Reversing a decision by the Appellate Division, the Court of Appeals has held in a 5-2 decision that a charitable organization is not entitled to a continued exemption from real property taxes for the public parking facilities it owns and operates. Matter of Greater Jamaica Dev. Corp. v. New York City Tax Commission, N.Y. Decision No. 108 (July 1, 2015).
Facts. Greater Jamaica Development Corporation (“GJDC”) was formed in 1967 as a charitable not-for-profit corporation with a mission to promote the development of the business district of Jamaica, Queens. In 1998, it created Jamaica First Parking, LLC (“JFP”) to acquire, develop, and operate parking facilities in Jamaica on a nonprofit basis. JFP operated five facilities, four of which had formerly been operated by the New York City Department of Transportation, and the fifth of which was built on vacant land purchased from the City with monies received from the operation of the other four parking facilities. The parking facilities offered below-market rate parking accessible to local retail stores, state and federal office buildings, and religious organizations.
In 2001, the IRS concluded that (1) JFP was a disregarded entity for federal income tax purposes, and (2) JFP’s activities would not adversely impact GJDC’s federal tax-exempt status because JFP’s operation of the parking facilities was “substantially related” to GJDC’s charitable purposes and would “lessen the burdens of government.” Further, in 2007, the New York City Department of Finance (“Department”) granted real property tax exemptions for the five parking facilities pursuant to RPTL § 420-a, which allows a property tax exemption for property owned by entities organized or conducted for charitable purposes when the primary use of such property is for such purposes. However, in February 2011, the Department revoked the property tax exemption prospectively on the grounds that the operation of parking facilities was not a charitable activity as contemplated by RPTL § 420-a.
GJDC and JFP challenged the revocation, and the trial court ruled in the Department’s favor. However, as discussed in the January 2014 issue of New York Tax Insights, the Appellate Division, Second Department, reversed on the basis that when an exemption has been granted, the Department has the burden to establish “revocation of the tax exemption on the grounds that petitioners’ activity did not conform to a charitable purpose within the meaning of RPTL 420-a,” and that the Department had not met its burden.
The Court of Appeals Decision. The Court of Appeals concluded that the property was not exempt. It found that while the taxing authority seeking to revoke a previously granted property tax exemption carries the initial burden of establishing that a property is not exempt from taxation, the Department satisfied this initial burden simply by demonstrating the grounds outlined in the exemption revocation letter provided by the Department. Such grounds included that JFP’s parking facilities were not used for a charitable purpose or a purpose incidental to a charitable purpose, but instead were used for economic development, and that JFP collected monies exceeding the costs of the parking facilities and used its excess proceeds to fund other operations, such as the purchase of land for a fifth parking facility. The majority was also persuaded by an affirmation submitted by the New York City Assistant Corporation Counsel, who claimed that the factual allegations in GJDC and JFP’s court petition challenging the exemption revocation established that the parking facilities were not entitled to exemption because JFP was created for the sole purposes of acquiring, owning, developing, and operating public parking facilities to promote GJDC’s purpose of promoting commerce and business growth in Jamaica.
After finding that the Department had sustained its initial burden, the Court determined that GJDC and JFP failed to carry the burden of showing that the use of JFP’s parking lots carried out GJDC and JFP’s exempt charitable purpose. The majority determined that evidence of GJDC’s and JFP’s federal income tax- exempt status was insufficient to establish that the parking facilities were entitled to exemption from real property taxes under RPTL § 420-a, reasoning that the IRS’s determination for federal income tax purposes requires “an analysis of the organization and its operation as a whole,” while RPTL § 420-a requires both that real property (1) be owned by an entity organized for charitable purposes and (2) be used for carrying out such charitable purposes. While agreeing that GJDC and JFP were entities organized and operated for charitable purposes, the majority concluded that they failed to demonstrate that the use of their public parking facilities was consistent with their charitable purposes.
The Court called the operation of parking facilities that enable visitors to frequent local businesses in downtown Jamaica “laudable,” but nonetheless concluded such activities were not charitable because they fulfilled the “primary purpose of economic development,” focusing on the fact that the economic benefit conveyed by the below-market rate parking provided by JFP inures to the benefit of private enterprise. The majority also rejected the argument that the parking facilities fulfilled a “charitable” purpose by lessening the burden on local government—even though federal Treasury Regulations specifically identify such a purpose as charitable for federal income tax purposes.
Notably, a dissenting opinion strongly took issue with the majority’s conclusions. The dissent stated that no change in facts or law predicated the change in the tax exemption for JFP’s parking facilities, and that the Department’s explanation for revoking the exemption was that the Department made a “mistake” and “erroneously awarded” the exemption “in the first instance.” The dissent then classified the taxing authority’s revocation of the exemption as a “flip-flop,” and stated that a taxing authority should be required to show “some objective indication” other than a “mere change of heart” for revoking a previously issued exemption.
It had been well established under New York law that when a taxing authority has granted a property tax exemption and later attempts to revoke it, the burden of proof is on the taxing authority. See, e.g., Matter of New York Botanical Garden v. Assessors of the Town of Washington, 55 N.Y.2d 328 (1982). In this case, however, the burden on the taxing authority appears to have been easy to meet. As discussed in the dissent, no facts or law changed between the time the Department granted an exemption for JFP’s parking facilities in 2007 and revoked such exemption in 2011. Instead, it appears that the Department reexamined the facts surrounding JFP’s parking facilities and reached a different legal conclusion—or, in the words of the dissent, had a “change of heart”—and the majority agreed with the Department’s revised reasoning.