Court Opinion

ID: 9953004
Source: CourtListenerOpinion
Date Created: 2024-03-21 13:08:05.361331+00
Date Added: 2024-06-11T14:45:35.498188
License: Public Domain

State of New York                                                        OPINION
Court of Appeals                                          This opinion is uncorrected and subject to revision
                                                            before publication in the New York Reports.

 No. 5
 In the Matter of Brookdale
 Physicians' Dialysis Associates,
 Inc., &c.,
          Respondent,
 et al.,
          Petitioner,
       v.
 Department of Finance of the City
 of New York,
          Appellant.

 Adam C. Dembrow, for appellant.
 Menachem J. Kastner, for respondent.

 RIVERA, J.:

        New York Real Property Tax Law (RPTL) § 420-a mandatorily exempts from

 taxation any real property owned by certain not-for-profit entities and used exclusively for

 statutorily-enumerated beneficial purposes without financial gain. The statute

 unambiguously reflects the legislative intent to limit the exemption to those purposes. The

 exemption also does not apply to property, like that at issue here, which is leased by a
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for-profit corporation. Consequently, the subject property is not exempt under

RPTL 420-a, and the petition to annul the revocation of the property’s standing exemption

should have been denied.

                                               I.

          RPTL 420-a Not-For-Profit Real Property Mandatory Tax Exemption

       New York has a longstanding public policy of exempting real property owned by

certain not-for profit entities to encourage and foster legislatively favored, publicly

beneficial services and operations (see Sisters of St. Joseph v City of New York, 49 NY2d

429, 437-438 [1980]). To that end, RPTL 420-a (1) (a) mandates, in relevant part:

       “Real property owned by a corporation or association organized or
       conducted exclusively for . . . charitable [or] hospital . . . purposes, or for
       two or more such purposes, and used exclusively for carrying out
       thereupon . . . such purposes either by the owning corporation or
       association. . . or by another such corporation or association. . . shall be
       exempt from taxation as provided in this section” (RPTL 420-a [1] [a]).

       The Court has construed the term “exclusively” in this subsection as meaning

“principal or “primary such that purposes and uses merely auxiliary or incidental to the

main and exempt purpose and use will not defeat the exemption” (Matter of Greater

Jamaica Dev. Corp. v New York City Tax Commn., 25 NY3d 614, 623 [2015] [internal

quotation marks and citation omitted]). Regardless of “[w]hether the use of real property

to carry out an exempt purpose is characterized . . . as the sole use of the property or . . . as

a use reasonably incident to an exempt purpose, it is the actual or physical use of the real

property that is determinative under section 420-a (1) (a)” (Matter of Lackawanna

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Community Dev. Corp. v Krakowski, 12 NY3d 578, 582 n [2009]). “Put differently, the

determination of whether the property is used exclusively for the statutory purposes

depends upon whether its primary use is in furtherance of the permitted purposes” (Merry-

Go-Round Playhouse, Inc. v Assessor of City of Auburn, 24 NY3d 362, 367-68 [2014]).

       To avoid abuse of this mandatory exemption, such property is subject to taxation

when the use allows for financial gain or when the entity is a guise or pretense for pecuniary

profit. Thus, under RPTL 420-a (1) (b):

       “Real property . . . shall not be exempt if any officer, member or employee
       of the owning corporation or association shall receive or may be lawfully
       entitled to receive any pecuniary profit from the operations thereof, except
       reasonable compensation for services in effecting one or more of such
       purposes, or as proper beneficiaries of its strictly charitable purposes; or if
       the organization thereof for any such avowed purposes be a guise or pretense
       for directly or indirectly making any other pecuniary profit for such
       corporation or association or for any of its members or employees . . . . ”
       (RPTL 420-a [1] [b]).

Further, 420-a (2) provides, in pertinent part, that:

       “If any portion of such real property is not so used exclusively to carry out
       thereupon one or more of such purposes but is leased or otherwise used for
       other purposes, such portion shall be subject to taxation and the remaining
       portion only shall be exempt . . . and provided further that such real property
       shall be exempt from taxation only so long as it or a portion thereof, as the
       case may be, is devoted to such exempt purposes and so long as any moneys
       paid for such use do not exceed the amount of the carrying, maintenance and
       depreciation charges of the property or portion thereof, as the case may be”
       (RPTL 420-a [2]).

       The language in section 420-a (2), “is phrased in the disjunctive; thus, two

occurrences could possibly serve as the grounds for disqualification: (a) that the property

is leased; or (b) that the property is used by the owner-organization for other than tax-

exempt purposes” (Sisters of St. Joseph, 49 NY2d at 440; see also New York State Dept.

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of Taxation and Fin., Instructions to Assessors: Application for Real Property Tax

Exemption     for    Non-Profit     Organizations     [May     3,    2023],    available     at

https://www.tax.ny.gov/research/property/assess/manuals/vol4/pt2/sec4_05/rptaxex.htm

[last accessed Jan 20, 2024]).1 In other words, and as relevant to this appeal, under the first

ground, if the property is not exclusively used for an exempt purpose and is leased in whole

or in part to a nonexempt entity, the leased portion is taxable.

       As the text illuminates, and as the Court has previously recognized, one goal of

RPTL 420-a (1) (a) and (2) is that the property actually be used for the recognized purposes,

without profit (see Matter of Greater Jamaica Dev. Corp., 25 NY3d at 631). Strict

adherence to the statutory framework is essential to achieving that legislative goal. Careful

application of the exemption also furthers another legislative goal of reversing the erosion

of local tax bases by according the statute’s reduced tax burden only to those properties

used for the benefit of society (see Matter of American Bible Socy. v Lewisohn, 40 NY2d

78, 86 [1976] [acknowledging “the evident intention of our Legislature to reduce rather

than to enlarge tax exemption” when it amended the RPTL in 1971 and its “articulated

desire to stem and to reverse the severe erosion of the local municipal tax base,

accompanied by its recognition of the corollary serious predicament of local municipal

finances”]; Richard L. Beebe and Stephen J. Harrison, A Law in Search of a Policy: A

History of New York’s Real Property Tax Exemption for Non-Profit Organizations, 9

1
 The Court in Sisters of St. Joseph was construing identical language in the predecessor to
RPTL 420-a (2)—former RPTL 421—before the RPTL’s renumbering (49 NY2d at 437;
see L 1977, ch 110, § 1).

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Fordham Urban LJ 533, 534 [1981] [noting the “erosion of the tax base due to a

proliferation of exemptions and exempt properties” and that “many municipalities,

particularly several of our largest cities and some of our most rural communities, face

excruciating problems as a result of dilution of their tax bases”]).

                                             II.

                              Factual and Procedural History

       The Department of Finance of the City of New York (DOF) challenges the

annulment of its determination to revoke petitioners’ real property tax exemption

commencing with the 2014 tax year. Petitioner Samuel and Bertha Schulman Institute for

Nursing and Rehabilitation Fund, Inc. (Schulman), is a federally tax-exempt, New York

not-for-profit corporation, which fundraises and manages assets in support of the

healthcare purpose of non-parties Schulman and Schachne Institute for Nursing and

Rehabilitation, Inc., and Brookdale Hospital Medical Center. Starting in 1995, Schulman

leased to petitioner Brookdale Physicians’ Dialysis Associates, Inc. (Brookdale Dialysis)

portions of a building Schulman owns in New York City. Brookdale Dialysis is a for-profit

New York corporation that used the building to provide dialysis services for a fee. Under

the lease Brookdale Dialysis paid $24,217.08 per month in rent to Schulman and was

responsible for any property taxes that might become due during the tenancy.

       From 2001-2013, the building was tax exempt under RPTL 420-a. In 2013, DOF

retroactively revoked the tax exemption to 1996 on the sole ground that the space had been

leased to a for-profit, commercial entity. Supreme Court granted petitioners’ CPLR Article

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78 petition to annul that determination in 2014, on the ground that DOF failed to show that

it considered whether Brookdale Dialysis’ “service is reasonably incidental to or in

furtherance of the exemption purpose” given that Brookdale Dialysis furthers “the

charitable activities of Brookdale Hospital and the Nursing Institute.”

       Thereafter, DOF assessed taxes on the property for the 2014-2015 tax year.

Brookdale Associates sought an exemption based on Supreme Court’s 2014 decision. In

response, DOF reissued the assessment but continued to scrutinize the standing exemption.

In 2016, DOF requested, amongst other items, additional income and expense

documentation, including a copy of the then-current lease and information regarding

maintenance and utility costs. In 2017, DOF advised petitioners by email that the

exemption was revoked. DOF attached the lease and explained that, “[u]nder

RPTL Section 420-a, property can be leased to another qualifying [not-for-profit]

organization provided that the Income does not exceed the expenses for the leased portion.”

DOF further explained that, in Supreme Court’s 2014 decision, “the for-profit entity was

determined to be treated as [a not-for-profit] organization for purposes of the lease.”

However, after reviewing the information Brookdale Dialysis provided, DOF denied

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petitioners’ exemption application “based on the fact that the income exceeds the expenses

for the property.”2

       Petitioners commenced this hybrid Article 78 proceeding and declaratory judgment

action seeking “to annul the DOF determination of revocation, direct DOF to restore the

Building to the tax-exempt tax roll and declare that the Building is entitled to tax-exempt

status for the 2014/2015 tax year through the tax year in which a decision is rendered.”

Supreme Court granted the petition.

       The Appellate Division affirmed (178 AD3d 443 [1st Dept 2019]). The court

determined that Brookdale Dialysis is a for-profit corporation and the rent receipts

exceeded the building’s maintenance expenses, such that “the non-profit entities received

an ostensible financial benefit” but that there was no benefit because Schulman put the

profit back into its provider affiliates (id. at 445). Nevertheless, the Appellate Division

concluded that the building was exempt under RPTL 420-a because Brookdale Dialysis’

services are “ ‘reasonably incident’ to Schulman’s purpose of funding and supporting its

healthcare affiliates” (id., citing Matter of St. Luke’s Hosp. v Boyland, 12 NY2d 135, 143

[1962]; Matter of Pace College v Boyland, 4 NY2d 528, 532-534 [1958]; Congregation

Rabbinical Coll. of Tartikov, Inc. v Town of Ramapo, 72 AD3d 869, 871 [2d Dept 2010],

affd 17 NY3d 763 [2011]). The court analogized this case to Matter of Genesee Hospital v

2
 The monthly rent for the property was $24,217, yielding an annual income of $290,604.
And, for 2014 and 2015, the total expenses were $224,081 and $252,021, respectively. For
2016, the prorated amount was $145,768 for eight months, or a monthly average of
$18,221.

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                                              -8-                                          No. 5

Wagner, where the courts denied a tax exemption to a hospital for that portion of the

property leased to physicians for their private practices, but upheld the exemption for areas

on the property used for hospital services, including an ambulatory X-ray unit even though

radiologists received a commission on the X-rays (id., citing 47 AD2d 37, 46-47 [4th Dept

1975], affd on op below 39 NY2d 863 [1976]).

       We granted DOF leave to appeal and now reverse. As we discuss, RPTL 420-a does

not exempt from taxation real property that is not used in whole or in part for an exempt

purpose and is instead leased to a for-profit corporation.

                                              III.

                                               A.

                                     Standard of Review

       The Court has previously recognized that an Article 78 proceeding is a proper

vehicle for challenging a revocation of a property tax exemption (Watchtower Bible and

Tract Soc. of New York, Inc. v Lewisohn, 35 NY2d 92, 99 [1974]; see also Hewlett Assoc.

v City of New York, 57 NY2d 356, 363 [1982] [“[I]f the claim is made that the subject

property is wholly exempt from taxation, review by way of collateral proceedings is

appropriate”]). “[I]n reviewing an administrative agency determination, [courts] must

ascertain whether there is a rational basis for the action in question or whether it is arbitrary

and capricious” (Natasha W. v New York State Off. of Children and Family Servs., 32 NY3d

982, 984 [2018] [internal quotation marks omitted]). “Arbitrary action is without sound

basis in reason and is generally taken without regard to the facts” (id. [internal quotation

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                                            -9-                                         No. 5

marks omitted]). “If the [reviewing] court finds that the determination is supported by a

rational basis, [then] it must sustain the determination even if the court concludes that it

would have reached a different result than the one reached by the agency” (id. [internal

quotation marks omitted]).

       Well established legal rules control our analysis. First, except for a construction “so

literal and narrow that it defeats the exemption’s settled purpose,” exemption statutes

generally “should be construed strictly against the taxpayer” (Matter of Symphony Space v

Tishelman, 60 NY2d 33, 36 [1983]). Second, “when, as here, a municipality seeks to

withdraw a previously granted tax exemption, the municipality bears the burden of proving

that the real property is subject to taxation” (Matter of Lackawanna Community Dev. Corp.,

12 NY3d at 581). The municipality may meet this burden by showing that the petitioners

“were not organized or conducted exclusively for exempt purposes or . . . not used

exclusively for carrying out thereupon one or more exempt purposes” (Matter of Greater

Jamaica Dev. Corp., 25 NY3d at 624 [emphasis omitted]). The municipality may also meet

its burden by showing a change in the law governing the applicable exemption (see, e.g.,

Matter of Niagara Mohawk Power Corp. v Town of Potsdam Bd. Of Assessors, 216 AD2d

775, 776 [3d Dept 1995], lv denied 87 NY2d 802 [1995]); a change in the property’s use

(see e.g. Matter of Miriam Osborn Mem. Home Assn. v Assessor of City of Rye, 275 AD2d

714, 715 [2d Dept 2000]); or that the exemption “was erroneously awarded in the first

instance” (Matter of Quail Summit, Inc. v Town of Canandaigua, 55 AD3d 1295, 1297 [4th

Dept 2008], lv denied 11 NY3d 716 [2009]). In assessing whether the municipality met its

“initial burden[,]” we examine both the agency’s “revocation letter” and any “additional

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proof” submitted in response to the taxpayer’s petition challenging the agency’s

determination (Matter of Greater Jamaica Dev. Corp., 25 NY3d at 624).

       Contrary to the dissent’s suggestion, we may consider DOF’s arguments for why

the building is not exempt under RPTL 402-a because the inapplicability of subsection

(a) (2) was the ground for revocation and, as petitioners contend (and the dissent agrees),

DOF was required to consider the relationship between the Schulman Fund and Brookdale

Dialysis. In other words, DOF’s cost analysis under (a) (2) also necessarily implicates

subsection (a) (1).3 In an analogous context, we adopted the same approach and gave full

consideration to the agency’s arguments in Matter of Greater Jamaica Dev. Corp., over

the dissent’s objection in that case that we improperly considered an affirmation that DOF’s

counsel lodged in response to the petition and which was part of the record on appeal (see

25 NY3d at 624-625; see also 639 [Read, J., dissenting]). Moreover, petitioners chose to

commence a plenary proceeding challenging the revocation under both RPTL 420-a (1)

and (2), they cannot be heard to complain that their chosen theory of the case both affords

3
  Notably, although the dissent claims that the only issue before us is whether DOF
correctly revoked the exemption based on its income-expense analysis, the dissent does not
actually review the agency’s determination on that ground.
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them the relief they seek and, at the same time, deprives DOF of an opportunity to argue

to the contrary.4

       Consequently, we are free to consider the only question on this appeal, as limited

by petitioners’ demand for relief: whether petitioners’ request to annul DOF’s revocation

of the exemption commencing with tax year 2014-2015 was properly granted. We note

that, contrary to petitioners’ implication, Supreme Court’s 2014 decision that no evidence

supported DOF’s consideration of the relationship between Brookdale Dialysis’s services

and the exempt purpose from the commencement of the lease up to the 2013 revocation,

did not prohibit DOF from undertaking a subsequent assessment of the property’s

RPTL 420-a tax-exempt status. Under that understanding of the parties’ dispute and the

posture of this appeal, we find no basis to annul DOF’s 2017 revocation determination.

                                             B.

                                    RPTL 420-a (1) (a)

       The mandatory real property tax exemption in section 420-a (1) (a) is strictly limited

to property owned by not-for-profit corporations organized exclusively for “charitable [or]

hospital . . . purposes, or for two or more such purposes,” and which those owners or

another such exempt not-for-profit uses exclusively for one or more of those purposes

4
  Unlike the dissent, we perceive no unfairness to petitioners in the course of this appeal
(see dissenting op at 6-7). DOF’s position has always been that Brookdale Dialysis’s
for-profit status rendered RPTL 420-a (1) and (2) inapplicable, and that the exemption
under (a) (2) applies only when a lessee is a not-for-profit. DOF maintains this same
position before us. In response, petitioners contended—and have maintained throughout
the course of this litigation—that the property is exempt under RPTL 420-a (1) and that
subsection (2) is irrelevant to whether DOF erroneously revoked the exemption.
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                                            - 12 -                                      No. 5

(RPTL 420-a [1] [a]). Here, it is undisputed that Schulman is a not-for-profit corporation

that owns the property and did not reside on the premises or otherwise itself use the building

in whole or in part for its exempt fundraising purpose. It is further undisputed that

Brookdale Dialysis is a for-profit corporation that had sole occupancy and used the building

during the lease term exclusively to perform its for-charge dialysis services. Thus, the

property is not tax exempt under RPTL 420-a (1) (a).

                                             C.

                                      RPTL 420-a (2)

       Real property not used exclusively for the not-for-profit owner’s exempt purposes

is subject to taxation under RPTL 420-a (2) if the property is leased to a for-profit entity.

That is the case here. The remaining provisions of this subsection confirm this

interpretation. If, as this additional language commands, the property or any portion

devoted to exempt purposes used by another not-for-profit is not taxable only so long as

any moneys paid for the use do not exceed the property’s “carrying, maintenance and

depreciation charges,” then property used by a for-profit corporation for its pecuniary gain

certainly is not exempt. The calibrated provisions in RPTL 420-a (2) thus emphasize that

the legislature did not intend to exempt property used for profit. 5 DOF met its burden to

5
  Given our conclusion that RPTL 420-a (2) subjects to taxation real property leased to a
for-profit entity, we need not consider the Appellate Division’s conclusion that, despite the
“ostensible financial benefit” from the rental payments and that Schulman’s rent receipts
exceeded the maintenance expenses, there was no benefit chargeable to Schulman because
it put the profits back into the hospital and nursing institute. However, we note as a legal
matter that the text of RPTL 420-a (2) nowhere refers to how the profit is reinvested and
focuses solely on the basic calculation of whether “the moneys paid for such use” exceed
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establish that the exemption was erroneously granted by showing that the property was

leased and used solely for pecuniary gain by a for-profit corporation. Consequently, RPTL

420-a does not apply on these facts.

                                             IV.

                       Petitioners’ Misinterpretation of RPTL 420-a

       Petitioners argue that the property is exempt under RPTL 420-a (1) (a) because the

building is used exclusively for its intended charitable purposes in that its dialysis services

are vital and necessary to the charitable missions of Schulman and non-parties Brookdale

Hospital and the Nursing Institute. However, the exempt purpose at issue here is that of the

property owner—Schulman—and its purpose is to raise funds, not to provide dialysis

services, or even medical services more generally. It is true that Brookdale Hospital and

the Nursing Institute provide health care services, but still, the exemption is for Schulman’s

property. And to the extent Schulman supports the health care efforts of these two entities

it does so by fundraising, not by providing direct health care services. If Schulman engaged

in its fundraising efforts in the building, then the exemption would apply to any portion so

used, but Schulman vacated the premises during Brookdale Dialysis’ tenancy. For similar

reasons, the Appellate Division erred in concluding that Brookdale Dialysis services are

“reasonably incident” to Schulman’s “funding and support[ ] of its healthcare affiliates”

the property’s “carrying, maintenance and depreciation charges.” Further, as a factual
matter, Brookdale Dialysis, not Schulman, paid the taxes.
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(178 AD3d at 445). This line of reasoning misunderstands the import of our precedent and

misapplies RPTL 420-a to the facts of this case.

       We address, in turn, each case relied upon below, to illustrate the flaw in the

Appellate Division’s analysis and why the cases on which it based that analysis are

distinguishable. In Matter of St. Luke’s Hospital, the Court considered a predecessor to

RPTL 420-a in the Tax Law in a case that involved a not-for-profit hospital’s lease of its

private apartments to hospital staff and family (12 NY2d at 140). The Court concluded that

renting the apartments for profit was “reasonably incident” to the hospital’s major purpose

because the rentals facilitated the hospital’s objectives of recruiting and training interns,

residents and nurses, who were in short supply and who testified that they would have

worked elsewhere had the hospital not supplied them with housing (id. at 142-143). It was

well understood that hospitals customarily provide such housing. Significantly the medical

provider was the landlord and leased the property to residential tenants it employed, and

the Court accordingly held that this relationship advanced the “hospital purposes” (id.).

       Here, by contrast, Schulman leased the property, not to its own employees but to a

separate for-profit business. Further, under its lease, Brookdale Dialysis was contractually

obligated to pay any property taxes that might become due, but, as discussed, nothing it

did as a tenant was “reasonably incident” to Schulman’s financial management purpose. In

short, a hospital’s direct lease of housing to personnel and their family as a strategy to

recruit and retain a talented medical and administrative staff—as was the case in Matter of

St. Luke’s Hospital (12 NY2d at 140)—is materially different from Schulman’s lease to

Brookdale Dialysis to provide private-sector dialysis services for-profit. If all that was

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necessary was some generalized connection to the purposes of a third party not-for-profit,

then a for-profit corporation could set up shop in Schulman’s building without affecting

the tax-exempt status of the property so long as the corporation provided some marginal

benefit to the nonowner entity. That would result in the type of “tax loophole” the Court

has rejected (Sisters of St. Joseph, 49 NY2d at 441).

       Matter of Pace College v Boyland (4 NY2d at 528) is similarly distinguishable.

There, Pace College converted an office building for educational purposes and set aside

space for a cafeteria to be used exclusively by the college’s students, faculty and staff (see

id. at 531). The college contracted with a for-profit restaurant corporation to operate the

cafeteria (see id.). Under the agreement, no rent was paid to the college, and it would

furnish utilities and maintenance for the space, the corporation would pay to the college

2% of the gross receipts monthly and net operating profits at the end of a year to be divided

equally between the college and the firm (id.). The corporation would also provide

personnel and would carry the costs of garbage disposal and liability insurance (id.). The

Court upheld the exemption because the cafeteria was not used by the public “paying a

revenue” to the college, the property had been leased solely for “the purposes of

incorporation of the lessor”, and the college retained “general supervision and control over

the operation,” which was “directed exclusively to the accomplishment of its educational

purposes” (id. at 532, 534). Here, Schulman retained no such control. And, unlike the

dialysis services which did not further Schulman’s fundraising purpose, the cafeteria in

Matter of Pace College was a vital and necessary service that ensured students, faculty and

staff had food available throughout the day so that they could continue their work, thus

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facilitating class attendance and promoting the college’s educational mission (see id. at

533). Essentially, the cafeteria was a staple of college life and enhanced the college

experience.

       Reviewing the analytic throughline of these cases, unlike the hospital and college,

Schulman is renting property to a “disassociated enterprise” (id.). While the apartments

and the cafeteria, respectively, were integral to the proper functioning of those

not-for-profits and the success of their exempt purposes, it cannot be said that the treatment

of renal failure and dysfunction “is part of the conventional operation” of Schulman’s

charitable fundraising (id.).

       The Appellate Division’s further reliance on Congregation Rabbinical College of

Tartikov, Inc. v Town of Ramapo, is misplaced (17 NY3d 763 [2011], affg 72 AD3d 869

[2d Dept 2010]). There, a religious corporation leased its land to a for-profit corporation to

operate a religious summer camp, which paid a licensing fee to the religious corporation

that, in turn, used the fee to finance plans for future construction of a religious college on

the site (see Congregation Rabbinical College of Tartikov, Inc., 72 AD3d at 870). The

Court affirmed a determination by the Appellate Division that the municipality failed to

establish that the operation of the camp by the for-profit corporation was inconsistent with

the intended principal use of the property as a religious college (see Congregation

Rabbinical College of Tartikov, Inc., 17 NY3d at 763). There, unlike here, the not-for-profit

owner of the property directly furthered its own religious purpose by leasing the land for a

fee used to build the religious college (id. at 764). Further, the not-for-profit itself

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contractually “retained general supervision and control” over the camp’s operations (id. at

764-765).

       Petitioners argue that Brookdale Dialysis’s use of the property as Brookdale

Hospital’s only hub for ambulatory dialysis treatment is “integral, vital, and necessary to”

charitable causes and, more specifically, the Schulman’s charitable purpose to “promote

the general health of the community.” However, petitioners alleged in their petition that

Schulman’s purpose is to “promote the general health of the community by providing funds

and managing assets in support of [the Nursing Institute]” (emphasis added). That is at

least one step removed from Brookdale Dialysis’s business of charging for dialysis services

for profit.

       As for the generality of the purpose relied upon by petitioners, the Court has

previously rejected such expansive objectives proffered in support of a tax-exempt use. For

example, in Matter of Lackawanna Community Dev. Corp., the Court held that property

leased to a for-profit corporation for the “laudable goal” of “encouraging the development

of, or retention of, an industry in the community or area,” did not qualify for an exemption

(12 NY3d at 582). Similarly, in Matter of Greater Jamaica Dev. Corp., the Court held that

parking facilities offered at below-market prices at local retail stores are not “charitable in

and of themselves” simply because they facilitate the exempt purpose of economic

development by providing a “public benefit” (25 NY3d at 629). There is no logical basis

for treating efforts to promote the general health of the community differently for real

property tax purposes than efforts to promote economic development. “While these goals

may be laudable, they are not charitable” (id.). And, as with efforts at economic

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development, petitioners’ goal is so broad that it could, if permitted to justify an exemption

here, justify an exemption for any business activity carried out for-profit so long as such

activity could be said to somehow advance public health. We decline to construe

RPTL 420-a in this manner, which would render its limitations “meaningless and useless”

(Ivey v State, 80 NY2d 474, 481 [1992]).

       The Appellate Division also analogized Brookdale Dialysis’s for-profit purpose to

the X-ray services that Genesee Hospital offered in exchange for a commission in Matter

of Genesee Hosp. v Wagner (47 AD2d 37 [4th Dept 1975], affd 39 NY2d 863 [1976]).

However, that conclusion overlooks several, legally-significant distinctions between that

arrangement and the one between Schulman and Brookdale Dialysis. Before the

tax-exempt ambulatory X-ray unit at issue in that case was relocated to an office building

connected to and built by the petitioner, Genesee Hospital, a non-profit membership

hospital, the unit was located within the hospital, where it shared 7,429 square feet of the

39,000 square foot property with an office and research area for the hospital’s chief of

surgery and the hospital’s complete nutrition clinic (Matter of Genesee Hosp., 76 Misc 2d

at 283 [Sup Ct, Monroe County 1973], revd 47 AD2d 37 [4th Dept 1975]). The radiologists

in charge of the X-ray unit were paid by the hospital and also received a percentage of

billings from X-rays taken at the facility—a fact that the City of Rochester contended

extinguished the unit’s tax exemption (Matter of Genesee Hosp., 47 AD2d at 39). The

Appellate Division concluded, and this Court affirmed that these payments to the

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radiologists—“common practice in hospitals” at the time—were “directly” related to

services rendered “by [the radiologists] to the hospital” (id. at 39, 46).

       Nothing even remotely similar existed between Schulman and Brookdale Dialysis.

Rather, this case is more like Matter of Greater Jamaica Dev. Corp., where we rejected a

claim that certain parking facilities were “charitable in and of themselves because they

fulfill[ed] the primary purpose of economic development (25 NY3d at 629). “The

economic benefit conveyed by below-market rate parking,” we reasoned, “inure[d] to the

benefit of private enterprise and cannot be said to further any charitable purpose” (id.).

Similarly, Brookdale Dialysis provides a service for, among others, Brookdale Hospital’s

patients, but the arrangement also yields a competitive advantage for Brookdale Dialysis

over other dialysis providers for its sole pecuniary benefit.

                                              V.

                                         Conclusion

       This case features a not-for-profit, corporate landlord that benefited economically,

yet did not use the leased property for its exempt purpose or assume any of its carrying

costs. The for-profit corporate tenant that operated on the property ran a profitmaking

business and, if the exemption applied, would reap the benefits of running a business

without paying real property taxes—a benefit the legislature strictly limited to exempt uses

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                                         - 20 -                                     No. 5

by not-for-profits that do not make money off the property. The RPTL does not treat this

competitive-advantage-creating arrangement as tax-exempt.

      Accordingly, the order of the Appellate Division should be reversed, with costs, the

petition denied and the proceeding dismissed.

                                         - 20 -
CANNATARO, J. (dissenting):

      Judicial review of the revocation of a previously granted tax exemption is limited to

the grounds invoked by the agency. This longstanding requirement is generally applicable

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                                            -2-                                        No. 5

to the review of government agency actions and is no mere docket management tool.

Rather, it goes to the heart of fairness and due process for litigants challenging adverse

government actions. Here, the grounds stated by the Department of Finance for revocation

of petitioner’s tax exemption bear no resemblance to the defense of that determination in

the courts below, or to the analysis conducted by the majority today. Because the

Department of Finance failed to consider at the agency level whether the property was used

exclusively for the owner’s charitable purposes, I agree with Supreme Court that the

agency conducted an incomplete analysis and therefore failed to meet its burden of

establishing that the exemption was properly revoked. I respectfully dissent.

       Petitioner, the Samuel and Bertha Schulman Institute for Nursing and Rehabilitation

Fund, Inc. (Schulman Fund), is a not-for-profit corporation, organized and operated for the

charitable purpose of promoting community health by providing funds and managing assets

in support of two other not-for-profit corporations that provide healthcare services: the

Schulman and Schachne Institute for Nursing and Rehabilitation (Nursing Institute), a

residential healthcare facility, and the Brookdale Hospital Medical Center (Brookdale

Hospital). As the majority explains in detail, in 1995, petitioner Brookdale Dialysis, a for-

profit corporation, leased the basement and first floor of the building from the Schulman

Fund for use as an ambulatory dialysis center to provide dialysis treatment for patients of

Brookdale Hospital and the Nursing Institute.

       Between 2001 and 2013, respondent New York City Department of Finance (DOF)

accorded the building tax-exempt status pursuant to RPTL 420-a. In 2013, DOF attempted

to revoke the exemption, retroactive to 1996, on the ground that the building had been

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                                            -3-                                        No. 5

leased to a commercial entity. Petitioners challenged the revocation in a CPLR article 78

proceeding and Supreme Court, in a 2014 order, granted the petition. The court found that

DOF failed to meet its burden of proving that the property was ineligible for the exemption

as the agency relied solely on Brookdale Dialysis’ status as a for-profit corporation without

considering whether its services were in furtherance of Brookdale Hospital’s exempt

purpose. DOF did not appeal Supreme Court’s order annulling its determination.

       Three years later, after reviewing additional information relating to the lease and

expenses for the building, DOF again revoked the tax exemption for the property, setting

forth the basis for its determination in an April 4, 2017 email. In what it now concedes

was a mistaken interpretation of Supreme Court’s 2014 order, DOF proceeded under the

assumption that Brookdale Dialysis should be deemed a not-for-profit organization for

purposes of the lease. Proceeding under that mistaken presumption, DOF then evaluated

petitioner’s eligibility for an exemption by comparing the annual rental income to the

expenses incurred and revoked the exemption “based on the fact that the income exceeds

the expenses for the property.”

       Having just defended their tax exemption on essentially the same facts three years

earlier, petitioners commenced this hybrid CPLR article 78 proceeding and declaratory

judgment action, seeking to annul the determination revoking the property’s tax-exempt

status as well as a declaration that the property was exempt from real property taxes for the

tax years at issue. DOF cross-moved to dismiss, now asserting a different basis for the

revocation, namely that the subject property was leased to Brookdale Dialysis, a for-profit

entity that was “primarily, if not exclusively,” using the property for profit-making

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                                             -4-                                      No. 5

purposes. DOF also repeated its claim that, even if Brookdale Dialysis was considered a

not-for-profit corporation, the property was not entitled to exempt status under RPTL 420-

a (2) because the Schulman Fund was profiting from the lease.

       Supreme Court annulled the determination on the ground that DOF did not meet its

burden of establishing that the exemption should be revoked. The court held that DOF

conducted an incomplete analysis by resting its determination solely on the fact that the

Schulman Fund profited from the lease. Rather, it was required to consider whether the

property was used exclusively for the Schulman Fund’s charitable purposes.

       The Appellate Division affirmed, concluding that Supreme Court “correctly

determined that the building . . . qualifies for tax-exempt status” (178 AD3d 443, 444 [1st

Dept 2019]). Evaluating the use of the premises, the Court concluded that the provision of

dialysis services for patients of Brookdale Hospital and the Nursing Institute was

reasonably incident to the Schulman Fund’s charitable purpose of providing funding and

support for its healthcare-provider affiliates.

       “ ‘Generally, the burden of proof lies with the taxpayer who is seeking to have real

property declared tax exempt’ ” (Matter of Lackawanna Community Dev. Corp. v

Krakowski, 12 NY3d 578, 581 [2009], quoting Matter of New York Botanical Garden v

Assessors of Town of Washington, 55 NY2d 328, 334 [1982]). However, where, as here,

“the taxing authority seeks to revoke [an] exemption previously granted, it is the taxing

authority that has the burden of establishing that the property is not exempt from taxation”

(Matter of Greater Jamaica Dev. Corp. v New York City Tax Commn., 25 NY3d 614, 623

[2015]). To meet this burden, DOF was required to prove that the building was not being

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                                           -5-                                        No. 5

used exclusively to carry out the Schulman Fund’s exempt purposes (see id. at 624).

Exclusive use in this context includes uses that are “reasonably incident” to the owner’s

charitable purpose (id. at 630; see Matter of St. Luke’s Hosp. v Boyland, 12 NY2d 135, 143

[1962]). As we have explained, “[t]he question is how the property is used, not whether it

is profitable” (Matter of Adult Home at Erie Sta., Inc. v Assessor & Bd. of Assessment

Review of City of Middletown, 10 NY3d 205, 216 [2008]).

       As noted above, DOF revoked the tax exemption based solely on its conclusion that

the Schulman Fund was making a profit from its receipt of rental income in excess of the

property’s carrying costs. That is the specific determination that the Fund commenced this

proceeding to challenge as arbitrary and capricious.        DOF cannot concede that it

improperly analyzed and revoked the exemption under RPTL 402-a (2) but nonetheless

argue now that the property should have been analyzed under RPTL 402-a (1) and the

exemption revoked because the property was not used exclusively for petitioner’s

charitable purposes. Indeed, it is well-settled that “[j]udicial review of an administrative

determination is limited to the grounds invoked by the agency” (Matter of Rizzo v New

York State Div. of Hous. & Community Renewal, 6 NY3d 104, 110 [2005] [quotation marks

and citation omitted]). “If those grounds are inadequate or improper, the court is powerless

to affirm the administrative action by substituting what it considers to be a more adequate

or proper basis” (Matter of Scherbyn v Wayne-Finger Lakes Bd. of Coop. Educ. Servs., 77

NY2d 753, 758 [1991] [internal quotation marks and citations omitted]).

       In an attempt to side-step this procedural problem, DOF argues that the basis for its

determination includes the record generated in the prior proceeding challenging the 2013

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                                            -6-                                         No. 5

tax-exemption revocation. However, in that prior proceeding, DOF revoked the exemption

on grounds that the property was leased to a commercial entity. Supreme Court concluded

that DOF failed to meet its burden because it relied on Brookdale Dialysis’ for-profit status

and failed to consider the issue of exclusive use—whether the dialysis services were

reasonably incident to or in furtherance of the Schulman Fund’s charitable purpose—and

DOF did not appeal that order. Thus, it is of no avail for the majority to accept DOF’s

argument that the record in the prior proceeding should be used to uphold the later DOF

determination under review in this proceeding, where the prior record itself was held to be

patently insufficient.

       Nor does Greater Jamaica support DOF’s position. The Court in that combined

RPTL article 7 and CPLR article 78 proceeding considered additional materials submitted

by the agency beyond the original revocation letter. However, in explaining the reason for

this departure, the Court expressly noted that “the grounds in the City’s revocation letter,

which were plainly sufficient on their own [were] nonetheless elucidated by the affirmation

of the City’s Assistant Corporation Counsel detailing how the allegations in the petition

established that the parking facilities were not being operated for a charitable purpose” (25

NY3d at 624-625 [emphasis added]). Thus, although the Court considered the additional

submission, it did not purport to allow the agency to set forth entirely different grounds for

its revocation. More to the point, this passage certainly does not support the majority’s

conclusory assertion that our review encompasses “both the agency’s ‘revocation letter’

and any ‘additional proof’ submitted” (majority op at 9-10).

                                            -6-
                                            -7-                                        No. 5

       DOF’s decision to suddenly change tack when challenged in court, and to proceed

with a defense of its revocation not previously relied upon, puts the Schulman Fund—and,

indeed, all similarly situated nonprofits afforded tax exemptions—in an impossible

situation with respect to their disputes with taxing authorities. Going forward, an authority

that seeks to revoke a previously-granted (not to mention litigated) tax exemption can assert

any grounds for the revocation—or none at all—safe in the knowledge that any justification

for revocation that meets the exigencies of the situation will be available for use if the

determination is challenged in court. In its zeal to undo a longstanding tax exemption that

it finds to be unjustified, the majority fails to explain how fairness or consistency will be

served by ignoring the Schulman Fund’s procedural rights in order to reach its desired

result. As a result of the majority’s decision, taxing authorities may now revoke long-

standing exemptions and provide the reasons for doing so later—if the non-profit chooses

to litigate and find out. This burden is incompatible with due process and our precedent.

       In an unavailing effort to achieve consistency with Greater Jamaica—where the

grounds stated by the agency were “plainly sufficient on their own” to justify the

revocation—and our precedent constraining reviewability in article 78 proceedings, the

majority recasts both DOF’s legal argument and petitioners’ requested relief. DOF’s

present legal argument that Brookdale Dialysis is not entitled to an exemption under RPTL

420-a (1) or (2) is not the functional equivalent of the agency’s stated grounds for

revocation, as it does not align with the reason given at the agency level (majority op at 11

n 4). The majority also points to the fact that petitioner commenced these proceedings as

a joint article 78 and declaratory judgment action, presumably to justify consideration of

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                                            -8-                                         No. 5

information outside the administrative record (majority op at 10-11). However, the

declaratory relief sought by petitioners relates solely to the retroactive revocation of their

tax exemption. Indeed, even the majority recognizes that the “only question on this appeal”

is whether DOF’s revocation of the exemption should be annulled—quintessential CPLR

article 78 relief (majority op at 11). Thus, despite the majority’s attempt to obfuscate the

nature of the proceedings in order to reach an issue not properly before us—an attempt

which risks shifting to the taxpayer the well-settled burden of proof on the agency to

withdraw the exemption—there is no justification for admission of additional proof or

consideration of grounds other than those relied on by DOF for the revocation.

       Focusing on the basis for revocation invoked by the agency, as we must, I agree

with Supreme Court that DOF’s determination to revoke the property’s tax-exempt status

on the stated basis was arbitrary and capricious. As previously stated, an “economic benefit

to a charitable organization does not by itself extinguish a tax exemption” (Matter of Adult

Home, 10 NY3d at 216).

       Therefore, I would affirm the Appellate Division order.

Order reversed, with costs, petition denied and proceeding dismissed. Opinion by Judge
Rivera. Chief Judge Wilson and Judges Troutman and Brathwaite Nelson concur. Judge
Cannataro dissents and votes to affirm in an opinion, in which Judges Garcia and Singas
concur. Judge Halligan took no part.

Decided March 21, 2024

                                            -8-