Volume 11 - Opinions of Counsel SBRPS No. 48
Nonprofit organizations exemption (generally) (ownership) - Real Property Tax Law, § 420-a:
A nonprofit organization which is organized or conducted for the purposes of raising money for other nonprofit organizations may be entitled to the exemption provided that its own activities qualify for exemption. [Opinion 6 Op.Counsel SBEA No. 24 modified]
Our opinion has been requested concerning a nonprofit organizations exemption (Real Property Tax Law, §§ 420-a, 420-b) being sought by a foundation [Foundation] which claims to be an educational and charitable organization. The Foundation leases a boathouse on its property to another allegedly nonprofit organization, a boat club [Club]. It appears that both the Foundation and the Club are exempt from Federal income taxes pursuant to section 501(c)(3) of the Internal Revenue Code (26 USCS § 501(c)(3)). It also appears that the Foundation’s primary purpose is to receive contributions and distribute them to other charitable organizations. It is unclear whether the Foundation itself conducts charitable activities. The individual who established the Foundation (and who built the boathouse) serves on the board of directors of both organizations.
There are essentially three requirements for exemption under section 420-a or 420-b: nonprofit status, exempt organizational purpose(s) and exempt property use(s). Moreover, the organization may not be a guise or pretense for pecuniary profit; members and employees may receive only reasonable compensation for services performed. Here, apparently, no Foundation officer receives any payment for services.
Because a determination of nonprofit status can be a difficult one, we have advised assessors that they may rely on an IRS determination. In 10 Op.Counsel SBRPS No. 43, we quoted from the Assessor’s Manual: “[A]ll the exempt purposes listed in section 420-a and 420-b for a real property tax exemption are included in either section 501(c)(3) or 501(c)(6) [of the IRS Code]. . . .” Given the IRS determinations here, both the Foundation and the Club appear to satisfy the statutory nonprofit test. We therefore turn our focus to organizational purpose and property use.
As to the Foundation’s organizational purpose, in 6 Op.Counsel SBEA No. 24, we expressed the opinion that a nonprofit organization, the primary purpose of which was to lease property to other nonprofit organizations, was not itself organized for an exempt purpose within the meaning of what are now sections 420-a and 420-b. In reaching our conclusion, we relied, in part, on the decision in Columbia County Medical Retardation Realty, Inc. v. Palen, 97 Misc.2d 9, 410 N.Y.S.2d 789 (Sup.Ct., Columbia Co., 1978).
Thereafter, however, in St. Joseph’s Health Ctr. Properties v. Srogi, 51 N.Y.2d 127, 412 N.E.2d 921, 432 N.Y.S.2d 865 (1980), a closely divided Court of Appeals held that property owned by a nonprofit corporation and used exclusively to provide housing for staff personnel of a separate hospital corporation was exempt since the owning corporation operated solely to carry out a purpose of the exempt hospital. In addition to disapproving of the reasoning in Palen, (supra), the Court rejected the assessor’s argument that, to be exempt, the property needed to be owned by the hospital itself, not its alter ego. The majority found a legislative “intention to exempt property owned by a corporation conducted for a purpose reasonably incident to the major purpose of another [section 420-a] exempt corporation, even though not itself organized to engage in all of the activities of the latter corporation” (51 N.Y.2d at 133, 412 N.E.2d at 923, 432 N.Y.S.2d at 867-68). {1}
One year later, a still divided Court distinguished St. Joseph’s (supra) and held that a thrift shop, which was used to generate profits donated to charities, was not itself exempt (Stuyvesant Square Thrift Shop, Inc. v. Tax Commission of the City of New York, 54 N.Y.2d 735, 426 N.E.2d 478, 442 N.Y.S.2d 984 (1981)). Then-Chief Judge Cooke, who had dissented in St. Joseph’s, dissented again, feeling bound by the prior decision:
In St. Joseph’s the corporation was organized to provide housing for the staff of the parent hospital corporation. Here the Stuyvesant Thrift Shop was organized to sell donated merchandise and distribute the proceeds to the member charitable corporations, who are unquestionably entitled to exemptions themselves. The sole function of the Thrift Shop corporation is “reasonably incident to the major purpose” of the parent charities. The fact that the Thrift Shop converts the merchandise to money before distributing it to the parent charitable corporations does not alter this conclusion. I can therefore perceive no meaningful distinction between this case and St. Joseph’s and must dissent and vote to reverse (54 N.Y.2d at 738, 426 N.E.2d at 479-80, 442 N.Y.S.2d at 986).
One year after that, the Court of Appeals denied an exemption where it found the owning organization “was not itself organized or conducted exclusively for charitable purposes and the activities carried on by it were statutorily denied to its charitable affiliate (cf., Matter of Stuyvesant Sq. Thrift Shop v. Tax Comm. of City of N. Y., [citation omitted]; contrast Matter of St. Joseph’s Health Center Props. v Srogi, [citation omitted])” (Matter of Youth Building Corporation v. Board of Assessors of the County of Nassau, 56 N.Y.2d 765, 767, 437 N.E.2d 277, 277, 452 N.Y.S.2d 18, 18 (1982)).
From these decisions, it appears that a charitable organization which is organized or conducted for the purposes of raising money for other charitable organizations may be entitled to the exemption provided that its own activities are charitable. An example would be an entity such as the United Way, which we understand raises funds for other charities, and which has been referred to as being charitable in other (non-property tax) contexts (International Service Agencies v. O’Shea, 104 Misc.2d 1071, 430 N.Y.S.2d 224 (Sup.Ct., Albany Co., 1980); International Service Agencies v. United Way of New York State, 108 Misc.2d 305, 437 N.Y.S.2d 533 (Sup.Ct., Albany Co., 1981)). Nevertheless, the organization must prove its entitlement to exemption (Greentree Foundation v. Assessor of County of Nassau, 302 A.D.2d 523, 755 N.Y.S.2d 271 (2d Dept., 2003)).
Presumably, the same would be true of nonprofit organizations in general. That is, a nonprofit organization which is organized or conducted for the purposes of raising money for other nonprofit organizations may be entitled to the exemption provided that its own activities qualify for exemption. Accordingly, 6 Op.Counsel SBEA No. 24 should be considered to be modified.
If the assessor determines that the Foundation is a charitable/educational organization, then its property’s use must also be examined. Obviously, a portion of its property is leased to another nonprofit organization. In this regard, we note that section 420 a(2) permits one nonprofit organization to lease its property to another and not lose its exempt status, provided that the lessee would be exempt if it had title to the property, and, provided further, that the rentals received do not exceed the carrying, maintenance and depreciation charges on the rental property (see, 10 Op.Counsel SBRPS No. 88). Here, the Foundation apparently allows the Club to use its property rent-free (as a charitable gift).
We were not provided with information related to the Club other than its IRS determination letter. While it is true that the IRS has determined the Club to be a section 501(c)(3) organization, the assessor should still determine if the property used by the Club is being used for an exempt purpose (e.g., educational, charitable) and not primarily a social or recreational purpose (10 Op.Counsel SBRPS No. 117).
Finally, if the assessor determines that some Foundation property may qualify for the exemption, he or she must analyze each aspect of the property to ascertain if its use is reasonably incidental to the Foundation’s purposes. Should the assessor determine that only a portion of the property is used for exempt purposes, he or she should grant tax exempt status to that portion of the property (RPTL, § 420-a(2)). In such a situation, when a portion of property is deemed exempt and another portion non-exempt, the taxable portion may be separately assessed (see, RPTL, § 502). If, however, it is not practical to separately assess the exempt and non-exempt portions, the property should be entered on the taxable portion of the assessment roll, and the assessed value should be apportioned between the taxable and exempt portions (Trustees of Sailors’ Snug Harbor in City of New York v. Tax Commissioner City of New York, 26 N.Y.2d 444, 259 N.E.2d 906, 311 N.Y.S.2d 486 (1970); 3 Op.Counsel SBEA No. 77).
August 15, 2003
{1} In a dissenting opinion in a subsequent case, Judge Gabrielli characterized the St. Joseph’s conclusion as holding that “a not-for-profit corporation, operated solely to carry out the purpose of another exempt corporation (a hospital) can qualify for a tax exemption, notwithstanding the fact that it was not itself the exempt corporation. We have only required that such an organization be constructed for a purpose reasonably incident to the major purpose of another exempt corporation” (University Auxiliary Services v. Smith, 54 N.Y.2d 986, 991, 430 N.E.2d 917, 919, 446 N.Y.S.2d 41, 43 (1981)).