Monday, October 15, 2012

A Lesson in State Property Tax Exemption Law

The dispute between the town of Vestal, NY and United Health Services over a property tax exemption for a new clinic owned by UHS offers a good lesson in the requirements for state property tax exemption.  UHS built the clinic on land leased from a for-profit corporation.   There is no dispute that the building is tax-exempt; the dispute regards an exemption on the underlying land.

While property tax exemption laws vary considerably from state to state, in most states property tax exemption requires that the exempt property meet two requirements: (1) it must be owned by an exempt charity and (2) it must actually be used "exclusively" (which usually really means "primarily") for exempt purposes.  In New York, the relevant statutory language comes from Section 420-a of the New York Real Property Tax Law, which states:

Real property owned by a corporation or association 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 of such purposes either by the owning corporation or association or by another such corporation or association as hereinafter provided shall be exempt from taxation as provided in this section.

The New York law seems pretty clear in requiring "ownership" by an exempt entity, which is pretty clearly not the case in the Vestal-UHS dispute.   It may be, however, that UHS is claiming that the terms of its lease are the equivalent of "ownership" for New York property tax rules.  The IRS sometimes treats very long-term leasing arrangements as the equivalent of fee ownership.  In its regulations regarding tax-deferred exchanges under Code Section 1031, for example, the IRS treats a leasehold of 30 years or more as "like kind" to a fee interest.  Treas. Reg. 1.1031(a)-1(c).

Since UHS has declined to reveal the specific provisions of its lease, I don't know what it's argument is on the ownership question (there is a suggestion in the cited story that UHS is claiming that it is responsible for paying the property taxes, which is enough to meet NY law).  I'm also not sure whether New York would recognize certain leasehold interests (or obligations to pay the taxes) as the equivalent of "ownership" for property tax purposes - perhaps some reader from New York could enlighten us on that point.

But the story is a good illustration of how state property tax exemption differs from federal (or even state) income tax exemption.  Federal income tax exemption is focused solely on the "charitable-ness" of the entity seeking exemption.  Property tax exemption, on the other hand, generally requires meeting a two-pronged "ownership and use" test.  The latter can produce different results - for example, property that is owned by a charity but not used for charitable purposes (e.g., leased to for-profit entities, or not used at all - that is, fallow property) generally will not qualify for exemption, just as property used for exempt purposes but owned by a for-profit entity and leased to a charity will not qualify.

JDC

 

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