A non-stock, non-profit corporation exists solely to hold title to real property for a labor union local, and is federally exempt under IRC section 501(c)(2) as a title-holding company -- is it exempt from New York's Article 9-A corporate franchise tax?

Plain-English summary

Service Employees Local 200 Building Corp. is a non-stock corporation that merely holds title to real property on behalf of Service Employees Local 200 (a labor union). It operates on a non-profit basis, with no part of its net earnings benefiting any officer, director, or member, and it's exempt from federal income tax as a title-holding corporation described in IRC section 501(c)(2). Petitioner asked whether it's also exempt from New York's Article 9-A franchise tax.

The Department applied 20 NYCRR 1-3.4(b)(6), which excludes from Article 9-A any corporation organized other than for profit that has no stock or shares, operates on a non-profit basis with no earnings inuring to any officer/director/member -- and creates a PRESUMPTION of New York exemption for any such corporation that is federally tax-exempt under IRC section 501(a) (conversely, a corporation federally denied exemption is presumed subject to New York tax, and the Department will "ordinarily" follow an IRS determination revoking exemption). Since Petitioner is a non-stock, non-profit corporation exempt under federal section 501(a) as a section 501(c)(2) title-holding company, it falls squarely within this regulation and is NOT subject to Article 9-A tax.

But the Department didn't stop there -- it flagged a separate, independent exposure: even a corporation exempt from Article 9-A can still owe New York's Article 13 tax on UNRELATED business income if it has any income described in IRC section 511. This is the same doctrine applied more fully in the Department's contemporaneous TSB-A-86(15)C ruling for a private charitable foundation, where debt-financed investment income triggered Article 13 tax despite the foundation's otherwise exempt status.

What this means for you

Title-holding companies and other non-stock nonprofit corporations tied to unions, associations, or foundations

Federal tax-exempt status under IRC section 501(a) creates a presumption of New York Article 9-A exemption under 20 NYCRR 1-3.4(b)(6) -- but that presumption only covers the general corporate franchise tax. If your exempt organization generates unrelated business income (rents from debt-financed property, income unrelated to your exempt purpose, etc.), you may still owe New York's separate Article 13 tax on that income even while remaining Article 9-A exempt.

Losing federal exemption

If the IRS denies or revokes your federal section 501(a) exemption, the Department will "ordinarily" follow that determination and presume you're subject to Article 9-A tax -- so a federal exemption problem tends to flow straight through to New York.

Common questions

Q: Does federal 501(c)(2) exempt status automatically mean exemption from New York's corporate franchise tax?
A: Yes, via a presumption under 20 NYCRR 1-3.4(b)(6) -- a non-stock, non-profit corporation with federal section 501(a) exemption is presumed exempt from Article 9-A.

Q: Can an organization be exempt from Article 9-A but still owe New York tax?
A: Yes -- if it has unrelated business taxable income under IRC section 511, it can still be subject to New York's separate Article 13 unrelated business income tax.

Q: What happens if the IRS later revokes the organization's federal exemption?
A: The Department will ordinarily follow that revocation, and the corporation would then be presumed subject to Article 9-A tax.

Q: Can another title-holding corporation rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other title-holding or non-profit corporations, even with similar federal exemptions.

Citations and references

Statutes and regulations:

• Tax Law § 209.1
• 20 NYCRR 1-3.4(b)(6)
• Internal Revenue Code § 501(a), § 501(c)(2), § 502, § 503, § 511

Related rulings:

• TSB-A-86(15)C -- Article 13 unrelated business income tax applied to a private foundation's debt-financed investment income, the same doctrine flagged here
• TSB-A-86(4)C and TSB-A-86(6)C -- contrasting homeowners/condo associations found TAXABLE, since they actively provide services or rentals rather than merely holding title passively
• TSB-A-86(1)C -- a similar title-holding corporation for a different union local found TAXABLE, because unlike this Petitioner it had issued stock

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a86_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (7) C
Corporation Tax
March 24, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C851212C

On December 12, 1985 a Petition for Advisory Opinion was received from Service
Employees Local 200 Building Corp., 3060 Erie Boulevard East, Syracuse, New York 13201.
The issue raised is whether the corporation is exempt from the franchise tax imposed by
Article 9-A of the Tax Law.
Petitioner states that it is a non-stock corporation that merely holds title to real property for
Service Employees Local 200. Petitioner operates on a non-profit basis and no part of the net
earnings of which inures to the benefit of any officer, director, or member. Petitioner is a
corporation described in Section 501(c)(2) of the Internal Revenue Code. Petitioner believes that
it should be exempt from the New York State franchise tax pursuant to Business Corporation
Franchise Tax Regulation section 1-3.4(b)(6)(i).
Section 209.1 of the Tax Law imposes a franchise tax on every domestic or foreign
corporation "[f]or the privilege of exercising its corporate franchise, or of doing business, or of
employing capital, or of owning or leasing property in this state...." Section 1-3.4 of the Business
Corporation Franchise Tax Regulations describes corporations that are not subject to Article 9-A of
the Tax Law and subdivision (b) of such section states, in part:
"...(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).
Section 501(a) of the Internal Revenue Code exempts from Federal income taxation
organizations described in subsection(c) of Section 501 unless such exemption is denied under
Section 502 or 503 of the Internal Revenue Code.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

-2­
TSB-A-86 (7) C
Corporation Tax
March 24, 1986

Since Petitioner is a non-stock corporation that is operated on a non-profit basis and no part
of its net earnings inures to the benefit of any officer, director or member, and which is exempt from
Federal income tax pursuant to section 501(a) of the Internal Revenue Code, Petitioner falls within
the ambit of section 1-3.4(b)(6) of the Business Corporation Franchise Tax Regulations and is not
subject to the tax imposed under Article 9-A of the Tax Law.
However, if pursuant to section 511 of the Internal Revenue Code, Petitioner has any
unrelated business taxable income, Petitioner may be subject to the tax imposed under Article 13 of
the Tax Law on unrelated business income.

DATED: March 24, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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