August 9, 2001
TAXING CHURCHES WHOSE STEEPLES ARE USED FOR CELL PHONE ANTENNAS
By: Judith Lohman, Chief Analyst
You asked whether a church that leases its steeple to a cellular mobile telephone company to install an antenna is subject to any taxation as a result. You also asked for information on a New Jersey law that taxes churches on parts of their facilities leased to profit-making ventures and about a Bloomfield, New Jersey lawsuit arising from it. Finally, you asked whether taxing churches that lease their facilities to cell phone companies is an issue in other states.
Under Connecticut law, a church that rents out its steeple to a cell phone company for an antenna site is subject to local property tax on the portion of the building used for the antenna, if the church receives income from the transaction. But, in practice, local assessors do not always take advantage of their authority to tax churches in this situation.
The cell phone company is responsible for paying property tax on the antenna itself. Depending on the company that owns the antenna, the tax may be assessed by the state or a municipality. A fuller description of the property tax treatment of cell phone towers may be found in the enclosed OLR report (2001-R-0071).
New Jersey recently changed its property tax law to make it similar to Connecticut's. The new law allows local authorities to impose property taxes on any part of an exempt religious organization's building that is not used for the organization's or another exempt organization's purposes or that is leased to a profit-making entity. Under New Jersey's old law, the organization lost the exemption for the entire property if it leased part of it for other purposes. The new law has generated a lawsuit by the Bloomfield, New Jersey tax assessor against a church that rents space in its steeple for cell phone antennas. The dispute centers on the assessor's valuation of the church for tax purposes.
In addition to the property tax, a church could be subject to state and federal income taxes on rental income it receives from a cell phone company. Federal law requires normally exempt organizations to pay taxes on their unrelated business income. But because of the complexity of the federal unrelated business income tax (UBIT) law, UBIT applicability depends on the specific facts of each situation. This report only touches the basics of the UBIT. In 2000, the United Methodist Church's General Council on Finance and Administration commissioned a legal analysis of the federal income tax consequences for churches renting their steeples to cell phone companies from Arnold & Porter, a Washington, D.C. law firm. The firm's conclusion was that a church could avoid the UBIT by meeting various conditions. We enclose a copy of Arnold & Porter's analysis and a follow-up letter, along with the Methodists' general counsel's cover memo for your further information. According to Michael Galliher of the Department of Revenue Services, Connecticut follows the federal rules for assessing UBIT under the state income tax.
Extensive computer searches and a call to the National Conference of State Legislatures (NCSL) failed to turn up any state where taxing churches that make rental agreements with cell phone companies is an issue. NCSL is posting an inquiry on its Listserve on tax issues and we will report any additional information we receive.
Under Connecticut law, “houses of religious worship;” the land on which they stand; and any pews, furniture, and equipment a religious organization owns or that is held in trust for it, are exempt from local
property tax (CGS § 12-81 (13)). But the exemption is limited by another
statute that makes real property belonging to or held in trust for the purposes of a religious organization taxable if the organization derives “rents, profits, or income” from using it for “other purposes” (CGS § 12-88).
The law also provides that, if only part of the organization's land or building is rented out for other purposes, only the part that is rented out is taxable. Section 12-88 was enacted in 1927 and has not been amended since. It applies not just to religious organization property but also to property owned by other exempt organizations, including scientific, literary, educational, and charitable ones.
According to Kathy Rubenbauer of the Office of Policy and Management, under § 12-88, if 5% of a church's building or land is leased as a site for cell phone equipment, the church loses the property tax exemption on 5% of the property. Rubenbauer says that, in practice, assessors may not always exercise their authority to tax a portion of a church building leased for an antenna because the proportion of the building may be relatively small and they may have difficulty assigning a value to it.
Like Connecticut, New Jersey state law exempts various types of buildings from local property taxes, including buildings used for educational or charitable purposes. Among the buildings New Jersey exempts are those “actually used in the work of associations and corporations organized exclusively for religious purposes, including religious worship.” Legislation approved January 29, 2001 and retroactive to September 30, 1999 excludes from the exemption any part of such a building that is “leased to a profit-making organization or is otherwise used for purposes which are not themselves exempt from taxation.” The new legislation was enacted in response to a court ruling that interpreted the prior law as requiring a religious organization to give up the exemption on the entire property if it leased a portion to another entity or profit-making organization (2001 NJ Session Laws, Chap. 18, § 1).
The new law has led to litigation in Bloomfield, New Jersey, which is attempting to impose property taxes on St. Thomas the Apostle Church. St. Thomas rents space in its steeple to VoiceStream for six cell phone
towers. The lawsuit is over the assessed value of the steeple and the part of the land on which it stands, according to the New Jersey Star-Ledger (“Town Ringing Up Tax Bill for Cell Towers in Church,” July 5, 2001, copy enclosed).
Under federal law, a tax-exempt organization, such as a church, may still have to pay income tax on income it receives from an unrelated trade or business. The tax, called the unrelated business income tax (UBIT), applies to income over $1,000 annually from certain types of activities. In general, an activity is considered an unrelated business if it is (1) carried on to produce income from selling goods or performing services, (2) regularly carried on by the organization, and (3) not substantially related to the furtherance of the organization's exempt purpose. A trade or business is considered related to the exempt purposes if it has a substantial causal relationship to achieving those purposes (other than by producing income) (IRC, § 512).
On its face, it appears that the UBIT would apply to church income from cell phone companies. But the federal tax law contains several exemptions and exclusions that could allow a church to avoid paying UBIT on its cell phone income. For example, under the law, rental income from real property and from personal property leased with the real property is not subject to UBIT if the transaction meets certain conditions. Under this provision, assuming the Internal Revenue Service considers a church steeple to be “real property,” the church's income from renting it to a cell phone company would not be subject to the UBIT.
On the other hand, the real property rental exclusion contains its own exceptions and conditions. For example, rental income is taxable if:
1. the rent attributable to any personal property rented with the real property makes up more than 50% of the total rent;
2. the rent the church receives depends wholly or partly on the income or profits the cell phone company derives from the antenna in the steeple, or
3. the church owns or otherwise “controls” the cell phone company (IRC, § 512 (b) (3) and (4)).
In addition, the rent is taxable if the steeple is “debt-financed property.” But, the rent a church derives from leasing a debt-financed steeple is not taxable if “substantially all” of the steeple's use is “substantially related” to the church's religious purpose (IRC, § 514 (b) (1)).
Whether a church is subject to UBIT under the state income tax depends on the same factors as its federal UBIT tax liability. According to Michael Galliher of DRS, state UBIT rules follow federal rules. Galliher says DRS has not seen any UBIT activity arising from church steeple rentals to cell phone companies. He said the likely reason for this is that DRS audits run about three years behind return dates and the majority of church rentals to cell phone companies have occurred more recently.