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Volume 12 - Opinions of Counsel SBRPS No. 20

Opinions of Counsel index

Nonprofit organizations exemption (generally) (organizational purpose; property use) - Real Property Tax Law § 420-a:

The property of a nonprofit organization organized for one of the tax exempt purposes listed in section 420-a of the Real Property Tax Law but conducted or used for another section 420-a exempt purpose is exempt from taxation.

We have received an inquiry concerning the nonprofit organizations (mandatory class) exemption (Real Property Tax Law, § 420-a). A church owns a house adjacent to the church which was formerly used as the minister’s residence. {1}  Currently, however, it is being used to house a “disadvantaged family.” The church is receiving rent in an amount which it contends is “well below market prices.”

The statute exempts real property owned by nonprofit “corporations or associations organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes, and used exclusively for carrying out thereupon one or more such purposes. . .” (RPTL, § 420-a(1)(a)). In this context, the courts have regularly held that “exclusively” means “principally” or “primarily” (e.g., Association of the Bar of the City of New York v. Lewisohn, 34 NY2d 143, 313 NE2d 30, 356 NYS2d 555 (1974)).

Essentially then, there are three tests for exemption under section 420-a: nonprofit status, organizational purpose, and property use. Here, we assume there is no question as to the church’s nonprofit status or its organizational purpose, the sole question being the use of the residence.

The Court of Appeals has stated: “[R]ather than dissecting each exempt purpose, this court has indicated that the statute may encompass property used primarily for various and varied charitable and educational purposes and the moral or mental improvement of the citizenry [citation omitted]” (Symphony Space, Inc. v. Tishelman, 60 NY2d 33, 37, 453 NE2d 1094, 1096, 466 NYS2d 677, 679 (1983)). That Court has also stated:

To determine whether a particular piece of land is exempt under the statute it is necessary to determine first whether the owner of the land is “organized or conducted” exclusively, or primarily, for an exempt purpose. If the answer to that inquiry is in the affirmative, it then becomes necessary to determine whether the particular land for which the exemption is sought is itself primarily used for an exempt purpose (Mohonk Trust v. Board of Assessors, 47 NY2d 476, 483, 392 NE2d 876, 880, 418 NYS2d 763, 767 (1979)).

The Court continued: “[A]n organization may be entitled to an exemption if it is either ‘organized or conducted’ primarily for an exempt purpose or purposes. Hence, 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” (47 N.Y.2d at 484, 392 N.E.2d at 880, 418 N.Y.S.2d at 767).

In explaining this decision, the Court stated:

[W]e held that the Mohonk Trust was organized primarily for purposes entitling it to absolute exemption under then section 421 (subd 1, par (a)) of the Real Property Tax Law. In so doing, we examined both the trust's stated purposes, as well as its activities, which were considered indicative of its primary purpose. The trust’s actual primary purpose was held to be the preservation of wilderness area for the public benefit; subsidiary activities included numerous endeavors of a scientific and educational nature. We recognized that the trust’s primary purpose was an assortment of charitable, educational and moral improvement purposes, and concluded that environmental and conservation purposes are also encompassed within the broader categories for which exemption is afforded absolutely (New York Botanical Garden v. Assessors of the Town of Washington, 55 NY2d 328, 335-36, 434 NE2d 703, 706, 449 NYS2d 467, 470 (1982)). {2}

There seems to be little doubt that, today, an organization’s actual activities are more important to a determination of its property’s tax exempt status than are its corporate purposes. Based upon the discussed decisions, we think it likely that a court would exempt the property of a nonprofit organization organized for one section 420-a exempt purpose (e.g., religious) but conducted or used for another section 420-a exempt purpose (e.g., charitable).

If so, the question would seem to be whether the lease arrangement is a charitable endeavor from which the church does not receive a profit. In the first instance, that is a question for the assessor to decide. The assessor is the initial trier of fact as to whether property satisfies the statutory conditions for tax exempt status. If that status is denied, the applicant organization may seek administrative and, if necessary, judicial review of that determination in which case the board of assessment review and then the court becomes the trier of fact.

December 23, 2008

{1}  Section 462 of the RPTL provides a tax exemption for the residence of a religious organization’s “officiating clergymen,” but that section is inapposite to property no longer used for such purpose (see 11 Op.Counsel SBRPS No. 55).

{2}  In still another explanation of Mohonk, a majority of the Court of Appeals said that that decision held that “what the corporation does rather than what its certificate [of incorporation] says determines exemption” (St. Joseph's Health Center Properties v. Srogi, 51 NY2d 127, 134, 412 NE2d 921, 924, 432 NYS2d 865, 868 n 6 (1980). The dissent criticized this approach as “appl[ying] only half of the statute’s test for exempt status” (51 NY2d at 136, 412 NE2d at 926, 432 NYS2d at 870.