This was a case of an overzealous zoning official. The "church" in question only has a total of 7 members. The city officials are now in damage control mode.
Here is an update to the story:
http://www.azcentral.com/arizonarepublic/local/articles/2010/03/16/20100316religionban0316.htmlAs mentioned in this article, Gilbert is one of those city that has taken code enforcement to an asisnie level.
I "think" the law was actually a Mormon-protectionist law to make it hard for Baptists and other Protestants to get a congregational foothold in the Mormon stronghold of Mesa/Chandler/Gilbert. Got nothing to back up that assumption, other than the fact that there is a Mormon church every quarter mile, it seems.
I live in the area, and this is a common opinion. There is a strong presence of LDS members in the city council, school boards, and in government jobs. (This does make a certain amount of sense due to the local demographics) This, coupled with a lot of CA transplants who are comfortable with a high level of regulation and HOA restrictions have created a perfect storm for a very authoritarian local government.
As mentioned in this article, other churches have been harassed with minor code infractions. Meanwhile numerous code variances have been unanimously approved for a soon to be built LDS temple. Another example that often pops up is how hard it is for a place like an Applebees or Chilis to open in Gilbert due to the extra hoops and public scrutiny they make businesses jump through for an alcohol permit.
Mind you, I am not Mormon or religion bashing. However, Gilbert and a few other communities in this area have a remarkable authoritarian streak in a state that is largely quite libertarian and non-intrusive.