Is a Swiss nonprofit medical-research joint-stock company, federally tax-exempt under IRC section 501(c)(3) and dedicated entirely to charitable cancer research with no shareholder profit rights, exempt from New York's Article 9-A franchise tax simply because it has stock?

Plain-English summary

Ludwig Institute for Cancer Research is a nonprofit joint-stock company organized under Swiss law for medical cancer research benefiting the public, funded by an endowment and planning to establish a research laboratory with a hospital in New York City. Its fifty shares carry only the right to vote on directors, auditors, and the corporation's registered "seat" -- no dividend or liquidation rights whatsoever. Most shares are held by an irrevocable charitable trust (itself IRS-recognized under section 501(c)(3)) that elects and oversees the Institute's directors much like members of a nonprofit membership corporation; one share is held by the Swiss Confederation specifically to ensure nonprofit operation. The Institute's basic articles can't even be amended to change its nonprofit charitable purpose, and on liquidation, all surplus and capital must go to other 501(c)(3) hospitals -- never the shareholders. The Institute is federally tax-exempt under IRC section 501(c)(3) and had already registered with the New York Secretary of State to operate as a not-for-profit organization in the state.

Despite every one of those facts, the Department found the Institute taxable, because it has stock. Regulations section 1-3.4(b)(6) exempts from Article 9-A only corporations "organized other than for profit which do not have stock or shares or certificates for stock or for shares." The Department traced the deliberate legislative choice behind that limitation: a 1966 bill that would have explicitly extended the exemption to nonprofit stock corporations was vetoed specifically to avoid creating doubt about the settled exemption for nonstock corporations -- confirming lawmakers intentionally left nonprofit stock corporations outside the exemption. The Department also cited a consistent line of its own prior rulings and State Tax Commission decisions reaching the identical result for other nonprofit stock corporations (Cornell Research Foundation, TSB-A-87(18)C; University Medical Practice Services, TSB-A-90(3)C; 1049 Management Corporation, TSB-A-86(1)C; Matter of Cape Pond, TSB-H-80(20)C). It made no difference that the Institute is exempt for federal income tax purposes, or that its shareholders have no ownership rights in its assets at all -- the mere fact of being organized as a stock corporation, regardless of purpose or how powerless the shares are, takes it outside section 1-3.4(b)(6) entirely.

What this means for you

Nonprofit organizations considering a stock-corporation structure (including foreign entities operating in New York)

If your organization's governing documents create shares of any kind -- even shares with zero economic rights, held only by a controlling charitable trust -- you fall outside New York's franchise tax exemption for nonprofits under Regulations section 1-3.4(b)(6), no matter how genuinely charitable your purpose or how airtight your nonprofit governance. To access this exemption, the entity needs to be a true nonstock (membership) corporation.

Foreign (non-U.S.) nonprofits establishing New York operations

Federal 501(c)(3) exemption and even formal not-for-profit registration with the New York Secretary of State do NOT automatically confer New York franchise tax exemption -- the corporate form itself (stock vs. nonstock) is the controlling factor for Article 9-A purposes, independent of both federal tax status and state not-for-profit registration.

Accountants and tax attorneys structuring nonprofit entities

If a client's nonprofit needs a stock structure for governance reasons (e.g., a controlling charitable-trust shareholder model, common among international research foundations), flag the New York franchise tax exposure early -- restructuring as a true nonstock corporation may be the only path to the section 1-3.4(b)(6) exemption.

Common questions

Q: Does federal 501(c)(3) tax-exempt status automatically exempt an organization from New York's Article 9-A franchise tax?
A: No. The nonprofit franchise tax exemption under Regulations section 1-3.4(b)(6) turns on corporate form (nonstock), not federal tax-exempt status.

Q: If shares carry no dividend or liquidation rights, does that make the corporation effectively "nonstock" for this exemption?
A: No. The Department treats the mere existence of stock or shares -- regardless of what rights they carry -- as disqualifying, per the deliberate 1966 legislative history limiting the exemption to true nonstock corporations.

Q: Is New York not-for-profit registration with the Secretary of State the same as franchise tax exemption?
A: No. Registering to operate as a not-for-profit organization in New York is a separate matter from qualifying for the Article 9-A franchise tax exemption, which depends on corporate structure.

Citations and references

Statutes and regulations:

• Tax Law section 209.1 (Article 9-A franchise tax)
• Business Corporation Franchise Tax Regulations section 1-3.4(b)(6) (nonprofit exemption, limited to nonstock corporations)

Legislative history and prior opinions cited:

• Senate Bill Introductory No. 2503 of 1966 (vetoed May 16, 1966, specifically to preserve the nonstock-only limitation); Opinion of Counsel, November 28, 1967, NYTB 1967-4, p. 47
• Cornell Research Foundation, Inc., Adv Op St Tax Comm, July 20, 1987, TSB-A-87(18)C
• University Medical Practice Services, P.C., Adv Op, Comm T&F, January 26, 1990, TSB-A-90(3)C
• 1049 Management Corporation, Adv Op St Tax Comm, December 23, 1985, TSB-A-86(1)C
• Matter of Cape Pond, Inc., Dec St Tax Comm, July 18, 1980, TSB-H-80(20)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(17)C
Corporation Tax
August 29, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C900724A

On July 24, 1990 a Petition for Advisory Opinion was received from Ludwig Institute for
Cancer Research, c/o Universe Tankships, Inc., 1345 Avenue of the Americas, New York, New York
10105.
The issue raised by Petitioner, Ludwig Institute for Cancer Research, is whether it is exempt
from the franchise tax imposed under Article 9-A of the Tax Law by reason of Section 1-3.4(b)(6)
of the Business Corporation Franchise Tax Regulations (hereinafter "Regulations").
Petitioner is a nonprofit joint-stock company organized under the laws of Switzerland for the
purpose of engaging in medical research, primarily in the field of cancer, for the benefit of the public.
The Petitioner has issued fifty shares. Under the Petitioner's basic articles and Swiss law the shares
entitle the shareholders simply to vote on the election and removal of the board of directors of the
Petitioner and on limited corporate matters, such as the appointment of auditors, approval of annual
reports and changes in the Petitioner's registered "seat". The shares provide no rights to dividends,
liquidation distributions or other payments. The Petitioner's basic articles cannot be amended to
change its basic nonprofit charitable and scientific purposes.
The bulk of the shares are held by an irrevocable charitable trust which selects and elects the
Petitioner's directors and maintains oversight and control over the directors in the same way that the
members of a nonprofit membership corporation supervise their directors. The charitable trust has
been determined by the Internal Revenue Service to be an organization described in Internal Revenue
Code Section 501(c)(3). One share is held by the Swiss Confederation subject to its undertaking to
hold and vote such shares to assure that the Petitioner is operated for nonprofit charitable and
scientific purposes.
Petitioner's research is funded by an endowment. Its primary source of income is dividends
and interest and other income such as royalties. All income received or earned by Petitioner must
be used for research. In the event that Petitioner liquidates, the entire surplus and capital of the
Petitioner must be distributed to hospitals described in Section 501(c)(3) of the Internal Revenue
Code, and not to the shareholders.
Petitioner qualifies as an exempt organization for Federal tax purposes under Section
501(c)(3). In addition, Petitioner applied for and received authority from the Secretary of State of
New York to conduct activities in New York as a not-for-profit organization. Petitioner desires to
establish a cancer research laboratory in association with a hospital in New York City.
TP-9 (9/88)

-2­
TSB-A-90(17)C
Corporation Tax
August 29, 1990
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
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. Such section 1­
3.4(b)(6) provides further that "[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."
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 Cornell Research Foundation, Inc., Adv Op St Tax Comm, July 20, 1987, TSB-A-87(18)C,
and in University Medical Practice Services, P.C., Adv Op, Comm T & F, January 26, 1990, TSB-A­
90(3)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
Regulations. Also, see 1049 Management Corporation, Adv Op St Tax Comm, December 23, 1985,
TSB-A-86(1)C and Matter of Cape Pond, Inc., Dec St Tax Comm, July 18, 1980, TSB-H-80(20)C.
Based on the legislative history of this issue, State Tax Commission and Commissioner of
Taxation and Finance advisory opinions issued, and State Tax Commission decisions rendered, 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 Regulations.
Herein, Petitioner is a stock corporation. Therefore, Petitioner does not fall within the scope
of the exemption contained in section 1-3.4(b)(6) of the Regulations. It is of no consequence that
Petitioner is exempt for federal income tax purposes or that the holders of its stock have no right of
ownership in its assets. Accordingly, Petitioner is subject to the franchise tax imposed by Article
9-A of the Tax Law.

DATED: August 29, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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