular religious worship, and C. reasonably necessary for engaging in religious worship.
To qualify as a “religious organization,” the entity must meet these requirements:
- be organized and operated primarily for the purpose of engaging in religious worship or promoting the spiritual development or well-being of individuals;
- be operated in a way that does not result in accrual of distributable profits, realization of private gain resulting from payment of compensation in excess of a reasonable allowance for salary for services rendered, or any form of private gain;
- use its assets in performing the organization’s religious functions or the religious functions of another religious organization; and
- by charter, bylaw, or other regulation adopted by the organization to govern its affairs direct that on discontinuance of the organization by dissolution or otherwise the assets are to be transferred to the government or an organization that is qualified as a charitable organization under section 501(c)(3) of the Code.
Tex. Tax Code § 11.20(c)-(c)(4). Most local appraisal district’s application for a religious organizations property tax exemption incorporates each of the requirements of section 11.20(c) of the Texas Tax Code. See, e.g, Dallas Central Appraisal District Exemption Application for Religious Organization, Step 2 and Schedule AR: Real Property Used as Actual Place of Religious Worship, Clergy Residence or Endowment Fund Property, (incorporating all requirements of section 11.20(c) of the Texas Tax Code).
Most importantly, perhaps, to qualify for a religious organizations property tax exemption afforded by section 11.20 of the Texas Tax Code, the real property must be used primarily as a place of regular religious worship. See Tex. Tax Code § 11.20(a)(1).
“Religious worship” is defined as “individual or group ceremony or meditation, education, and fellowship, the purpose of which is to manifest or develop reverence, homage, and commitment in behalf of a religious belief.” Id. at § 11.20(e). This definition was adopted by the Texas Legislature in 1982 following the Davies decision. See Kerrville Independent Sch. Dist. v. Southwest Tex. Encampment Assoc., 673 S.W.2d 256, 259-60 (Tex. App.—San Antonio 1984, no writ).
The term “primarily” has been interpreted to mean—first; principal; chief; leading. See Earle, 670 S.W.2d at 781.
Texas courts—including the Texas Supreme Court—recognize and emphasize that there is a difference between religious purposes and religious worship, but a program which is collateral to a religious program will not necessarily defeat an exemption which would otherwise be allowed. See Davies, 541 S.W.2d at 828, 830 (noting that “The worship of God is not prohibited in any place, but we are of the opinion that the spirit of the Constitution would include any place at which the worship might be indulged in so continuously and in such a manner as to give it the character of ‘a place of worship.’”); Southwest Tex. Encampment Assoc., 673 S.W.2d at 260.
In Swearingen v. City of Texarkana, 596 S.W.2d 157 (Tex. Civ. App. 1979), writ refused n.r.e. (Tex. 1980), the court of appeals, citing Davies, noted:
“Although we recognize that the preparation and dissemination of religious materials for the purposes of inspiration, education and evangelization can be considered as worship in the larger meaning of the word, most courts which have dealt with the problem of tax exemptions for places of worship have construed and applied the term in the sense of a place where persons come together for congregational worship and for the administration or observance of church sacraments and ordinances. Implicit in such a view is the truth that there is a vast difference between property used for religious purposes and property used as an actual place of religious worship. The constitution does not permit the exemption of the former, but only the latter type of property.”
Swearingen, 596 S.W.2d at 159-60 (citation omitted; emphasis added).
Following Davies and Swearingen, the Texas Legislature enacted section 11.20(d) of the Texas Tax Code which allows for a religious organization property tax exemption even when there is “occasional” secular use of the property, provided that the primary use of the property is for religious worship and the revenue derived from secular uses is devoted exclusively to the improvement of the property as an actual place of religious worship. See Tex. Tax Code § 11.20(d); First Baptist Church of San Antonio v. Bexar County Appraisal Rev. Bd., 833 S.W.2d 108, 111 (Tex. 1992) (finding that a property leased by a church to a for-profit company for commercial parking lot purposes was still entitled to an exemption from property tax under section 11.20 because the parking lot property was primarily used for religious worship); City of Austin v. Univ. Christian Church, 768 S.W.2d 718, 720 (Tex. 1988) (addressing religious organizations exemption under section 11.20 of the Texas Tax Code for property owned by a church but leased to a for-profit business for commercial parking lot purposes).
For purposes of a religious organization property tax exemption, “a place of religious worship includes not only the sanctuary, but also those grounds and structures surrounding the sanctuary which are necessary for the use and enjoyment of the church.” City of Austin v. Univ. Christian Church, 768 S.W.2d 718, 719 (Tex. 1988). But, the extent of the possible exemption is not boundless. In Davies—a decision that pre-dates the enactment of Section 11.20(e) (statutory definition of “religious worship”)—the Episcopal Diocese of North Texas sought a religious organizations exemption for a 155-acre church camp. The trial court held that an open-air chapel and an acre surrounding it as well as the minister’s residence with its surrounding acre of land were the only parts of the camp that were exempt. The Diocese failed to prove entitlement to an exemption to the remaining 153 acres. The court of civil appeals refused to hold that the evidence established as a matter of law that the entire tract was “an actual place of religious worship.” The Texas Supreme Court affirmed. See Davies, 541 S.W.2d at 828-830.
The case of City of Austin v. University Christian Church, 768 S.W.2d 718, 719 (Tex. 1988) regarded a religious organization property tax exemption sought for parking spaces owned by the church. The court of appeals’ opinion in University Christian Church v. City of Austin was reversed due to improper jury instruction and remanded by the Texas Supreme Court in City of Austin v. University Christian Church, 768 S.W.2d 718, 719 (Tex. 1988). But, the court of appeals’ discussion on the evidence presented to support the issue of “primarily used as a place of religious worship” is illustrative of the effort that a religious organization should undertake to prove entitlement to a property tax exemption:
“A strong case can be made on behalf of the church. Dr. Ervin Crain, minister of the church, testified that the parking lots are used by those attending Sunday morning worship services, Sunday School, and other regular Sunday events such as evening worship and afternoon religious studies and socials. He further testified that the property is used extensively throughout the week by the church staff, and by those attending devotionals, college group meetings, choir practices, concerts, weddings, funerals, Texas Bible Chair classes held in conjunction with the University of Texas, as well as by congregation members seeking to meet with staff members or to use the chapel for private meditation and prayer. Floyd Savage and Hugh Eckols, long-time members of both the church and its governing board, substantially repeated this testimony. All three witnesses testified that all who participate in these activities depend on using the lots.
The lots unquestionably serve purposes of primary importance to the religious institution. They are the essential means of providing access to the church building. They contain a total of approximately fifty spaces to serve three hundred members, comparable to the reasonable needs of the congregation, albeit inadequate. The evidence showed with almost no dispute that were it not for the two lots in question, this church could not continue, and that the availability of parking in this location is a vital component of the church’s ministry for at least two reasons. First, the lots permit church members to utilize their sanctuary building and engage in church activities. Second, the lots play a role in attracting new members to the church. Four of appellant’s five witnesses stated that the availability of parking has an impact on this congregation’s growth comparable to other ministerial programs. Without the lots, the church probably could not pursue its ministry. Without the lots, the church might well have no ministry.”
Univ. Christian Church v. City of Austin, 789 S.W.2d 361, 363–64 (Tex. App.—1990), rev’d and remanded by, City of Austin v. Univ. Christian Church, 768 S.W.2d 718, 721 (Tex. 1988) (finding that, at the trial court level, the jury instruction regarding whether the property in question was used primarily for religious worship was erroneous and thus required a remand).
The Texas Constitution also provides, in part:
“[T]he legislature may, by general laws, exempt from taxation public property . . . actual places of religious worship, also any property owned by a church or by a strictly religious society for the exclusive use as a dwelling place for the ministry of such church or religious society, and which yields no revenue whatever to such church or religious society; provided that such exemption shall not extend to more property than is reasonably necessary for a dwelling place and in no event more than one acre of land . . . [.]”
See Tex. Const. art. VIII, § 2(a) (emphasis added).
Section 11.20(a)(3) of the Texas Tax Code provides that a religious organization is entitled to an exemption of “the real property that is owned by the religious organization and is reasonably necessary for use as a residence (but not more than one acre of land for each residence) if the property: (A) is used exclusively as a residence for those individuals whose principal occupation is to serve in the clergy of the religious organization; and (B) produces no revenue for the religious organization[.]” Tex. Tax Code § 11.20(a)(3) (emphasis added).
Additionally, a religious organization is entitled to an exemption of the tangible personal property that is owned by the religious organization and is reasonably necessary for the use of the clergy residence. Id. at § 11.20(a)(4).
Insights and Closing
The supposed “religious organization” that owns any real or personal property in Texas should not take lightly its potential for exemption from state property taxes (or rejection of same). Due care should be taken that the organization is appropriately organized as a qualified religious organization as defined by the Texas Tax Code, and the organization’s property should be used primarily as a place of actual religious worship, as that phrase or term has evolved over near 100 years of Texas jurisprudence. Many religious organizations that are, pursuant to 26 U.S.C. § 508(c)(1)(A), automatically exempt from federal income taxes pursuant to section 501(c)(3) of the Internal Revenue Code believe these state law property tax exemption requirements are in place, but all statutes for the exemption of property from taxation are strictly construed against the exemption. Many local taxing authorities take a hard stance on these ideals of strict statutory construction. Thus, the religious organization is wise to engage competent legal counsel to help guide the organization through the property tax exemption process, just as the organization should in any application for exemption from federal income taxes pursuant to section 501(c)(3) of the Internal Revenue Code.
Every nonprofit is different, that’s why we collaborate with our nonprofit clients to identify and meet their unique needs. Freeman Law represents associations & 501(c)(6) organizations, churches and other religious organizations, foundations, private foundations, 501(c)(3) organizations, and other nonprofit clients. While nonprofits encounter many of the same economic concerns and administrative challenges as any business, they also face many unique challenges. Schedule a consultation or call (214) 984-3000 to discuss your nonprofit concerns or questions.