PLR 201205018 is an example of a church requesting a ruling to establish that it reasonably expected to use land acquired for prospective exempt use in an exempt function within the allowed period under the neighborhood land rule.
If an exempt organization earns income from the use or sale of debt-financed property, income or gain from the sale of the property is subject to the UBIT to the extent the property is financed. Under an exception called the neighborhood land rule, land acquired for future exempt use may be excepted from classification as debt-financed property for a10-year period (15 years for churches). The rule allows an exempt organization to use land purchased for prospective exempt use in a nonexempt activity pending conversion of the property to the exempt use. Meanwhile, income from the property, such as rents, is not subject to the UBIT.
Note: The neighborhood land rule applies only when an exempt organization acquires property for future exempt use. Once the property is converted to an exempt use, it is not debt-financed property because of another exception for property used in an exempt purpose.
The neighborhood land rule does not apply after the first five years from the acquisition date unless the organization shows that the property is reasonably expected to be used in an exempt function within the applicable period. Such a showing is made in a ruling request filed at least 90 days before the end of the fifth year. In PLR 201205018, the IRS ruled that the church was eligible to take advantage of the final 10 years in the 15-year period.
The following factors convinced the IRS that the exempt use was reasonably expected before the termination of the 15-year period:
● The organization demolished structures that were on the land when acquired.
● The organization had incurred substantial expenses for engineering, design, construction, documentation, infrastructure, and more.
● Several new church facilities were already constructed on the land, including a worship center, a children’s facility, classrooms, and parking lots.
● The congregation was already using the completed facilities.
● Additional planned improvements were expected to take an additional (unspecified) time period not to exceed 10 years.
● The former church property was listed for sale.
See §514(b)(3); §1.514(b)-1(d).