Does a new nonprofit LLC formed to manage a national laboratory meet the organizational test for New York's sales-tax exemption as a scientific/educational organization?

Plain-English summary

Brookhaven Science Associates, LLC was a brand-new Delaware nonprofit limited liability company, formed in October 1997 and jointly owned 50/50 by the Research Foundation of SUNY and Battelle Memorial Institute (with six additional board seats held by the presidents of Columbia, Cornell, Harvard, MIT, Princeton, and Yale). The Department of Energy had just selected it to take over management of Brookhaven National Laboratory -- a major scientific research facility on Long Island housing reactors and particle accelerators -- from the prior nonprofit manager. Because DOE requires the lab's manager to be a nonprofit, Brookhaven Science Associates asked whether it would qualify for New York's sales tax exemption available to organizations organized and operated exclusively for scientific or educational purposes under Tax Law § 1116(a)(4).

Qualifying for that exemption requires passing two separate tests: an "organizational test" (do the entity's own governing documents limit it to exempt purposes?) and an "operational test" (does it actually run that way in practice?). Since Brookhaven Science Associates hadn't started operating yet, the Department could only evaluate the organizational test based on its draft operating agreement. That agreement limited the company's purposes to scientific research, education, and running the Brookhaven lab; didn't give it power to pursue unrelated commercial activities; and locked both its earnings and any assets left over if it dissolved to organizations that themselves qualify for the same New York exemption. Based on those provisions, the Department concluded that -- assuming the agreement was executed as drafted -- Brookhaven Science Associates would meet the organizational test.

That's only half the job, though. The Department made clear that passing the organizational test on paper doesn't itself grant exempt status. Once operating, the company would still have to demonstrate it actually satisfies the operational test (that almost all of its real-world activities further exempt purposes, and that no earnings improperly benefit private parties) and get formal approval of an exempt organization certificate from the Department's Taxpayer Assistance Bureau before it can claim the exemption on its purchases.

What this means for you

New nonprofits, joint ventures, or LLCs seeking New York sales-tax exempt status

Getting your governing documents right on paper is a necessary first step but not the end of the process. Make sure your certificate of formation and operating agreement or bylaws explicitly limit your purposes to Tax Law § 1116(a)(4)'s exempt categories, restrict distributions of earnings and dissolution assets to other exempt organizations, and don't give you power to run unrelated commercial activities as anything more than an insubstantial sideline. Then be ready to separately prove your actual day-to-day operations match those documents before the Department will issue an exempt organization certificate.

University-affiliated foundations, research consortia, and multi-institution LLCs

A multi-member nonprofit LLC (here, jointly owned by a university-affiliated research foundation and an independent nonprofit research institute, with several universities holding board seats) can qualify under § 1116(a)(4) the same as a traditional nonprofit corporation, as long as its governance documents satisfy the same organizational-test requirements -- purpose limitation, no private inurement, and asset dedication on dissolution.

Accountants and tax professionals

This ruling walks through 20 NYCRR § 529.7's organizational test in detail: purpose limitation (subdivision (c)(1)), no power to conduct more than an insubstantial amount of non-exempt activity (subdivision (c)(1)(ii)-(iii)), and dedication of assets to an exempt purpose on dissolution (subdivision (c)(3)). Note that the organizational test is evaluated purely from the text of the governing documents -- actual conduct doesn't matter until the separate operational test under subdivision (d).

Common questions

Q: Can a newly formed nonprofit get a ruling on its exempt status before it starts operating?
A: Yes, but only on the organizational test (whether its governing documents qualify it). It still must separately prove it meets the operational test and get Taxpayer Assistance Bureau approval once it's actually running.

Q: What does the organizational test actually require?
A: The entity's own organizing documents (not its stated intentions or later conduct) must limit its purposes to the exempt categories in § 1116(a)(4), not empower it to run substantial unrelated activities, and dedicate its earnings and dissolution assets to other qualifying exempt organizations.

Q: Does a multi-institution ownership structure (universities, research foundations, nonprofit institutes) prevent exempt status?
A: Not by itself. What matters is whether the governing documents satisfy the purpose-limitation, no-inurement, and asset-dedication requirements, regardless of how many organizations sit on the board or hold membership interests.

Q: Does this ruling apply to my nonprofit's exempt-organization application?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your own governing documents and actual operations would need to be independently reviewed.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(14)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S971231H

On December 31, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Brookhaven Science Associates, LLC, Office of
Research Services, S-5422 Melville Library, State University of New York-Stony
Brook, Stony Brook, New York 11794-3365.
The issue raised by Petitioner, Brookhaven Science Associates, LLC, is
whether Petitioner is organized exclusively for the purposes specified in Section
1116(a)(4) of the Tax Law.
Petitioner submits the following facts as a basis for this advisory
opinion. Petitioner is a not-for-profit limited liability company formed under
Chapter 18, Title 6 of the Delaware Code on October 28, 1997. A certified copy
of its Certificate of Formation and a proposed draft of the Limited Liability
Company Operating Agreement (the "Agreement") was submitted with the Petition.
The Certificate of Formation and the Agreement together constitute Petitioner's
governing instruments. Petitioner will be entitled to elect, and intends to
elect, to be treated as a partnership for federal and New York State corporate
income tax purposes.
Petitioner is owned by its two members, The Research Foundation of State
University of New York (the "Foundation") and Battelle Memorial Institute
("Battelle"), each of which has a 50 percent interest in Petitioner.
The
Foundation and Battelle will each appoint five of the directors to Petitioner's
Board of Directors. The remaining six directors are the presidents (or their
designees) of Columbia University, Cornell University, Harvard University, the
Massachusetts Institute of Technology, Princeton University and Yale University.
The approval of four of the Foundation's and four of Battelle's directors is
required for any matter which materially affects the finances, liabilities or
business of Petitioner. Neither the Foundation nor Battelle may assign their
membership in Petitioner except to one another or with the consent of the other,
and neither has any plans or intentions for making, or seeking permission to
make, any such transfers.
The Foundation is a private New York not-for-profit educational
corporation. The Foundation administers externally funded contracts and grants
for and on behalf of the State University of New York ("SUNY"). It is governed
by a Board of Directors composed of researchers, campus and SUNY administrators,
SUNY Trustees, and representatives of business and industry. The chancellor of
SUNY serves as chair of the Foundation's Board, ex officio. A Sponsored Programs
Advisory Council, composed of faculty researchers and campus administrators,
provides operating advice to Foundation management. Since its establishment in
1951, the Foundation has facilitated research, education, and public service at
SUNY. The Foundation supports, through quality management services, more than
4,800 sponsored programs being conducted at 30 State-operated SUNY locations.
The Foundation is exempt from federal income tax under Section 501(c)(3) of the
Internal Revenue Code.

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Battelle is a nonprofit Ohio corporation formed in 1925 pursuant to the
Will of Gordon Battelle (the "Will") to utilize science for the benefit of
mankind through technological innovation.
Battelle serves industry and
government in the generation, application and commercialization of technology and
scientific knowledge. Battelle's principal services include research (conceptual
problem-solving and product and process development), on-site technical
assistance, and management of large complex technology programs. Battelle is
known for utilizing multi-disciplinary approaches to provide practical,
imaginative, and scientifically sound answers to its project sponsors' problems
and needs.
The Will and its interpretation by the courts provide for the distribution
by Battelle of its earnings at specified levels to such charitable institutions,
needy enterprises, or persons as in the judgement of Battelle's Trustees will do
the greatest good for humanity. An Ohio nonprofit corporation is, by law, a
corporation not formed for the pecuniary gain or profit of, and no part of any
net earnings of which is distributable to, its members, trustees, officers or
other private persons. In 1974, Battelle voluntarily relinquished its tax exempt
status under Section 501(c)(3) of the Internal Revenue Code because of
uncertainty as to whether the development aspects of the scientific research
which it was conducting pursuant to the Will and Ohio Law were consistent with
Treasury Regulations interpreting Section 501(c)(3) of the Internal Revenue Code.
Petitioner has been organized for the purpose of submitting a proposal to
the United States Department of Energy ("DOE") in response to a DOE request for
proposals for the management and operation of Brookhaven National Laboratory
("BNL") in Suffolk County on Long Island, and undertaking the management and
operation of BNL pursuant to a management agreement (the "Management Agreement")
with DOE. DOE requires that the manager of BNL be a non-profit entity. BNL is
dedicated to basic and applied investigation in a multitude of scientific
disciplines, including experimental and theoretical physics, medicine, chemistry,
biology, environmental research and engineering. Major BNL facilities include
the High Flux Beam Reactor, the Brookhaven Medical Research Reactor, the
Alternating Gradient Synchrotron complex, and the National Synchrotron Light
Source, and in the future will include a relativistic heavy ion collider. The
two reactors and the two synchrotrons (also referred to as accelerators) are used
for a variety of research, most notably in high and medium energy physics,
isotope production, material science, solid state physics, chemistry, biology,
environmental science, and geo-science. Experiments are conducted in a wide
range of areas, such as high energy collisions, radiobiology, photochemistry, and
trace chemical composition.
Certain of the research activities at BNL are
designed and conducted by university and industry users.
DOE announced in May of 1997 that a new contractor would be retained to
manage BNL effective January 1998. On November 25, 1997, DOE announced that
Petitioner had been selected. BNL was previously managed by Associated
Universities, Inc. ("AUI").
AUI has been performing essentially the same
activities at BNL as will be performed by Petitioner. AUI has been issued an
Exempt Organization Certificate by the Department of Taxation and Finance.

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Section 2.4 of the Agreement provides:
Purposes. The purposes of the Company [Petitioner] are to engage in
scientific research and educational activities and any other related
activities for which not-for-profit limited liability companies may
be organized under the Act [Delaware Limited Liability Company Act,
Title 6, §§ 18-101] and which are in furtherance of scientific
research and educational activities.
The primary purpose of the
Company is to enter into and perform the BNL Management Agreement.
The Company shall possess and may exercise all the powers and
privileges granted by the Act or by any other law, together with any
powers incidental thereto, so far as such powers and privileges are
necessary or convenient to the conduct, promotion or attainment of
the purposes of the Company. Notwithstanding any other provision of
this Agreement to the contrary, the Company is organized exclusively
for one or more of the following purposes: religious, charitable,
scientific, testing for public safety, literary, or educational
purposes as specified in Section 1116(a)(4) of the New York State
Tax Law and shall not carry on any activities not permitted to be
carried on by an organization exempt from the New York State Sales
and Compensating Use Tax under said Section 1116(a)(4) or
corresponding provisions of any subsequent New York State tax laws.
Section 6.5 of the Agreement provides:
Restriction on Distributions. Notwithstanding any other provision of
this Agreement, no distribution shall be made to any Member who, at
the time the distribution is made, is not an organization which
would qualify for exemption under Section 1116(a)(4) of the Tax Laws
of the State of New York.
Section 11.2(c) of the Agreement, relating
termination of Petitioner, provides, in part:

to

the

liquidation

The liquidating trustee(s) shall distribute the proceeds of such
liquidation and any other assets of the Company (subject to any
requirement under the Act) in the following order of priority:
(i) First, to payment of all of the debts, liabilities and
obligations of the Company...
(ii) Second, to the establishment of such adequate reserve for
payment and discharge of all debts, liabilities and obligations of
the Company, including, without limitation, contingent, conditional
or unmatured liabilities in such amount and for such term as the
liquidating trustee(s) may reasonably determine.
(iii) Third, to the Members in accordance with their
respective positive Capital Account balances, as determined after
giving effect to all allocations and Distributions under this
Agreement (other than the Distributions to be made pursuant to this
sentence) provided, however, that notwithstanding any other

and

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Sales Tax

provision of this Agreement, no distribution shall be made to any
Member who, at the time the distribution is made, is not an
organization which would qualify for exemption under Section
1116(a)(4) of the Tax Laws of the State of New York.
Applicable Law and Regulations
Section 1116(a) of the Tax Law exempts from sales and use tax any sale or
amusement charge by or to any of the following or any use or occupancy by any of
the following:
(4) Any corporation, association ... organized and operated
exclusively for religious, charitable, scientific, testing for
public safety, literary or educational purposes,... no part of the
net earnings of which inures to the benefit of any private
shareholder or individual...
Section 529.7 of the Sales and Use Tax Regulations provides, in part:
*

*

*

(b) Qualifications. (1) In order to qualify for exemption, an
organization must be formally organized. An organization will not
be considered formally organized unless it has an organizing
document defining its purposes and activities and a code of
regulations describing how it will function and select the officers
empowered to act for it.
Evidence of a formal organization
structure includes:
(i) a certificate of incorporation and bylaws;
(ii) a declaration of trust and bylaws;
(iii) articles of association and bylaws; or
(iv) a constitution and bylaws.
(2) In addition to the formal organization requirement, an
organization must prove that it is both organized and operated
exclusively for one or more of the purposes specified in subdivision
(e) of this section. If an organization fails to meet either the
organizational test or the operational test, it is not exempt.
(c) Organizational test. (1) General. The organizational test
relates solely to the provisions of the organizing documents.
(i) An organization is organized exclusively for one or more exempt
purposes only if its organizing documents:

(a) limit the purposes of such organization to one or more exempt
purposes; and

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(b) do not expressly empower the organization to participate, other
than as an insubstantial part of its activities, in activities which
in themselves are not in furtherance of one or more exempt purposes.
(ii) In no case will an organization be considered organized
exclusively for one or more exempt purposes, if, by the terms of its
organizing documents, the purposes for which such organization is
created are broader than the purposes specified in section
1116(a)(4) of the Tax Law. The fact that the actual operations of
such an organization have been exclusively in the furtherance of one
or more exempt purposes is not sufficient to permit the organization
to meet the organizational test. Similarly, such an organization
will not meet the organizational test as a result of statements or
other evidence that the members thereof intend to operate only in
the furtherance of one or more exempt purposes.
(iii) An organization is not organized exclusively for one or more
exempt purposes if its articles expressly empower it to carry on,
otherwise than as an insubstantial part of its activities,
activities which are not in furtherance of one or more exempt
purposes, even though such organization is, by terms of such
articles, created for a purpose that is no broader than the purposes
specified in section 1116(a)(4) of the Tax Law.
Thus an
organization that is empowered by its articles to engage in a
manufacturing business, or to engage in the operation of a social
club, does not meet the organizational test regardless of the fact
that its articles may state that such organization is created for
charitable purposes within the meaning of section 1116(a)(4) of the
Tax Law.
*

*

*

(3) Distribution of assets on dissolution. An organization is not
organized exclusively for one or more exempt purposes unless its
assets are dedicated to an exempt purpose. An organization's assets
will be considered dedicated to an exempt purpose if, upon
dissolution such assets would, by reason of a provision in the
organization's organizing documents or by operation of law, be
distributed for one or more exempt purposes, or to the Federal or a
state government or to a local government, for a public purpose. An
organization does not meet the organizational test if, by operation
of law or through the provisions of its organizing documents, the
organization's assets could, upon dissolution, be distributed to its
members or shareholders or for a nonexempt purpose.
The operational test relates
(d) Operational Test. (1) General.
solely to an organization's activities.
(2) Activities. An organization will be regarded as "operated
exclusively" for one or more exempt purposes only if almost all of
its activities accomplish one or more exempt purposes specified in
section 1116(a)(4) of the Tax Law and described in subdivision (e)

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of this section. An organization will not be so regarded if more
than an insubstantial part of its activities is not in furtherance
of an exempt purpose.
(3) Distribution of earnings. An organization is not operated
exclusively for one or more exempt purposes if its net earnings
inure in whole or in part to the benefit of private shareholders or
individuals. Private shareholders or individuals refers to persons
having a personal and private interest in the activities of the
organization.
*

*

*

(e) Exempt purposes. (1) In order to be exempt from the sales and
use tax as an organization described in section 1116(a)(4) of the
Tax Law, an organization must be both organized and operated
exclusively for one or more of the purposes listed in this
subdivision.
*
*
*
(iii) Scientific.

(a) Since an organization may meet the requirement of section
1116(a)(4) of the Tax Law only if it serves a public rather than a
private interest, a "scientific" organization must be organized and
operated in the public interest. Therefore, the term "scientific"
includes the carrying on of scientific research in the public
interest.
Research when taken alone is a word with various
meanings; it is not synonymous with "scientific"; and the nature of
particular research depends upon the purpose which it serves. For
research to be "scientific", it must be carried on in furtherance of
a "scientific" purpose.
(b) Scientific research does not include activities of a type
ordinarily carried on as an incident to commercial or industrial
operations, as, for example, the ordinary testing or inspection of
material or products or the designing or construction of equipment,
buildings, etc.
(c) Scientific research will be regarded as carried on in the public
interest:
(2) if such research is performed for the United States or any of
its agencies or instrumentalities, or for a State or political
subdivision thereof;...
*

*

*

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(v) Educational shall mean the instruction or training of the
individual for the purpose of improving or developing his
capabilities or the instruction of the public on subjects useful to
the individual and beneficial to the community. An organization may
be educational even though it advocates a particular position
or
viewpoint so long as it presents a sufficiently full and fair
exposition of the pertinent facts as to permit an individual or the
public to form an independent opinion or conclusion. On the other
hand, an organization is not educational if its principal function
is the mere presentation of unsupported opinion....
Opinion
Section 1116(a)(4) of the Tax Law is modeled after Section 501(c)(3) of the
Internal Revenue Code. Only those organizations which meet the requirements of
paragraph three of Section 501(c) qualify for sales tax exemption pursuant to
Section 1116(a)(4) of the Tax Law. Jamestown Campus of the Jamestown Community
College Faculty-Student Association, Adv Op St Tx Comm, September 16, 1985,
TSB-A-85(44)S. Section 529.7(b) of the Sales and Use Tax Regulations provides
that in order to qualify for exemption under Section 1116(a)(4) of the Tax Law,
an organization must be formally organized and prove that it is both organized
and operated exclusively for one or more of the purposes specified in Section
1116(a)(4).
Petitioner has filed a Certificate of Formation as a limited liability
company with the Secretary of State of the State of Delaware. The Agreement
defines Petitioner's purposes and activities, and describes its management
procedures and selection of officers.
If the Agreement is executed by
Petitioner's members, Petitioner will be formally organized for purposes of
Section 529.7(b)(1) of the Sales and Use Tax Regulations.
Section 2.4 of the Agreement limits the purposes of Petitioner to
scientific research, educational activities and other exempt purposes described
in Section 1116(a)(4) of the Tax Law. The Agreement does not expressly empower
Petitioner to participate in activities which are not in furtherance of the
specifically stated exempt purposes.
Sections 6.5 and 11.2(c)(iii) of the
Agreement limit, respectively, the distribution of Petitioner's earnings, and the
distribution of Petitioner's assets upon dissolution after payment of all debts,
liabilities and obligations, to members which qualify for exemption under Section
1116(a)(4) of the Tax Law. Accordingly, the Agreement dedicates Petitioner's
assets to an exempt purpose, as required by Section 529.7(c)(3) of the Sales and
Use Tax Regulations, and also would limit Petitioner’s distribution of earnings
in accordance with the prohibition in Section 529.7(d)(3) of the Sales and Use
Tax Regulations against inurement of net earnings to the benefit of persons
having a private interest in the organization.
Accordingly, under the Agreement, Petitioner would be organized exclusively
for the purposes specified in Section 1116(a)(4) of the Tax Law.
However, in
order to establish its exempt status and to receive an exempt organization

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certificate, Petitioner must demonstrate that it meets the requirements of the
operational test of Section 529.7(d) of the Sales and Use Tax Regulations, and
obtain approval from the Taxpayer Assistance Bureau as provided in Section
529.7(f) of the Regulations.
This Advisory Opinion presumes that all provisions of the Agreement are
valid under the laws of the State of Delaware and would be given effect under
such laws.

DATED: February 26, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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