Islamic Teaching On Usury Kills Property Tax Exemption In Tennessee

This post was originally published on Forbes Feb 16, 2015

The Islamic Center of Nashville is listed on guidestar.org as being a church meaning it has 501(c)(3) status, but is not required to file Form 990.  They are advertising for an imam and presumably whoever gets the job would qualify for a tax exempt housing allowance under Section 107(2).  So you would think that ICN would not have any issues with its property tax exemption, as long as it avoids doing something like running a bookstore and a fitness center as Christ Church Pentecostal of Nashville (which is a bit over nine miles away according to mapquest) did.  Only ICN did have a problem with its property tax exemption.  And sad to say, the problems come from it being Islamic, although you really can't blame the Tennessee State Board of Equalization, which ruled against ICN.  They were following Reilly's First Law of Tax Planning - It is what it is. Deal with it.

Usury

You see Islam forbids paying interest on borrowed money.  Apparently usury is the ninth greater sin falling between usurping the property of an orphan and fornication. So when ICN decided to finance a school it deeded property to Devon Bank, which paid for the construction. ICN leased the property and bought it back over time from the bank.  So even though the religious use of the property had not changed, it was no longer owned by a religious organization and hence for a period of time did not qualify for property tax exemption.  Only for how long?  That was what ICN was in court about and it turned out to be longer than it had expected.

The board had approved the property tax exemption effective January 1, 2014.  ICN had sold the property to Devon Bank in 2008 and was done paying the bank back, so to speak, on October 25, 2013 when the bank deeded the property back.

No Change In Use

ICN was asking for the exemption to be retroactive three years based on a Tennessee statute that provided

If a religious institution acquires property that was duly exempt at the time of transfer from a transferor who had previously been approved for a religious use exemption of the property, or if a religious institution acquires property to replace its own exempt property, then the effective date of exemption shall be three (3) years prior to the date of application, or the date the acquiring institution began to use the property for religious purposes, whichever is later. The purpose of this subdivision (b)(3) is to provide continuity of exempt status for property transferred from one exempt religious institution to another in the specified circumstances. For purposes of this subdivision (b)(3), property transferred by a lender following foreclosure shall be deemed to have been transferred by the foreclosed debtor, whether or not the property was assessed in the name of the lender during the lender's possession.

ICN wanted to argue that its transaction with Devon was analogous to the foreclosure scenario contemplated in the statute.

The taxpayer characterized the subject as property acquired to “replace its own exempt property” under this subsection. The taxpayer argued the subject was a functional replacement for operations occurring at a portion of one of its other locations and/or a replacement for itself.

The Board was not buying it.

The documents make it quite clear that ICN had no ownership interest in the [subject property] until such time as they paid Devon Bank $900,000. If Devon Bank simply sold the property they would be in breach of a contract with ICN but there is no doubt that Devon Bank owned the property lock, stock and barrel. As was described in the testimony, ICN concluded that in actuality their transaction with Devon Bank was so close to [being an interest bearing loan arrangement] as to be indistinguishable and accelerated payment to acquire the property more quickly. This is reflected as Devon Bank conveyed the property to ICN on October 24, 2013... Prior to that date, the land, and the structures on the land, were owned entirely by Devon Bank.

It is axiomatic that exempt property must be not only occupied and used by an exempt institution, but also owned by an exempt institution in order to qualify for exemption; further, such exemptions are non-transferable.

It Is What It Is?

There was some sympathy.

The administrative judge is neither insensitive to the taxpayer's predicament nor unmindful of the Tennessee courts' policy of liberally construing exemption statutes in favor of exempt institutions. Prior precedent promotes discernment of “the substance of an arrangement rather than its form” in the construction and application of Tenn. Code Ann. § 67-5-212.

If this were an income tax case, there is little doubt that the arrangement would be considered, in substance, a loan.  I think it is likely that the Bank accounted for it as a loan.

In the purchase payment schedule, the monthly payments gradually increased from the initial scheduled purchase payment of $1,560.52 to a final purchase payment of $7,384.83 scheduled for August 13, 2028 in the same manner as principal reduction escalation on an amortization table. This, coupled with a portion of a 2010 “End-of-Year Loan Statement” the taxpayer submitted while the situation was still under review by State Board staff, indicated that Devon Bank was achieving the financial equivalent of a 7.83% annual rate mortgage product structured with equal monthly payments of $7,433.02. It would follow that the portion of each month's revenue attributed to rent would have gradually decreased from roughly $5,872 in the first month to $48 for the final payment in the 240^th month. As such, the taxpayer might have paid Devon Bank as much as $342,065 in designated rent during the period of August 13, 2008 through October 25, 2013.¹⁰

Respectfully, the administrative judge cannot conceive how real property generating rent for a for-profit owner could qualify for exemption under the same statute that disqualifies property of an exempt institution owner who charges another exempt institution any more rent than “a reasonably allocated share of the cost of use, excluding the cost of capital improvements, debt service, depreciation and interest...”

Why This Is Interesting

One of the things that I follow is the intersection of taxes and religion.  Our first amendment prohibits the establishment of religion but it also prohibits interfering with its free exercise.  Of course there are fifty state constitutions that also enter into the mix with different conceptions of what is and is not charitable.  One of the things that you see happening is that statutes that are designed to chart the dangerous course between violating the Scylla of the Establishment Clause and the Charybdis of the Free Exercise Clause are complicated by the eddies of religious doctrines that are unusual.  Actually Christians used to have a problem with usury also, but somehow lightened up on it, but my cursory research indicates, that I'm not going to get into that.

At any rate, an example of accommodation to different beliefs and practices shows up in the debate about the parsonage exclusion.  Defenders of the constitutionality of the income tax exclusion for cash housing allowances for "ministers of the gospel", which is pretty dubious, indicate that it puts denominations that don't provide housing in-kind on the same footing as those do.  In Maryland, which has a Catholic pedigree if you go back far enough (There is a reason that they call it the Baltimore catechism)  an apartment complex housing married couples serving as temple "ordnance workers"  for the Church of Latter Day Saints was exempted as a "convent".  Similar status was sought and won by a pagan Phryganium in a pretty bitter struggle with assessors in Catskill, NY.

In the case of the Islamic Center of Nashville, we have an arrangement that was, in substance under general tax principles, a mortgage.  If religious scruples did not prevent the calling of a spade a spade, ICN's property tax exemption would not have been disturbed at all.  Every other religion I can think of can take out a mortgage without disturbing is property tax exemption.  It will be interesting if this is appealed and feeds into the debate about importing Sharia law into judicial decisions.