Does New York's franchise tax exemption for 'limited-profit housing companies' organized under Article 2 of the Private Housing Finance Law also cover nonprofit 'housing development fund companies' organized under Article 11 of that same law -- and if not, can an Article 11 company still be exempt some other way?

Plain-English summary

1274 Fifth Avenue Housing Development Fund Corporation, Inc. was incorporated under Article 11 of the Private Housing Finance Law (Housing Development Fund Companies) and the Not-for-Profit Corporation Law, operated on a genuinely nonprofit basis with no net earnings distributed to or set aside for any officer, director, or member. It asked whether Tax Law Section 209(4)'s franchise tax exemption for "housing companies organized and operating pursuant to...article two of the private housing finance law" also covers Article 11 companies like itself -- and if not, whether it's exempt anyway because of its nonprofit status.

The Department held Section 209(4) does NOT reach Article 11 companies. Neither Article 9-A nor the Private Housing Finance Law contains language extending the exemption beyond Article 2's "limited-profit housing companies," and the legislative history showed no intent to broaden it -- even though Article 2 and Article 11 share substantially the same underlying purpose (assisting construction of low-income housing). Citing Grace v. State Tax Commission, the Department applied the general rule that tax exemptions are construed narrowly against the taxpayer unless a broader reading is needed to avoid defeating the statute's settled purpose, and found no such need here.

But that wasn't the end of the analysis. Separately, the Department's own regulations (20 NYCRR 1-3.4(b)(6)) provide a GENERAL exemption for any corporation "organized other than for profit which do[es] not have stock or shares...and which [is] operated on a non-profit basis no part of the net earnings of which inures to the benefit of any officer, director, or member." Ordinarily, a corporation that has actually obtained a federal tax-exemption determination under IRC section 501(a) is presumed exempt under this regulation, and one that's been denied federal exemption is presumed taxable. Here, Petitioner had neither requested nor received an IRS determination letter -- but the Department looked past that gap and found Petitioner independently satisfied the regulation's core substantive requirements (no stock, genuinely nonprofit operation, no inurement to insiders), so it qualified for the exemption on that basis alone.

What this means for you

Article 11 housing development fund companies

Don't assume Tax Law Section 209(4)'s housing-company exemption covers you just because your organization serves the same low-income-housing mission as an Article 2 limited-profit housing company -- it doesn't, on this Department's narrow reading. But you may still be exempt under the SEPARATE general nonprofit-corporation exemption if you're genuinely non-stock, nonprofit, and have no insider inurement.

Nonprofit corporations without an IRS determination letter

An IRS Section 501(a) exemption determination isn't strictly required to claim New York's general nonprofit-corporation exemption under 20 NYCRR 1-3.4(b)(6) -- while having one creates a presumption of state exemption, this Petitioner qualified by independently demonstrating it met the regulation's substantive criteria (no stock, nonprofit operation, no inurement) even without ever applying for federal recognition.

Anyone relying on a "similar purpose" argument for a tax exemption

This ruling is a clear illustration that New York courts and the Department construe tax exemptions NARROWLY -- sharing a statute's underlying policy goal (here, low-income housing) with an expressly exempted category isn't enough to extend the exemption to your own, differently-authorized entity.

Common questions

Q: Are all nonprofit housing companies under the Private Housing Finance Law exempt from New York franchise tax?
A: Not automatically under Section 209(4) -- that exemption is limited to Article 2 limited-profit housing companies. Article 11 housing development fund companies must look to a different exemption (like the general nonprofit-corporation rule) instead.

Q: Do you need an IRS 501(a) determination letter to claim New York's general nonprofit-corporation exemption?
A: Not strictly -- while having one creates a presumption of exemption, a corporation can still qualify by independently satisfying the regulation's substantive requirements without ever applying for federal recognition.

Q: Can another Article 11 housing company rely on this Opinion?
A: No. It binds the Department only as to this petitioner's own facts and cannot be relied upon by other taxpayers, even other Article 11 companies with a similar nonprofit structure.

Citations and references

Statutes, regulations, and cases:

• Tax Law § 209(4)
• 20 NYCRR 1-3.4(b)(6)
• Private Housing Finance Law, Article 2, Article 11
• Internal Revenue Code § 501(a)
• Grace v. State Tax Commission, 37 N.Y.2d 193, 197 (1976)

Date note: The document header reads "April 29, 1985," while the sign-off line reads "DATED: April 25, 1985" -- a four-day gap consistent with internal signing before the header/publication date; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (2) C
Corporation Tax
April 29, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C830623B

On June 23, 1983 a Petition for Advisory Opinion was received from 1274 Fifth Avenue
Housing Development Fund Corporation, Inc., c/o Settlement Housing Fund, Inc., 1780 Broadway,
New York, New York 10016.
At issue is whether exemption from the Franchise Tax provided in 209(4) of the Tax Law
for housing companies organized pursuant to Article 2 of the Private Housing Finance Law also
applies to housing companies organized pursuant to Article 11 of that Law, and if not, whether
Petitioner is in any case exempt from such tax by virtue of its not-for-profit status.
1274 Fifth Avenue Housing Development Fund Corporation, Inc. is incorporated pursuant
to Article 11 of the Private Housing Finance Law and the Not-for-Profit Corporation Law. The
corporation is, in fact, operated on a non-profit basis; net earnings are not distributed to, or set aside
for, the benefit of any officer, director, or member.
Section 209(4) of the Tax Law provides in pertinent part that "housing companies organized
and operating pursuant to the provisions of article two of the private housing finance law shall not
be subject to tax under [Article 9-A]." Neither Article 9-A of the Tax Law, nor any article of the
Private Housing Finance Law, contain provisions which would exempt a company formed under
Article 11 of the latter Law from any franchise tax imposed by the State.
The purpose of the Private Housing Finance Law as set forth in both Article 2 (Limited-Profit
Housing Companies) and Article 11 (Housing Development Fund Companies) is substantially the
same -- that is, to assist the construction of housing for low-income individuals. However, an
examination of applicable legislative history does not show any intent on the part of the Legislature
to extend the exemption granted by 209(4) of the Tax Law beyond limited-profit housing companies.
Further, where exemptions from tax are at issue they are to "be construed against a taxpayer unless
it would defeat the settled purpose of the statute." Grace v. State Tax Commission, 37 N.Y.2d 193,
197 (1976). Accordingly, the exemption provided in 209(4) of the Tax Law is to be narrowly
construed, and as so construed reaches only to limited profit housing companies organized pursuant
to Article 2 of the Public Housing Finance Law. Thus, Petitioner does not fall within the ambit of
this exemption.
However, the regulations applicable to 208 of the Tax Law provided that the following
corporations, among others, are exempt from the New York State Franchise Tax:

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85 (2) C
Corporation Tax
April 29, 1985
(6) corporations organized other than for profit which do not have stock or
shares or certificates for stock or for shares and which are operated on a non-profit
basis no part of the net earnings of which inures to the benefit of any officer, director,
or member, including Not-For-Profit Corporations and Religious Corporations.
(i) A corporation organized other than for profit, as described in this
paragraph, which is exempt from Federal income taxation pursuant to subsection (a)
of section 501 of the Internal Revenue Code, will be presumed to be exempt from tax
under article 9-A. If a corporation organized other than for profit is denied
exemption from taxation under the Internal Revenue Code, such corporation will be
presumed subject to tax under article 9-A.
(ii) The determination of the Internal Revenue Service, denying or revoking
exemption from Federal taxation under the Internal Revenue Code, will ordinarily
be followed.
20 NYCRR 1-3.4(b)(6).
In the present case, Petitioner fits within the above exemption. Although the corporation has
neither requested, nor received, an IRS ruling or determination letter indicating exemption under
section 501(a) of the Internal Revenue Code, it is 'operated on a non-profit basis no part of the net
earnings of which inures to the benefit of any officer, director, or member, including Not-For-Profit
Corporations and Religious Corporations'. Accordingly, it is exempt from the State Franchise Tax
imposed under Article 9-A. 20 NYCRR 1-3.4(b)(6).

DATED: April 25, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.