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Volume 9 - Opinions of Counsel SBEA No. 116

Opinions of Counsel index

Business investment exemption (scope) (country club) - Real Property Tax Law, § 485-b:

A private country club is not eligible for the business investment exemption (RPTL, § 485-b) if it is not operated for a profit.

We have been asked whether a “private country club” would be eligible for the business investment exemption (Real Property Tax Law, § 485-b) on a “multi-million dollar addition to [its] building.” The club and its facilities are not open to the public; the club is owned by the membership, which hires managers to operate the club. The purpose of the addition is not specified, but we assume for purposes of this discussion that it is to be used for providing recreational and social services to its members.

In order for real property to be eligible for the business improvement exemption, it must meet two use-related criteria:

(1) the facility must be built “for the purpose of commercial, business or industrial activity” (§ 485-b(1)), and

(2) the facility must be “used primarily for the buying, selling, storing or developing goods or services, the manufacture or assembly of goods or the processing of raw materials,” but may not be “used primarily for the furnishing of dwelling space or accommodations to either residents or transients other than hotels or motels” (§ 485-b(5)).

Though these criteria are closely related, a particular installation may satisfy one but not the other. For example, the equipment of a utility company used to transmit or distribute natural gas or electricity is not eligible for the exemption, even though it is used for commercial purposes, because it is not used to buy, sell, store, develop or produce goods or services (Long Island Lighting Company v. Board of Assessors and the Board of Assessment Review of Nassau County, 81 N.Y.2d 1029,616 N.E.2d 845,600 N.Y.S.2d 188 (1993)). In other words, though that equipment satisfies the first criterion above, it does not satisfy the second.

In the case of the country club addition, it is likely that the improvement will satisfy the second criterion, for it appears that it is used to “sell . . . services,” namely, recreational or social services. The fact that the services will be recreational in nature does not, in and of itself, disqualify property from the exemption.

However, in order to receive the exemption, the property must also satisfy the first criterion, that is, it must be used for commercial or business purposes. As to country clubs, and as is explained below, it is problematic whether this criterion can be satisfied.

First, we observe that a tax exemption statute must be strictly construed; any ambiguity or uncertainty must be resolved against the exemption (City of Lackawanna v. SBEA, 16 N.Y.2d 222, 212 N.E.2d 42, 264 N.Y.S.2d 528 (1965)), so long as the interpretation is not so narrow as to defeat the settled purpose of the exemption (Association of the Bar of the City of New York v. Lewisohn, 34 N.Y.2d 143, 313 N.E.2d 30, 356 N.Y.S.2d 555 (1974)).

Second, we note that for purposes of the business investment exemption, “commerce” means any activity carried on for a profit (Mechanical Farm Equipment Distributors v. Porter, 156 F.2d 296, 298 (9th Cir. 1946); Kinney v. Sutton, 230 N.C. 404, 53 S.E.2d 306 (1949)). If the facility is owned by members and open only to members, the operation of the facility would not generate “profits” in any traditional sense, for the “buyers” and the “sellers” of the services would be one and the same. If the sellers “sell” only to themselves, the “sale” clearly does not increase their collective wealth. Accordingly, we would conclude that the country club could not be said to generate profits, and so could not be considered a business or commercial activity for purposes of section 485-b.

We believe that it would be instructive for assessors to review a particular country club’s articles of incorporation to determine the statute under which the corporation has been formed. If the club has been organized pursuant to the Not-for-Profit Corporation Law (N-PCL) {*} or its predecessor, the Membership Corporations Law, it would be a nonprofit making entity by definition (N-PCL, § 102(5); see, also, General Construction Law, §§ 65(a), (c), (d), 66(7), (8), (13), (19), (20)). A not-for-profit corporation is legally precluded from conducting activities specifically for a profit (N-PCL, § 204); any incidental profits it does earn must be applied for the lawful activities of the corporation and may not be distributed in any manner to the membership (id., §§ 204, 508). Such an entity, in our opinion, may not be granted the business investment exemption.

To conclude, it is the applicant’s burden to establish eligibility for an exemption. If the applicant can show that the club has been incorporated under the Business Corporations Law and that it is operated for a profit, the exemption may be granted. Otherwise, we believe that the exemption should be denied.

March 19, 1993
Revised October 1993

{*}  Country clubs may be formed under the N-PCL (see, e.g., Bernbach v. Bonnie Briar Country Club, 144 A.D.2d 610, 534 N.Y.S.2d 695 (2d Dept. 1988)), although it appears that they may also be formed as profit-making entities (see, C&S Golf & Country Club Corp. v. Stevens, 60 A.D.2d 841, 400 N.Y.S.2d 572 (2d Dept. 1978)).