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Threat to Tax-Exempt Status? Using Facilities for Profit

Question:

Can a church member conduct piano lessons in her church's auditorium without threatening the loss of the congregation's tax-exempt status?

Answer:

Our answer comes from Matthew Davis, J.D., former attorney with the nationally recognized Christian Law Association, who currently practices law in Wisconsin, Illinois, and Florida.

"As a tax-exempt entity, churches must be careful not only in what activities they engage in directly, but also in how they allow the facilities to be used.

"The primary way in which this can come up relates to the requirement for tax-exempt status that the ministry's activities must relate to its exempt purpose. Assuming the church's exempt purposes are 'religious, charitable, and educational,' (three of the purposes specifically mentioned in the Internal Revenue Code 501(c)(3)), piano lessons would certainly fit within that expectation as 'educational' and therefore not be a problem on the tax-exempt purpose issue, even if tuition is charged for the lessons. The same principle applies for a Christian school operating in a church building.

"The next potential issue relates to use of the building. Some questions have arisen in recent years about circumstances in which churches could be a considered a 'public accommodation' and required to allow outsiders to use their buildings - presumably outsiders that would use the building for uses the church would not agree with. The argument goes something like, 'Well you allowed this outsider to use the building for piano lessons, so now you have to let us have our wedding in your church.' To protect against this very remote possibility, I generally advise churches to avoid "outside rentals" to non-members. This simple rule protects the church from any argument that it is a public accommodation. In the present question, the piano lesson provider is not an outsider, so the public accommodation question is not at risk.

"Finally, the issue of private inurement should be considered. Church assets cannot be used by private individuals for personal use or private gain without compensating the church appropriately. For example, I once heard of a situation where a church staff member started a dog washing business on the side using the church's baptistry (believe it or not!). Other examples involve using church vehicles for private benefit, using church facilities, etc.

"In order to maintain its tax-exempt status, the church must avoid private inurement which the IRS defines generally as, 'an individual receives a personal, non-compensatory benefit from use of a tax-exempt organization's assets' (IRS Publication 557). In this case, the use of the piano and facility to give piano lessons does raise the issue of private inurement if fair market rental value is not paid in exchange for the use.

"An arrangement can and should be made with the lesson provider to compensate the church for the use of the facility. Other arrangements could also be made to avoid this private inurement issue, such as bringing the lessons 'in-house' for the church to offer the lessons in its own name and 'hire' the lesson provider to give the lessons. An accountant should be consulted to help with the determination of fair market rental value and other advisable options."



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