Is a nonprofit patent-holding corporation exempt from New York's corporate franchise tax if it's a STOCK corporation whose only shareholder is a tax-exempt university?

Plain-English summary

Cornell Research Foundation, Inc. was organized in 1932 by Cornell University officers to hold patents, patent rights, and trademarks discovered by University faculty, purely for the University's benefit. It's a stock corporation, but its stock is owned entirely by Cornell University itself (a federally and New York tax-exempt organization). Cornell Research Foundation has held a federal tax exemption since 1940 (originally under a 1939 Code provision, now corresponding to IRC § 501(c)(2), the "title-holding company" exemption). Its role: when a faculty member has a potentially patentable invention, the Foundation evaluates whether it's patentable and commercially viable, files the patent application (with outside counsel), and then seeks a licensee or venture capitalist to develop and commercialize it. Royalty income is shared with the inventor and the University under the University's Patent Policy. The Foundation asked whether it qualifies for New York's not-for-profit corporate franchise tax exemption.

The Department's answer turned entirely on corporate FORM, not purpose. Article 9-A's not-for-profit exemption, found in the regulations, is explicitly limited to corporations that have NO stock or shares or certificates for stock or shares at all, operated on a nonprofit basis with no inurement to any officer, director, or member. The Department traced the legislative history: a 1966 bill that would have explicitly extended this exemption to nonprofit STOCK corporations was vetoed by the Governor -- specifically to avoid creating doubt about the (already-understood) exemption for NON-stock nonprofit corporations, which the veto message treated as settled and valid even without being spelled out in the statute. Prior State Tax Commission decisions confirmed that a stock corporation, even one organized and operated exclusively for nonprofit purposes, simply doesn't qualify for this exemption. Because Cornell Research Foundation is unambiguously a stock corporation, it doesn't matter that its sole shareholder is a tax-exempt university, or that its purpose is entirely to benefit that university and its faculty inventors -- it remains subject to Article 9-A franchise tax, computed under whichever of the four statutory alternative bases (income, an alternative income-plus-compensation measure, capital, or the flat $250 minimum) produces the highest tax.

What this means for you

University-affiliated foundations, patent-holding companies, and similar entities

Being wholly owned by a tax-exempt parent, and operating purely for that parent's nonprofit benefit, does NOT exempt your organization from New York's corporate franchise tax if it's organized as a STOCK corporation. The not-for-profit exemption is a formal, structural test (no stock at all) -- not a functional "operates like a nonprofit" test.

Organizations considering their corporate form for New York tax purposes

If avoiding Article 9-A franchise tax as a nonprofit is a goal, this ruling underscores that the entity generally needs to be organized WITHOUT stock or shares from the outset (e.g., as a true membership or not-for-profit corporation) -- converting a stock corporation's PURPOSE to nonprofit, without changing its stock structure, won't get there.

Entities that are subject to tax but expect minimal activity

Even a taxable nonprofit-purpose corporation still computes its tax under the same four alternative bases as any other Article 9-A taxpayer (entire net income; an alternative capital-plus-compensation base; a capital-based measure; or the flat minimum), paying whichever yields the highest amount.

Common questions

Q: Does it matter that Cornell Research Foundation's sole shareholder is a tax-exempt university?
A: No -- the Department was explicit that it's "of no consequence" that the stock is owned solely by a tax-exempt entity. The exemption turns on the corporation's OWN form (no stock at all), not who owns whatever stock exists.

Q: Is there any path for a stock corporation to get New York's not-for-profit franchise tax exemption?
A: Not under section 1-3.4(b)(6) as interpreted here -- the 1966 legislative history shows the state deliberately declined to extend this exemption to nonprofit stock corporations.

Q: Can another university-affiliated foundation 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 organizations, though the "stock corporations never qualify" holding reflects settled Department and State Tax Commission precedent (Cape Pond, 1049 Management Corp.).

Citations and references

Statutes and regulations:

• Tax Law § 209.1 (Article 9-A franchise tax); § 210.1(a) (four alternative computation bases); Reg. § 3-1.2(a)
• Business Corporation Franchise Tax Regulations § 1-3.4(b)(6) (not-for-profit exemption, non-stock corporations only)
• IRC § 501(c)(2) (title-holding company exemption)
• Matter of Cape Pond, Inc., TSB-H-80(20)C (1980); 1049 Management Corporation, TSB-A-86(1)C (1985)
• Opinion of Counsel, Nov. 28, 1967, NYTB 1967-4, p. 47 (1966 veto history)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (18) C
Corporation Tax
July 20, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C870218B

On February 18, 1987, a Petition for Advisory Opinion was received from Cornell
Research Foundation, Inc., East Hill Plaza, Ithaca, New York 14850.
The issue raised is whether, pursuant to section 1-3.4 of the Business Corporation
Franchise Tax regulations, Petitioner is exempt from the franchise tax imposed on business
corporations under Article 9-A of the Tax Law.
Petitioner is a New York State corporation, organized in 1932 by officers of Cornell
University for the purpose of holding for the exclusive benefit of the University certain patents,
patent rights, trademarks or trademark rights, obtained by members of the faculty of the
University as a result of research and discoveries. Petitioner is a stock corporation whose stock is
owned solely by Cornell University, which is an exempt organization for Federal income tax
purposes and New York State franchise tax purposes.
On August 1, 1940, Petitioner was granted a federal tax exemption under section 101(14)
of the Internal Revenue Code of 1939. This exemption corresponds to section 501(c)(2) of the
Internal Revenue Code of 1954. Petitioner was advised by the Treasury Department on August
25, 1943 that its plans to share royalty income with vendors would not alter its tax exempt status,
but each such original inventor agreement should be obtained by Petitioner as evidence by its
property right. On July 11, 1944, Petitioner was advised by the Treasury Department that it
would be required to file Form 990 based on the provisions in section 101(14) of the Internal
Revenue Code.
Petitioner is, generally, an information source for Cornell University faculty and staff on
questions of patenting and patent ability. Typically, as the result of a general publicity campaign,
an inventor approaches Petitioner for assistance. Sometimes, through a publication or by word of
mouth, Petitioner is referred to the inventor. After receiving a formal invention disclosure, and
when necessary, reporting it to the appropriate government agency, Petitioner evaluates the
invention on two basis. First, is it patentable? Second, assuming it is patentable, is there
sufficient likelihood a commercial product will arise out of the invention to make the patenting
process economically relevant? The patent ability decision is usually made after a search of the
relevant prior art, and input from knowledgeable experts if they can be uncovered and are willing
to assist. Next, the commercial feasibility is explored by talking with the inventors, other faculty,
alumni who may have skills in the area and corporations who are potential licensees. Once a
decision is made to proceed, a patent application is filed, usually with the assistance of outside
counsel. At that point, serious licensing efforts begin by attempting to find either an existing
corporation or a venture capitalist who will license the patent and develop a commercial product.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

-2­
TSB-A-87 (18) C
Corporation Tax
July 20, 1987

The purpose of Petitioner's existence is first to bring Cornell University research to
practical benefit for the public and, secondarily, to economically benefit the inventors and the
University. The income generated by Petitioner is shared with the faculty and the University in
accordance with the University Patent Policy.
Section 209.1 of Article 9-A 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(b)(6) of
the Business Corporation Franchise Tax regulations exempts from the franchise tax
"...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 nonprofit 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.
It was not intended that such exemption be applied to not-for-profit stock corporations.
Senate Bill Introductory No. 2503 of 1966 would have explicitly exempted stock corporations
operated on a nonprofit basis. That bill was vetoed by the Governor on May 16, 1966 specifically
to avoid creating doubt about the exemption of nonstock corporations which is acknowledged as
valid but which is not explicit in the statute. Opinion of Counsel, November 28, 1967, NYTB
1967-4, p. 47.
In Matter of Cape Pond, Inc., Decision of the State Tax Commission, July 18, 1980, TSBH-80(20)C, it was determined that a stock corporation, even if it is organized and operated
exclusively for nonprofit purposes, is not exempt from the franchise tax pursuant to section 1­
3.4(b)(6) of the Business Corporation Franchise Tax regulations. Also, see 1049 Management
Corporation, State Tax Commission Advisory Opinion, December 23, 1985, TSB-A-86(1)C.
Based on the legislative history of this issue, State Tax Commission Decisions rendered
and State Tax Commission Advisory Opinions issued, it is clear that a stock corporation,
regardless of whether it is organized and operated exclusively for nonprofit purposes, is not
exempt from tax pursuant to section 1-3.4(b)(6) of the Business Corporation Franchise Tax
regulations.
Herein, Petitioner is a stock corporation. It is of no consequence that Petitioner's stock is
owned solely by a tax exempt entity. Therefore, Petitioner does not fall within the scope of the
exemption contained in section 1-3.4(b)(6) of the Business Corporation Franchise Tax
regulations. Accordingly, Petitioner is subject to the franchise tax imposed by Article 9-A of the
Tax Law.

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TSB-A-87 (18) C
Corporation Tax
July 20, 1987

It should be noted, that Section 209.1 of Article 9-A of the Tax Law provides "...every
domestic or foreign corporation... shall annually pay a franchise tax, upon the basis of its entire
net income, or upon such other basis as may be applicable as hereinafter provided...." Section
210.1(a) of Article 9-A sets forth four methods of computing such tax and provides that the
method which produces the largest tax shall be applicable. Section 3-1.2(a) of the Business
Corporation Franchise Tax regulations describes the four methods as follows:
(1)

10 percent of its entire net income, or the portion thereof allocated to New York

State;
(2)
10 percent of an amount equal to 30 percent of the balance remaining after adding
to entire net income compensation paid to officers and to stockholders owning in excess of five
percent of its issued capital stock and deducting therefrom $30,000... and any net loss for the
reported year, or the portion of such amount allocated to New York State;
(3)
1.78 mills... of the total of its business capital and investment capital, or the
portion thereof allocated to New York State; or
(4)

$250.

DATED: July 20, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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