Volume 6 - Opinions of Counsel SBEA No. 24
Nonprofit organizations exemption (generally) (ownership) - Real Property Tax Law, § 420:
A nonprofit organization, the primary purpose of which is to lease property to other nonprofit organizations, is not in and of itself organized for an exempt purpose pursuant to section 420 of the Real Property Tax Law.
Our opinion has been requested regarding the taxable status of real property owned by a nonprofit organization, the primary purpose of which is to lease property to other nonprofit organizations. Specifically, the organization’s certificate of incorporation states that the purpose of the organization is to own real estate which is to be leased at cost or less to not-for-profit corporations which currently or may in the future provide services in the nature of rehabilitation facilities for the mentally retarded. The owning organization itself, however, is not empowered to operate a facility for the mentally retarded.
Assuming the organization in question is not organized pursuant to the provisions of Article 75 of the Mental Hygiene Law, section 422 of the Real Property Tax Law, which provides an exemption for certain not-for-profit housing companies, is not relevant to this inquiry. Rather, it appears that if an exemption is to be considered, it will be pursuant to section 420 of the Real Property Tax Law.
The requirements for exemption pursuant to section 420 of the Real Property Tax Law can be summarized as follows:
1. The real property must be owned by an organization which is organized exclusively for one or more of the exempt purposes listed in the section.
2. The real property must be used exclusively for carrying out thereupon one or more of the listed exempt purposes.
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 can 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 our opinion, the issue of the taxable status of the above-described organization is determined by analyzing the first of these requirements. Although our research has disclosed that most of the cases granting or denying a section 420 exemption have been decided on the question of the use to which the property in issue is put, there are several cases which stress the importance of the ownership requirement.
In Hebrew Free School Association v. Mayor, 99 N.Y. 488, 2 N.E. 399, the Court of Appeals was asked to determine the taxable status of property used by a religious society for a school. The facts showed that the society owned neither the lot upon which the building was located nor the building itself; that is, the society was “simply the lessee of the premises upon which the tax was levied .... It is a sufficient answer to this action that the real estate taxed is not exclusively the property of the plaintiff, the fee being in an individual liable to taxation” (99 N.Y. at 490).
Where the American Red Cross had only a beneficiary’s interest in a parcel of real property, title being in a trustee, the exemption was denied (People ex rel. National Commercial Bank & Trust Co. v. Lewis, 179 Misc. 140, 39 N.Y.S.2d 64). In construing the predecessor to section 420, the court said, “The exemption which accrues to ‘the real property of’ the beneficiary under Tax Law, Section 4, Subdivision 6, does not extend to the trustee. The Red Cross is not the owner of real property in this instance” (39 N.Y.S.2d at 66). (emphasis added)
In Young Israel of Far Rockaway v. City of New York, 59 Misc.2d 4, 297 N.Y.S.2d 671, the organization seeking exemption was scheduled to take title to a parcel on January 25 (taxable status date in New York City). The closing of title was postponed, however, to February 4. The judge said that an exemption could be granted “in view of plaintiff’s enjoying ‘ownership’ of the property on January 25,1965 within the intent and contemplation of the law [Real Property Tax Law, §420]...” (297 N.Y.S.2d at 673). In granting the exemption, the court said:
The primary purposes of the statutory requirement of ownership would be to establish the unqualified right of the nonprofit corporation to use the property for exempt purposes and at the same time to negate the possibility that a nonexempt owner of legal title, for instance, might receive rental income from tax-exempt property. These purposes are satisfied if the exempt organization has legal title, but legal title is not indispensable to the unqualified right to use the property (297 N.Y.S.2d at 674).
This case has significance because it was reversed by the Appellate Division (33 App. Div.2d 561, 305 N.Y.S.2d 432). The unanimous court concluded its short memorandum opinion thusly:
Since the closing of title did not occur until ten days after ( the taxable status day of January 25th ..., the subject property was not owned by plaintiff, so far as the tax year 1965/66 is concerned within the meaning of section 420 of the Real Property Tax Law. Accordingly, the property was not exempt from real estate taxation for that year (305 N.Y.S.2d at 433). (emphasis added)
Another court, after reiterating the general rule that exemption statutes are to be strictly construed (see, People ex rel. Mizpah Lodge v. Burke, 228 N.Y. 345,126 N.E. 703), refused to grant an exemption where title was not in the organization claiming exemption. The court, construing the Tax Law section referred to above, stated:
The Tax Law . . . makes the ownership of the property sought to be freed from taxation one of the criteria by which its exemption is to be determined. “The real property of a corporation” means property owned by the corporation. If we are to give to the statute granting exemptions from taxation the strict construction required, we would not be justified in holding that the body having control and management of property was the owner of such property where title thereto was in another (Board of Education of City of Jamestown v. Baker, 241 App. Div. 574, 272 N.Y.S. 801, 804-05, aff’d. 266 l N.Y. 636, 195 N.E. 359).
At this juncture, it may be helpful to note that whereas the Tax Law (§4(6)) exempted real property “of” a nonprofit organization, the Real Property Tax Law (§420(l)(a)) exempts property “owned“ by such organizations. It is clear that no change in the prior law governing nonprofit organizations was intended by the recodification of the Real Property Tax Law (L.1958, c.959). Subdivision 6 of section 2002, in fact, provides, in part, as follows:
The repeal by this chapter of section four of the tax law...and the re-enactment of the provisions thereof in article four of this chapter are intended to effectuate a continuation and restatement, without change in substance or effect, of the provisions of such laws and no exemption heretofore granted shall be broadened, increased, discontinued, diminished or impaired, or new exemption granted or authorized by reason of such re-enactment.
Thus, ownership of real property by the organization claiming exemption has long been a definite statutory requirement and it remains so. It follows, therefore, that we cannot look to the purposes of the lessee organization in determining whether the lessor is organized exclusively for exempt purposes. This is not to say that an exemption will be denied whenever nonprofit organizations lease property. Subdivision 2 of section 420 provides that the exemption will continue if the otherwise exempt owning organization leases its property to another nonprofit organization or to an entity exempt pursuant to any of several sections of law specified in the statute, provided that the moneys received by the owning organization do not exceed the amount of the carrying, maintenance and depreciation charges of the leased property. However, this subdivision is relevant only when the owning organization is itself exempt pursuant to section 420; an issue, which in this case, is as yet unresolved. Accordingly, the issue of the taxable status of the property in question must be determined by comparing the four requirements set forth above to the lessor organization.
As previously indicated, the first criterion to be satisfied is whether or not the organization is exclusively organized for exempt purposes. This is determined by examining the purposes and objects in the organization’s certificate of incorporation or charter, if any (Great Neck Section, etc. v. Board of Assessors, 21 Misc.2d 142, 189 N.Y.S.2d 623; Good Will Club of Amsterdam, New York v. City of Amsterdam, 31 Misc.2d 1096, 222 N.Y.S.2d 896). It seems clear that the primary purpose of the organization is to lease property, albeit to an organization which might well qualify for exemption pursuant to section 420 if such lessee owned the property for which exemption is sought. In our opinion, a nonprofit organization, the primary purpose of which is to lease property to other organizations, is not in and of itself, organized for an exempt purpose pursuant to section 420.
This type of enterprise is to be distinguished from others involving the leasing of property. For example, in American-Russian Aid Association v. City of Glen Cove, 41 Misc.2d 622,246 N.Y.S.2d 123, aff’d, 23 App. Div.2d 966,260 N.Y.S.2d 589, an exemption was granted to an organization which leased its residential properties at an annual deficit to indigent aged men and women. That is, the owning organization itself operated the charity; it did not conduct its affairs through another corporation.
Finally, a decision has recently been handed down in a case involving an organization very similar to the organization with which we are presently concerned. In finding against Columbia County Mental Retardation Realty, Inc., the New York State Supreme Court held “that a corporation formed exclusively to hold legal title to real estate and to lease same...to a lessee charitable corporation is not a corporation entitled to an exemption under section 421 of the Real Property Tax Law” (Columbia County Mental Retardation Realty, Inc. v. James J. Palen, et al., 97 Misc.2d 9, 410 N.Y.S.2d 789).
Based on the foregoing, it is our opinion that no exemption should be granted given this factual situation.
April 28, 1977
Revised January, 1979
NOTE: The Opinion has been modified by Opinion 11-48. The exemption for nonprofit organizations was seemingly renumbered section 421 by chapter 417 of the Laws of 1971, the so-called “service charge” law, and has generally been referred to by this number. However, the service charge law’s effective date has annually been postponed by the Legislative (the latest being L.1980, c.42) so that the section legally remains 420. Therefore, beginning with this opinion, the nonprofit organizations exemption will be enumerated section 420 in Opinions of Counsel, subject to clarification by the Legislature.