Volume 6 - Opinions of Counsel SBEA No. 87
Nonprofit organizations exemption (educational) (community residences for retarded adults) - Real Property Tax Law, § 420:
Real property owned by a nonprofit corporation organized and conducted for the purpose of operating and maintaining community residences wherein developmentally disabled adults are to be trained to function independently in a home environment is entitled to exemption pursuant to section 420 of the Real Property Tax Law, assuming that the property is in fact used for such purpose.
Our opinion has been requested concerning the taxable status of three community residences to be constructed for the care and training of developmentally disabled adults. These properties are owned by a nonprofit corporation incorporated under section 402 of the Not-For-Profit Corporation Law and will be operated pursuant to an operating certificate issued by the Office of Mental Retardation. Each residence will accommodate up to eight adults and one couple who will function as “house parents.” The overall purpose of this program will be to provide the training, instruction and supervision needed to prepare retarded adults to live independently as members of a community.
The statute pursuant to which the property of such an organization could be exempt is section 420 of the Real Property Tax Law. The requirements of that statute can be summarized as follows:
1. The real property must be owned by an organization which is organized or conducted exclusively for one or more of the purposes listed in subdivision 1 of section 420.
2. The real property must be used exclusively for carrying out one or more of the purposes listed in subdivision 1 of section 420. Any portion of the property which is not used is subject to taxation.
3. No officer, member or employee of the organization may be entitled to receive any pecuniary profit from its operations, except reasonable compensation for services performed in furtherance of the corporate purposes.
4. No exemption shall be granted if the organization is a guise or pretense for directly or indirectly making any other pecuniary profit for such organization or for any of its members or employees.
In determining whether real property satisfies the requirements of section 420, two countervailing basic principles must be balanced. First, tax exemption statutes must be strictly construed against those seeking the exemption. The intention of the Legislature to grant exemption in a given situation must be too plain to be mistaken, and any doubt or ambiguity must be resolved in favor of taxation (City of Lackawanna v. State Board of Equalization and Assessment, 16 N.Y.2d 222, 212 N.E.2d 42, 264 N.Y.S.2d 528; Herkimer County v. Village of Herkimer, 251 App.Div. 126, 295 N.Y.S. 629, aff’d, 279 N.Y. 560, 18 N.E.2d 854). Second, however, in construing an exemption statute, the court should not adopt an interpretation which is so narrow and literal as to defeat the settled purpose of the statute (People ex rel. Watchtower Bible and Tract Society Inc. v. Haring, 8 N.Y.2d 350, 170 N.E.2d 677, 207 N.Y.S.2d 673).
The first requirement for exemption is that the organization be organized or conducted exclusively for exempt purposes. The word “exclusive,” as used in this statute has been held to mean “principal” or “primary” (People ex. rel. Untermyer v. McGregor, 295 N.Y.237, 66 N.E.2d 292). Thus, activities which are “necessary or fairly incidental to the maintenance of the institution for the carrying out of the purposes for which it was organized” will not defeat the right to exemption (People ex rel. Blackburn v. Barton, 63 App. Div. 581, 583, 71 N.Y.S. 933, 935).
Formerly, the question of whether an organization was organized exclusively for one or more of the exempt purposes listed in section 420 was determined by examining the purposes authorized by the documents pursuant to which it was organized (in the case of a corporation, its certificate of incorporation and by-laws; American-Russian Aid Association v. City of Glen Cove, 41 Misc.2d 622, 246 N.Y.S.2d 123, aff’d, 23 A.D.2d 966, 260 N.Y.S.2d 589). In fact, the certificate of incorporation and by-laws could admit of no construction which would permit corporate activity for a purpose not specified within the statute (Crusade for Christine Inc., v. Town of New Lebanon, 36 A.D.2d 247, 320 N.Y.S.2d 164, aff’d, 31 N.Y.2d 765, 290 N.E.2d 440, 338 N.Y.S.2d 440).
However, the statute was amended in 1971 to provide that property may be exempt if its owner is organized or conducted exclusively for exempt purposes (L.1971, c.414, § 2). In the case of Mohonk Trust v. Board of Assessors of the Town of Gardiner, 47 N.Y.2d 476, 392 N.E.2d 876, 418 N.Y.S.2d 763, the Court held this amendment to mean that “The determination of an organization’s primary purpose may turn upon the extent to which it pursues the various purposes for which it was created, and is not necessarily dependent solely upon the language of the document pursuant to which the organization operates.” Thus, a corporation may qualify for exemption although it is authorized to conduct nonexempt activities by its certificate of incorporation and by-laws if the corporation does not actually perform such activities. As this corporation is not yet in operation, we will assume for purposes of this opinion that the actual conduct of the corporation will be consistent with the purposes set forth in its certificate of incorporation.
The purposes for which the subject corporation is organized and is to be conducted are stated in its certificate of incorporation as follows:
to construct, fashion, erect, supervise, control, maintain and operate community residences for use and occupancy by adult persons who are mentally retarded or developmentally disabled as the same are defined in Article 31 of the Mental Hygiene Law of the State of New York, and to plan, promote, provide, establish, develop, coordinate, evaluate and conduct programs and services of prevention, diagnosis, examination, care, treatment, rehabilitation, residential living, training and research for such adults and to these ends, to establish, own, lease, sell, mortgage, operate and maintain such community facilities as may be necessary to provide the aforesaid programs and services.
One of the exempt purposes listed in section 420 is educational. It has been held that the term “educational” relates to formal education, basically instructional in nature (People ex rel. Board of Trustees Mount Pleasant Academy v. Mezger, 98 App.Div. 237, 90 N.Y.S. 488, aff’d, 181 N.Y. 511, 73 N.E. 1130; Matter of Syracuse University, 214 App. Div. 375, 212 N.Y.S. 253). However, this is not to say that such formal education can only take place within traditional settings, using traditional teaching methods.
The corporation in question presents a unique situation in regard to the nonprofit organizations exemption (Real Property Tax Law, § 420). At first glance, the contemplated use of the corporation’s real property would appear to be primarily residential. Residential purposes are not per se exempt. However, if necessary or incidental to educational purposes (i.e., dormitories) residential facilities may qualify for exemption (University at Rochester v. Wagner, 63 A.D.2d 341, 408 N.Y.S.2d 157, aff’d, 47 N.Y.2d 833, 392 N.E.2d 569, 418 N.Y.S.2d 583). In the case in question, residential use of the property is not merely necessary or incidental to an educational purpose. Rather the residential use is an integral part of the education activity.
It must be borne in mind that the “pupils” in this case will have unorthodox educational needs. They will require instruction in the basic skills of daily living, such as dressing, personal hygiene, housekeeping, cooking and transporting themselves from place to place. Thus, instruction on a one to one basis in a residential environment will be far more appropriate and effective for such persons than the instruction obtainable in a classroom environment. This situation is analogous to the one discussed in 5 Op.Counsel SBEA No. 71, which involved vacant land used for the training of mentally handicapped adults in forestry, game and fish farming, and agriculture. The purpose for which the corporation owning this land was formed was:
To provide vocational rehabilitation and training of . . . retarded adults . . . with the ultimate goal of achieving sufficient self-adequacy and personal independence; and to be able to achieve either gainful employment, or appropriate sheltered workshop employment. (emphasis supplied)
In that opinion, we concluded that these purposes are educational within the meaning of section 420. The achievement of a sense of self-adequacy and personal independence is the basic object of the organization in question herein. Further, since that goal must be reached before a person can engage in gainful employment, it would be incongruous to say that the operation of community residences is not an educational purpose.
The term education as used in section 420 cannot be broadly construed. As the Court of Appeals held in Swedenborg Foundation Inc. v. Lewisohn, 40 N.Y.2d 87, 351 N.E.2d 702, 386 N.Y.S.2d 54, 58:
. . . education, . . . refers to the development of facilities and powers and the expansion of knowledge by teaching, instruction or schooling. We distinguish the very much broader process of the communication of facts and ideas.
However, this does not mean that education is restricted to the classroom environment (see, e.g., Mohonk Trust v. Board of Assessors of the Town of Gardiner, supra; American Management Associations v. Assessor of Town of Madison, 63 A.D.2d 1102, 406 N.Y.S.2d 583, aff’d, 47 N.Y.2d 841, 392 N.E.2d 571, 418 N.Y.S.2d 584).
Since the corporation in question is organized for purposes which are instructional in nature, albeit carried out in a residential environment, the purposes do qualify as education within the meaning of section 420.
The remaining requirements for exemption pursuant to section 420 are that the organization be truly nonprofit and that the property be used exclusively for exempt purposes. Based upon the information supplied to us for analysis, it appears that the organization will be operated on a nonprofit basis. The organization has been incorporated pursuant to the Not-For-Profit Corporation Law and the certificate of incorporation states that the corporation is to be operated on a nonprofit basis. [The section 420 exemption application form prescribed for use by the State Board of Equalization and Assessment (see, 9 NYCRR 190.3(c)) requires, in part, that the organization seeking exemption provide the assessor with the information necessary to determine whether the applicant satisfies the nonprofit test of section 420.]
The community residences which this corporation proposes to establish and operate are not in existence at this time. Assuming, however, that once established, the use of the properties is consistent with the purposes set forth in the certificate of incorporation, the use requirement will be satisfied as well.
In view of the foregoing, we conclude that a corporation organized for the purpose of training mentally retarded adults to function independently in a community setting through placement in community residences qualifies for exemption pursuant to section 420.
October 5, 1979
