Volume 7 - Opinions of Counsel SBEA No. 3
Municipal corporations exemption (county hospital) (portion leased to doctors for private practices) - Real Property Tax Law, § 406:
That portion of a county owned hospital which is leased to doctors for their private practices is not entitled to exemption pursuant to section 406 of the Real Property Tax Law.
A building formerly used as a county hospital is being converted into offices for physicians. The county will be leasing this space to a medical college which will in turn lease the space to various doctors who will be treating both hospital and private patients in the offices. It is estimated that approximately 65% of the doctors’ practices will be for their private patients. Our opinion is requested concerning the taxable status of the facility.
Subdivision 1 of section 406 of the Real Property Tax Law provides that real property owned by a municipal corporation within its corporate limits held for a public use is exempt from taxation and from special ad valorem levies and special assessments to the extent provided in section 490 of that Law. Since a county is a “municipal corporation” as that term is used in section 406(1) (see, Real Property Tax Law, §102(10)), and the property in question is located within the county, the question of taxable status is dependent on whether the property is deemed to be “held for a public use.”
The leading case concerning section 406(1) is Town of Harrison v. County of Westchester, 13 N.Y.2d 258, 196 N.E.2d 240, 246 N.Y.S.2d 593 (1963), wherein the Court discussed the “public use” requirement as follows:
Although what comprises “a public use" within the meaning of the statute “has never been defined with exactitude” and “must necessarily depend upon the peculiar circumstances of each case”, it has been said, and most appropriately, that “‘Held for a public use,’ in this connection, means that the property should be occupied, employed, or availed of, by and for the benefit of the community at large, and implies a possession, occupation and enjoyment by the public, or by public agencies.” (County of Herkimer v. Village of Herkimer, 251 App. Div. 126, 128, 295 N.Y.S. 629, 634, affd. 279 N.Y. 560, 18 N.E.2d 854.) (13 N.Y.2d at 263.)
The court proceeded to deny exemption to hangars located on a county-owned airport which were leased to private parties under long term agreements.
Although we are aware of no judicial decision construing the taxable status of doctors’ private offices located in publicly owned buildings, there is considerable case law holding that no exemption may be allowed pursuant to section 420 of the Real Property Tax Law where private nonprofit hospitals lease a portion of their premises to doctors for their private practices (Genesee Hospital, Inc. v. Wagner, 47 A.D.2d 37, 364 N.Y.S.2d 934 (4th Dept., 1975), aff’d, 39 N.Y.S.2d 863, 352 N.E.2d 133, 386 N.Y.S.2d 216 (1976); Julia L. Butterfield Memorial Hospital Association v. Town of Philipstown, 48 A.D.2d 289, 368 N.Y.S.2d 852 (2d Dept., 1975); Community General Hospital v. Town of Onondaga, 80 Misc. 2d 96, 362 N.Y.S.2d 375 (S. Ct., Onondaga Co., 1974); and Little Falls Hospital v. Board of Assessors of the City of Little Falls, 75 Misc. 2d 731, 348 N.Y.S.2d 856 (S. Ct., Herkimer Co., 1973)).
In the Genesee Hospital case, supra, the Appellate Division stated:
Here, however, there is a commercialization and profitmaking which goes well beyond the hospital’s traditionally non-profit functions. The private practice of medicine by the attending physicians in the hospital’s professional office building is clearly the kind of profit-making activity intended to be excluded by the Legislature when it created the statutory exemption under Real Property Tax Law §421. . . .[H]ere we have third parties receiving pecuniary profit from their own private practice of medicine which is integrally related to the operation of the real property (364 N.Y.S.2d at 942).
Similarly, in 3 Op. Counsel SBEA No. 12, we expressed the opinion that property owned by a hospital district authority created by Title 7 of Article 8 of the Public Authorities Law, leased and exclusively used by a group of doctors for the treatment of their private patients for personal gain, was not entitled to exemption under section 1776 of the Public Authorities Law. In reliance on the Town of Harrison case (supra), we stated:
It is our firm conviction that if this hospital were owned by the city or any of the participating towns, any office space leased to doctors for their private use would not be entitled to exemption under section 406 of the Real Property Tax Law. In other words, such space would not be considered to be “held for a public use”, as is required by that section, any more than hangars at a county airport which are rented to private companies for their private use are “held for a public use.”
In the instant situation, it has been suggested that subdivision 9 of section 130 of the General Municipal Law (as added by L.1979, c.441) is relevant as to the issue of taxable status. That subdivision authorizes public general hospitals to enter into a clinical practice plan approved by the New York State Commissioner of Health. In approving chapter 441 of the Laws of 1979, Governor Carey stated:
The clinical practice plans authorized under this legislation will allow doctors and dentists to receive direct compensation for the treatment of private patients while using hospital facilities and equipment. . .
The institution of clinical practice plans is an important step in assuring continued availability of quality health services to the citizens of New York. It will encourage highly qualified physicians and dentists to practice in public hospitals by assuring them adequate compensation for their services and by allowing the development of personal contracts in a community (1979 N.Y.S. Legislative Annual, at 273).
The sponsor’s memorandum in support of the bill which became chapter 441 similarly states:
There may be as much as 100% salary disparity between professional employees of municipal hospitals and private hospitals. This has given to [sic] a competitive disadvantage for public hospitals in their efforts to recruit and retain a highly qualified medical and dental staff. In order to provide high quality medical care, the public hospitals should be allowed to compete with the private facilities in offering benefits to health professionals (id).
A similar argument was raised by those seeking exempt status for the private doctors’ offices in Genesee Hospital v. Wagner, supra; i.e., that there was a necessity to make private doctors’ offices available so as to encourage doctors to join the hospital staff. As noted above, however, the Court denied exemption pursuant to section 420 in that case.
Similarly, in this case, we do not feel that the broad public policy favoring the availability of clinical practice plans is sufficient to outweigh the general rule that tax exemptions are to be strictly construed (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 (1965)). In addition, a representative of the New York State Health Department has indicated that the leasing of the premises herein seemingly takes the property out of the “public hospital” category, thereby rendering section 130(9) of the General Municipal Law irrelevant. Therefore, it is our opinion that the portion of county owned hospital property used by physicians for their private practices is taxable.
Lastly, as we noted in 1 Op. Counsel SBEA No. 101, although no mention is made in section 406 of the prorating of real property taxes, in our opinion an exemption pursuant to section 406 of the Real Property Tax Law may be apportioned, with an exemption being granted to the portion of the property “held for a public use,” and with the remainder of the property being listed as taxable on the assessment roll.
May 27, 1980