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Volume 1 - Opinions of Counsel SBEA No. 64

Opinions of Counsel index

Nonprofit organizations, exemption (hospital) (leased office space) - Real Property Tax Law, § 421:

Where a presently tax exempt hospital erects an addition to be leased to members of the hospital staff, as office space for the conduct of their medical practice such addition is not exempt from taxation.

We have received an inquiry concerning the taxable status of a proposed addition to a presently exempt hospital, which addition will be leased to members of the hospital medical staff as office space where they may conduct their private practice.

All real property in New York is subject to taxation, special ad valorem levies and special assessments unless specifically exempted therefrom by law (Real Property Tax Law, section 300). Section 421 of the Real Property Tax Law provides for exemption from taxation of certain nonprofit organizations enumerated therein including property used for hospital purposes. In order to qualify for exemption pursuant to section 421, the real property must be owned by a corporation organized exclusively for the exempt purposes specified therein, and such property must be used exclusively for one or more such exempt purpose or purposes which are necessary and fairly incidental thereto, and no officer, member or employee may be entitled to any pecuniary profit from the operation thereof other than reasonable compensation for services rendered.

Exemption from taxation is in the nature of a renunciation of the sovereign’s inherent power to tax. An exemption, in effect, relieves one class of persons or property from its obligation to carry its share of governmental expenses and results in shifting a heavier burden on all other classes. For this reason exemption statutes are strictly construed against the person or corporation seeking exemption, and an exemption will not be established by doubtful implication.

The factual situation presented here has not as yet been before the courts. In the case of Matter of St. Luke’s Hospital v. Boyland, 12 N.Y.2d 135, 237 N.Y.S.2d 308, the Court of Appeals held that supplying living accommodations for hospital personnel and their immediate families is a “hospital purpose” and that, therefore, apartments occupied by such personnel are entitled to tax exemption under the provisions of section 421 of the Real Property Tax Law. The court indicated that the test which determines a tax exemption for a hospital facility under section 421 is whether the facility is devoted to a use which “is reasonably incident” to the major purpose of the hospital. In finding that the use of dwellings by hospital personnel is a use which “is reasonably incident” to hospital purposes the court quoted statements from the case of Matter of DeMott v. Notey, 3 N.Y.2d 116, 143 N.E.2d 804, 164 N.Y.S.2d 398, to the effect that the court could judicially notice that hospitals customarily provide living accommodations for at least some of their personnel and that some nurses and technicians would not take employment in the hospital or continue employment unless living quarters were provided. In a more recent case Matter of Ellis Hospital v. Fredette, 27 App. Div.2d 390, 279 N.Y.S.2d 925, a parking lot built by a hospital solely to provide off-street parking facilities for patients, employees and visitors and not for general public utilization was held to be exempt as “reasonably incident” to the major purpose of the hospital. In that case there was testimony that “visitations were part of the treatment of the patients, being considered as supportive therapy.”

In neither of the above mentioned cases, nor in any other case have the courts extended the exemption provided by section 421 to facilities used exclusively to conduct a private business for personal profit when the business is not directly related to an exempt purpose. In our opinion, furnishing doctors with offices in which to treat private patients for personal gain is not “reasonably incident” to the major purpose of the hospital, i.e., providing care and medical attention to patients in the hospital. We feel this is so even if the institution provides the facility as a means of attracting the services of the doctors or in order to have them nearby in case of emergencies. Keeping in mind the equities of other taxpayers, it appears that the only fair conclusion to draw is that the hospital should charge the physicians an amount in rent which will reflect the taxes which this facility should contribute. The doctors in turn can reflect this amount in patient charges which is what is usually done by doctors who own their own offices or have office space elsewhere. To allow an exemption on such facility would result in other taxpayers subsidizing a facility used by doctors in their private practice to make a personal profit.

A case in another jurisdiction supports this conclusion where an exemption was denied to an office facility constructed by a hospital. In Gifford Memorial Hospital v. Town of Randolph, 118 A.2d 480, 484 (Vt. 1965), the court stated as follows:

“But even so, providing a building for offices for physicians in and around Randolph in which to practice their profession whether at a distance from or adjacent to the hospital as here is not a facility that is reasonably necessary as a recognized function of the plaintiff.”

And in this case the benefit of the hospital could possibly have been considerable since the small hospital did not have resident physicians and interns.

Accordingly, it is our opinion that the proposed addition to the presently tax exempt hospital, which addition is to be leased to members of the medical staff for use as offices for their private medical practice, would not be eligible for exemption under section 421 of the Real Property Tax Law.

April 13, 1972

Updated: