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Volume 7 - Opinions of Counsel SBEA No. 28

Opinions of Counsel index

Nonprofit organizations exemption (general) (minerals; oil and gas rights); Assessment, separate (leasehold interests) (minerals; oil and gas rights) – Real Property Tax Law, §§ 420, 502:

The mere leasing of oil and gas rights to real property owned by a nonprofit organization will not deprive the real property of an exemption to which it is otherwise entitled pursuant to section 420 of the Real Property Tax Law. However, should the lessee enter on the property and exercise those rights through exploration, that portion of the property which is no longer primarily used for the nonprofit organization’s purposes would be taxable.

Our opinion has been requested as to the effect, if any, of a tax exempt organization (Real Property Tax Law, § 420) leasing the oil and gas rights to its property to a profit-making corporation. We have previously discussed the requirements for exemption pursuant to section 420 (7 Op.Counsel SBEA No. 18) and, for purposes of this Opinion, assume that all criteria are presently satisfied, and that the entire parcel is entitled to exemption.

In 4 Op.Counsel SBEA No. 77, we noted that oil and gas rights are real property (see, General Construction Law, § 39). As we indicated in that Opinion, oil and gas rights may be assessed in the name of a lessee separately from the land from which those rights are derived. The assessor is not required, however, to separately assess these rights.

The determination of whether the oil and gas rights should be assessed separately or with the land does not determine their liability to taxation. As is true of all real property, its condition as of taxable status date (Real Property Tax Law, § 302) determines its liability to taxation. it is the responsibility of the assessor to determine the value of oil and gas rights (§ 102(2), (3)), whether they are assessed with the land or separate and apart therefrom. In areas where the mineral resources of the land are unproven and the acquisition of rights thereto merely speculative, those oil and gas rights may have little more than nominal value.

In 7 Op.Counsel SBEA No. 20, we concluded that the leasing of mineral rights for purposes of oil and natural gas exploration would not have an immediate impact on the exempt status of property receiving exemption pursuant to the Agricultural Districts Law (Agriculture and Markets Law, Article 25AA). Our rationale was that the mere potential for a nonagricultural use “without more”, would not create a nonagricultural use. Similarly, it is our opinion that the mere leasing of mineral rights would not affect the exemption status of land receiving an exemption pursuant to section 420 of the Real Property Tax Law, since the lease creates only a potential for nonexempt use of the subject land, and does not in and of itself create a nonexempt use.

However, if the lessee subsequently exercises its right and enters upon the land for the purpose of conducting exploration for oil and natural gas, a different situation is presented. That is, once the assessor determines that the principal or primary use of the property is no longer for the nonprofit uses of the land owner, but rather is for oil or gas exploration, the portion so used will no longer be entitled to exemption, and only the remaining portion, if any, which continues to be used for exempt purposes, may receive exemption (Real Property Tax Law, § 420(2)). Should the assessor decide that it is not possible to separately describe and assess the taxable and exempt portions of the property, he or she may include the property on the taxable portion of the assessment roll, and grant a partial exemption (Sailors’ Snug Harbor in New York v. Tax Commission of the City of New York, 26 N.Y.2d 444, 259 N.E.2d 910, 311 N.Y.S.2d 486 (1970)).

With respect to the income which the nonprofit organization will obtain from the oil and gas rights or possible wells, although no organization receiving an exemption pursuant to section 420 may be a guise or pretense for directly or indirectly making any pecuniary profit, the fact that an organization makes a profit from its operations does not make it a commercial enterprise thereby rendering all of its property taxable. An exemption for those portions used exclusively for exempt purposes may continue so long as the profits are devoted to exempt permitted corporate purposes (Gospel Volunteers Inc. v. Village of Speculator, 33 A.D.2d 407, 308 N.Y.S.2d 785 (3d Dept., 1970), aff’d, 29 N.Y.2d 622, 273 N.E.2d 139, 324 N.Y.S.2d 412 (1971)).

Accordingly, it is our opinion that if the organization merely leases oil and gas rights, and utilizes the rentals therefrom in the furtherance of its corporate purposes, an exemption may continue provided the other requirements of section 420 are satisfied. However, if the property is subsequently used primarily for gas or oil exploration, the property “use test” of section 420 will no longer be satisfied, and no exemption may be granted to the affected portions, notwithstanding the organization’s uses of the revenue derived from the leased portions.

February 25, 1981

NOTE: Chapter 846 of the Laws of 1981 codified this Opinion (see, RPTL, § 596(2)).