Hawaii retreat center revenue challenged on tax-exempt status
By Rob Perez
Advertiser Staff Writer
The city and state have launched investigations into whether two religious organizations running O'ahu retreat centers are paying appropriate taxes on those operations.
Both tax-exempt organizations, the Roman Catholic Church of Hawaii and the Sisters of Sacred Hearts, use the centers for internal purposes, including housing for religious personnel and staff offices.
But both for years also have rented meeting and lodging space on the properties to outside organizations for short retreats or conferences, raising questions on whether such operations are considered commercial and should be subject to taxation.
The decisions to investigate were made last week after the Hawai'i Citizens for the Separation of State and Church, a loosely organized group of individuals, filed complaints with the city, state and federal governments over possible tax evasion by the two retreat operations.
The church runs St. Stephen Diocesan Center, a former seminary, on a 22-acre parcel it owns in Kāne'ohe just off the Pali Highway. The Sacred Hearts group operates St. Anthony Retreat Center, a former orphanage, on a 112-acre parcel it owns in Kalihi Valley.
The Kāne'ohe land has an assessed value of $1.9 million, and the Sacred Hearts property is valued at $7.6 million, according to the city's online records. Both organizations have been granted property-tax exemptions for the parcels and pay only the minimum $100 annual amount for exempt nonprofits.
Neither organization appears to be paying federal income taxes on revenue generated by renting facilities at the sites.
In addition to raising questions about income and property taxes, the citizens' group asked the government agencies to investigate whether the two religious organizations are paying the appropriate general excise and hotel room taxes for the retreat operations.
At a time when governments are hurting for revenue, potentially millions of dollars in taxes may have gone uncollected over the years from these two properties, according to Mitchell Kahle, president of the citizens' group.
"We just want them to follow the law," Kahle said. "That's all we're asking."
Both organizations say they are unaware of any violations of laws or regulations in running the retreats.
"St. Stephen Diocesan Center is central to the work of the Catholic Church in Hawai'i," the church said in a statement to the newspaper. "It will cooperate fully with the public authorities in any investigation they may wish to make."
The Sacred Hearts group, which operates the retreat center on a nonprofit basis, said it is reviewing the letters Kahle's group sent to the governments.
"The Sisters of the Sacred Hearts remain fully committed to the center's mission of providing a place of peace, quiet and calm for those individuals and groups seeking to renew themselves spiritually," the group said in a written statement to the newspaper.
The city, in response to Advertiser questions, said both organizations were issued property-tax exemptions based on "church use" of the property. The church-use exemption was first granted in 1987 for the St. Stephen parcel and in 1955 for the Kalihi Valley property. Prior to those years, each organization had property-tax exemptions based on other uses: a school for the Kāne'ohe property and an orphanage for the Sacred Hearts one, the city said.
But the complaint by Kahle's group is prompting the city to review whether the retreat operations are consistent with the current exemptions.
"We were unaware of any changes in the use of the property," the city said in its responses. "We will be investigating the use of the property based upon receipt of the complaint."
For the St. Stephen site, which is zoned agricultural, the city's investigation will include whether renting lodging and conference facilities is allowed on such land — a question raised in Kahle's complaint. For the St. Anthony parcel, which is zoned residential, the city likewise is checking whether such activities are permissible in the zoning.
Hugh Jones, the deputy attorney general assigned to the case for the state, declined comment. A representative of the Internal Revenue Service couldn't be reached for comment.
In its statement to the newspaper, the church noted that St. Stephen houses multiple diocesan offices, is home to Bishop Larry Silva and retired clergy and is a convent for Carmelite sisters. Numerous diocesan meetings, school groups and ministry and prayer activities also are held at the site, the church said.
Sacred Hearts said its center includes a chapel, office and housing for sisters.
Neither organization would answer a list of Advertiser questions about the retreat operations, including how much income was generated at each site annually over the past few years, whether various taxes were paid and which groups rented space last year.
But information from church-related Web sites indicates both retreats are heavily used.
Each year, hundreds of groups from the Catholic community and the community at large come to St. Stephen to meet and retreat, the church says on its site.
A November article in the Hawai'i Catholic Herald noted that St. Anthony's was booked for all of 2010. "Even Buddhists and Muslims come to the center," the article said.
Among the groups that have used one or both locations are the Hawai'i State Bar Association and a Department of Education-related institute.
Religious organizations, like many nonprofits, generally are able to obtain exemptions from certain taxes because of the charitable work they do.
But when the organizations earn money that isn't considered directly related to the chief purpose for their tax-exempt status, they are required to report that unrelated income on a Form 990-T and pay federal taxes on that revenue. They also must file a similar document with the state.
Neither the church nor Sacred Hearts said it files 990-Ts for its respective centers.
Government officials are prohibited from disclosing whether any organization pays income or general excise taxes because such information is considered confidential.
On the St. Anthony Web site, the retreat facilities are marketed to individuals and groups, with overnight accommodations costing as much as $75 per person for a suite. Conference facilities can handle up to 150 people.
On the St. Stephen site, the lodging and meeting spaces are marketed to Catholic groups, Christian organizations and community and business parties. The site has 53 dormitory-style rooms and four private suites.
PFLAG-O'ahu, a support group for lesbians, gays, bisexuals and others, recently received a price quote for a proposed 50-person conference at St. Stephen, according to Michael J. Golojuch Jr., event coordinator for the group. In the written quote, the center offered PFLAG a kama'āina package of $189 per person for two nights of accommodations and five meals. Private suites cost an additional $10 per person per night, the offer said.
A conference room with "spectacular mountain and ocean views" was available for $325, the quote said.
If the church were only renting the center to Catholic groups, the rental income could be considered related to the church's tax-exempt purpose, according to Washington, D.C.-based tax lawyer Marcus Owens, a former Internal Revenue Service official.
But if the church is renting facilities to outside organizations with no link to the church — even if it were a group of Protestant ministers — the income would be considered unrelated and taxable, Owens said.
"It's simply a commercial activity," he said.
A church that rents an adjacent social hall to outside organizations, such as a Little League group, would be subject to the same guidelines, the tax experts said.
Although the church would not disclose the names of organizations that have used St. Stephen in the past, Patrick Downes, a spokesman, said the Web site's reference to businesses as potential customers was a mistake.
The issue of whether religious groups or other non-profit organizations are subject to various taxes has been at the center of multiple court cases in the past.
In 1981, the state Supreme Court ruled that income that Central Union Church received from nonprofit retirement housing was not subject to taxation.
In 1992, a state judge ruled that the Polynesian Cultural Center, which is owned by the Church of Jesus Christ of Latter-day Saints, is subject to property taxes.