Real Estate Owned By Exempt Organization
Local Taxes Discussion
Property Subject to Tax
[Opinion - Virginia Attorney General: 1993 at 243]
REQUEST BY: The Honorable Elliot S. Schewel Member, Senate of Virginia P.O. Box 6800 Lynchburg, Virginia 24505
OPINION BY: Stephen D. Rosenthal, Attorney General
You ask whether real estate acquired by a tax exempt organization becomes exempt from local taxation on the date it is acquired, or at the beginning of the next tax year.
Your request involves two properties in the City of Lynchburg, which uses a fiscal tax year beginning on July 1, but assesses property as of the preceding January 1. The first property was purchased by an educational organization on December 31, 1992. The city exempted it for the tax year 1993-1994, but did not allow any refund or abatement for the previous tax year. The second property was purchased by an educational institution in January 1988. In February, it was conveyed to a religious organization exempted by the General Assembly under Article X, § 6(a)6 of the Constitution of Virginia (1971). In June, it was reconveyed to the educational institution. Lynchburg exempted the property for the tax year 1988-1989 but allowed no relief for the previous tax year. In each of these instances, therefore, the exempt organization's property effectively was subject to taxation for six months -- the second half of the fiscal tax year in which the exempt organization acquired the property. Your question is whether this delay by Lynchburg in recognizing the tax exempt status of these properties was legally proper.
II. Applicable Constitutional and Statutory Provisions
Article X, § 6 of the Virginia Constitution deals with exemptions of property from taxation. § 6(a)(2) provides for the automatic exemption of "real estate and personal property owned and exclusively occupied or used by churches or religious bodies for religious worship or for the residences of their ministers." § 6(a)(6) permits the General Assembly, by a three-fourths vote of the members elected to each house, to classify or designate other "property used by its owner for religious, charitable, patriotic, historical, benevolent, cultural, or public park and playground purposes."
Section 58.1-3010 of the Code of Virginia provides:
Notwithstanding any other provision of law . . . the governing body of any county, city or town may by ordinance provide that taxes on real estate . . . be levied and imposed on a fiscal year basis of July 1 to June 30. . . .
As to any locality which has adopted such ordinance all provisions of this Code specifying a date or month relative to the levy, payment or collection of such taxes shall be interpreted to specify the corresponding date or month of the fiscal year, except that all property shall be assessed as of January 1 prior to such fiscal year unless otherwise specifically provided. . . .
The first paragraph of § 58.1-3281 provides:
Each commissioner of the revenue shall commence, annually, on January 1, and proceed without delay to ascertain all the real estate in his county or city, as the case may be, and the person to whom the same is chargeable with taxes on that day. The beginning of the tax year for the assessment of taxes on real estate shall be January 1 and the owner of real estate on that day shall be assessed for the taxes for the year beginning on that day.1
Section 58.1-3360 provides, in part:
Any taxpayer whose lands, or any portion thereof, are in any year acquired or taken in any manner by the United States, the Commonwealth, a political subdivision, or a church or religious body, which is exempt from taxation by Article X, § 6 of the Constitution of Virginia, shall be relieved from the payment of taxes and levies from the date of divestment of such land for that portion of the year in which the property was taken or acquired. The county treasurers as to land situated in counties and the city treasurers and city collectors as to lands situated in cities shall receive from and receipt to the original owner of the lands so taken, for his proportionate part of the taxes and levies for the year and credit the payment on the tax tickets and shall return at the same time he makes his return of lands and lots improperly assessed, as required by law, the proportional part of the taxes and levies exonerated from taxation for any such year, indicating on the margin of the list the date on which the property was acquired by the government or religious body.
III. Status of Property Determined as of Tax Day
Because the property tax is a tax on value, it must be levied by reference to a specific date on which that value is ascertained; for the tax to be uniform, the date must be the same for everyone in the locality. Under the traditional calendar year system, ownership and value of taxable property, both real and personal, are determined as of January 1, the "tax day." See § 58.1-3281. The tax rate is set by the governing body later in the year. As a practical matter, the local officials responsible for assessing real estate taxes spend a good part of the tax year determining the facts as of the tax day. Because the status of the property is determined as of January 1, a change in ownership or value after that date is not recognized until the following tax day, for the following tax year. It is for this reason that contracts for sale of real estate usually require the taxes to be prorated between the buyer and the seller, based on the proportion of the tax year that each owns the property.
Lynchburg has adopted a statutory variant of the traditional tax scheme: it has a fiscal tax year running from July 1 to June 30, adopted under § 58.1-3010. Because it has not adopted the alternative tax day under § 58.1-3011, Lynchburg uses January 1 prior to its tax year as its tax day. Thus, Lynchburg would determine the ownership of property as of January 1, 1993, for its 1993-1994 taxes. Property sold after January 1, 1993, would not be taxed to the seller until the 1994-1995 tax year.
IV. Neither Property Described Is Eligible for Proration of Taxes Under § 58.1-3360
Charitable organizations are subject to the same rules that apply to other property owners. The purchase of property by a tax exempt entity is recognized by the taxing authorities on January 1, effective for the following tax year. Unfortunately, the private apportionment of the tax burden between buyer and seller in such a case may leave the charitable buyer liable for any taxes attributable to the portion of the tax year following the taxable seller's sale of the property.
As a general rule, proration of taxes and exoneration by the taxing entity is not allowed when a change in ownership occurs from a nonexempt to an exempt owner. See Warwick Co. v. Newport News, 153 Va. 789, 817, 151 S.E. 417, 426 (1930); 1979-1980 ATT'Y GEN. ANN. REP. 8, 9. § 58.1-3360 creates an exception to this general rule and directs localities to prorate and exonerate taxes assessed to owners whose property has been condemned or sold to a government or to a church or religious body. Property acquired during the tax year by any other exempt organization, however, is subject to tax for the full tax year. 1972-1973 ATT'Y GEN. ANN. REP. 417, 418. Accordingly, the first property you describe, which was acquired in the middle of the tax year by an educational organization, is not entitled to the benefit of the proration provision in § 58.1-3360.
The statutory predecessor of § 58.1-3360, former § 58-822, originally applied only to property acquired by a governmental entity, and obviously was intended to avoid adding insult to injury, by relieving the condemnee of the obligation to pay taxes on property that had been condemned. That proration and exoneration procedure has since been extended and now applies to land acquired by a "church or religious body, which is exempt from taxation by Article X, § 6 of the Constitution of Virginia."2 (Emphasis added.)
The second property you describe was acquired in the middle of a tax year by a religious organization. That property, however, is not property that is used for religious worship or the residence of a minister, automatically exempt from taxation by Article X, § 6(a)(2). Instead it is property owned and used by a religious organization that has been designated as exempt by a statute adopted by the General Assembly under the authority of Article X, § 6(a)(6).
Exemptions of property from taxation established or authorized under Article X, § 6 must be strictly construed. See Art. 10, § 6(f). That rule of strict construction therefore governs the application of § 58.1-3360 to determine what property is entitled to proration and exoneration of taxes under that section. The use of the word "by" in § 58.1-3360 implies that the only properties entitled to proration of taxes when they are acquired in mid-year by a religious organization are those properties used as actual places of worship or ministers' residences, automatically exempted by Article X, § 6(a)(2). The second property you describe has not, in my opinion, been exempted by the constitutional provision; it has been exempted by the General Assembly, pursuant to the constitutional authority of Article X, § 6(a)(6). Accordingly, the second property is also ineligible for the proration provision in § 58.1-3360.
It is my opinion, therefore, that Lynchburg's delayed recognition of the tax exempt status of both the properties you describe conforms to the relevant statutes, and is legally proper.
1 Section 58.1-3011 allows a locality to adopt an ordinance requiring all property to be valued as of July 1, instead of January 1, thereby shifting "tax day." This provision, however, is optional, even for localities that have adopted a fiscal tax year under § 58.1-3010.
2 In 1960, § 58-822 was amended to provide for mid-year exoneration and refund when previously taxable property was acquired by "any church or religious body . . . exempt from taxation by § 183 of the  Constitution." Ch. 58, 1960 Va. Acts (Reg. Sess.) 61, 61-62. At its 1971 Session, the General Assembly changed § 58-822 to refer to churches and religious bodies exempt by Article X, § 6 of the 1971 Constitution. Ch. 47, 1971 Va. Acts (Ex. Sess.) 54. In 1984, the General Assembly combined former § 58-822 with former § 58-818 (dealing with property acquired by United States), and recodified them as current § 58.1-3360. Ch. 675, 1984 Va. Acts 1178, 1393-94.