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The Real Property Taxable Status of New York Limited Liability Companies

There are a number of troubling issues concerning the taxable status of New York limited liability companies (“LLCs”) for purposes of Real Property Tax Law (“RPTL”) sections 420-a and 462 exemptions.  Holding title to real property in the form of an LLC is a popular way of owning real property because it shields the individual members of the LLC from personal liability, limits the liability of the property owner to the value of the real property, provides favorable tax treatment under the Internal Revenue Code, and provides some level of anonymity to the individual members of the LLC, among other benefits.  However, there has been an increase in real property tax exemption applications from LLCs that purport to be nonprofit entities pursuant to RPTL §420-a, with little to no guidance whatsoever as to how those applications should be evaluated.

RPTL §420-a(a) provides that real property “owned by a corporation or association organized or conducted exclusively for” exempt purposes may qualify for the exemption.  The New York Court of Appeals in Matter of Greater Jamaica Dev. Corp. v. New York City Tax Comm’n, 25 N.Y.3d 614, 625 (2015), accepted, without deciding, that a Delaware LLC could qualify as an exempt entity pursuant to RPTL §420-a.  However, Delaware LLCs may be formed for nonprofit purposes pursuant to Delaware law.  See 6 Del. C. § 18-106(a).  New York LLCs, on the other hand, can only be formed for for-profit purposes pursuant to the New York Limited Liability Company Law (“LLCL”).  See LLCL §§102(e), 201.  New York LLCs have the legal right to do many things that nonprofits are constrained from doing, such as conveying all or substantially all of their assets without approval by a court or the New York Attorney General’s Office, and dissolving, winding up affairs and paying distributions to members.

For purposes of federal income taxation, an LLC may be disregarded or treated as a “pass through” entity.  However, RPTL §420-a expressly requires the entity that owns the real property to qualify for the exemption.  Thus, if title to real property is held in the name of an LLC, the LLC may not merely be disregarded for purposes of RPTL §420-a.  Instead, the owner-entity itself must be closely scrutinized to determine whether it is entitled to the exemption.

So where does this leave assessors who are evaluating exemption applications submitted by LLCs, as there is little to no guidance on this emerging topic?  As a preliminary matter, the applicant bears the burden to show entitlement to the exemption by convincing evidence.  In Matter of Greater Jamaica, the Court of Appeals found “evidence in the record” that the LLC “was created to assist in the charitable purposes of its member,” where its sole member was an exempt entity that would also qualify for the RPTL §420-a exemption, and the LLC’s governing documents expressly provided that the LLC was formed to carry out the charitable purposes of the sole nonprofit member, that it would operate the property on a “nonprofit basis,” and that the LLC’s purposes were limited to those “not inconsistent with” its sole nonprofit member’s exempt status.  25 N.Y.3d at 622, 625 fn.3.  Thus, if Matter of Greater Jamaica opened the door a little bit for LLCs to prove entitlement to a RPTL §420-a real property tax exemption, then it limits eligibility to only those LLCs who have a sole nonprofit member (or members) that would also qualify for the exemption and requires that the LLC’s governing documents provide that the LLC is limited to the nonprofit purposes and conduct of its sole nonprofit member.

To qualify for the RPTL §420-a exemption, an LLC must therefore, at the very least, have a sole member that is a nonprofit entity that would also qualify for the exemption, and the LLC’s Articles of Organization and Operating Agreement must be closely scrutinized to determine whether it is limited to the exempt purposes and nonprofit activities of its sole exempt member.  On a separate point, an LLC cannot qualify for an RPTL §462 exemption at all because the plain language of that statute limits that exemption to a “religious corporation“—by definition, a corporation formed under the New York Religious Corporations Law.

This is not to be considered legal advice.  Please contact an attorney to discuss your specific situation.

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Kara Cavallo is a Partner with the firm and practices Tax Certiorari, Litigation & Appeals, State and Federal Appellate Practice and Trial Practice. She can be reached by phone at 845-764-9656 and by email.

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