Court Opinion

ID: 5483588
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:02:56.889539+00
Date Added: 2024-06-11T08:33:39.367370
License: Public Domain

Desmond, J.
(dissenting). This real property, owned by a nonstock, nonprofit educational corporation and used exclusively for secondary school educational purposes, is entitled to tax exemption. The applicable statutory law, expressing an old and basic (see L. 1823, ch. 262; L. 1893, ch. 498; N. Y. Const., art. XVI, § 1) public policy of this State is part of subdivision 6 of section 4 of the Tax Law, which exempts from taxation “ The real property of a corporation or association organized exclusively for * * * educational * * * purposes * * * and used exclusively for carrying out thereupon * * * such purposes ” but further provides that “ no such corporation or association shall be entitled to any such éxemption if any officer, member or employee thereof 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 cor*392poration or association, or for any of its members or employees, or if it be not in good faith organized or conducted exclusively for one or more of such purposes ’
In what respect does this parcel fail to meet those tests for exemption? Appellant was unquestionably “ organized exclusively for educational purposes ”, as conclusively shown by its charter granted by the State Board of Regents in October, 1950. No one doubts that its real property was “ used exclusively ” for educational purposes and had been so used by petitioner and its predecessor since 1930. (The school itself, conducted by Mrs. Semple individually till turned over by her to petitioner in 1950, had been in existence since 1898.) Any lawful denial of exemption would, therefore, have to be based on proof and finding of one or more of these factual situations described in the second sentence above quoted from the statute: first, that an officer, member or employee of the corporation receives or is lawfully entitled to receive pecuniary profit from its operations ; second, that the corporation is a mere guise or pretense for profit-making by it or its officer, member or employee; or, third, that the corporation is not in good faith organized for educational purposes.
The situation last above described, that is, of a corporation not in good faith organized for educational purposes, can be ruled out here without further discussion, since this petitioner corporation had no activity other than that of conducting an old, established private school for girls. Similarly, as to the second kind of situation above listed, that is, organization of a corporation for avowed educational purposes but actually as a guise or pretense for profit-making, there is no proof, permissible inference or finding in this case that anyone was disguising or pretending anything, or that the purpose, intent or possibility was to operate for individual profit. The undisputed proof is that this school had been running at a loss for years, before and after incorporation, and that it had been kept alive by loans and advances from Mrs. Semple, its founder and principal. Not only were there in fact no profits, but, under the Regents nonstock charter granted petitioner in 1950, any profits from operation could not lawfully be paid to any individual but, as Special Term pointed out, would have to be used for educational purposes. This case, therefore, readily distin*393guishes itself from the only two decisions of this court ratifying a refusal of such an exemption on “ profit ” grounds. The first of those decisions is People ex rel. Rye Country Day School v. Schmidt (266 N. Y. 196) where the land owner, although an educational corporation, had been specifically authorized to issue corporate stock and, on dissolution, to divide its assets among its stockholders. The other such decision is Lawrence-Smith School v. City of New York (166 Misc. 856, affd. 255 App. Div. 762, affd. 280 N. Y. 805). The Lawrence-Smith School, when previously owned by a business corporation, had mortgaged its realty for its full value and had become insolvent and indebted to its head master and an instructor for substantial sums. A new educational corporation was formed to take over the school property by assuming the mortgage and by agreeing to pay also, out of net earnings, not only the amounts owing to its two individual creditors but also to pay $10,000 to the former owners for “ good will ”. The courts, in Lawrence-Smith (supra), held that the actual purpose of the new arrangement was the making of profits, and the use thereof to pay up the debts (and to pay for the “ good will ”) of the former, and insolvent, profit-motive corporation. There is nothing remotely like that in the present record.
Special Term, in dismissing this petition, held that it did not appear from the record ‘ ‘ that no pecuniary profit will be made by the corporation or by its officers and employees ”, thus apparently relating the case to the first of the above-listed situations which make an educational corporation’s real property taxable. The decision against petitioner would be sound, we assume, if it appeared affirmatively that corporate profits would, in fact and in law, be available to individuals, or, negatively, if petitioner had failed to show nonavailability. Looked at from either direction, this record conclusively proves petitioner’s right to exemption. While Special Term held in effect that the facts showed that Mrs. Semple “ receives or may be lawfully entitled to receive pecuniary profit from the operation ” of the school, the court’s opinion makes it plain that what it was discussing was not “ pecuniary profit from the operation ” at all, but an entirely suppositious, hypothetical profit to the vendor on the sale of the property occupied by the school, by another corporation controlled by Mrs. Semple, all as described below.
*394Plainly, the statute, when it referred to “ pecuniary profit from the operations ” of a school, meant just that, and intended to refuse exemption to those educational corporations only, where the insiders received or were lawfully entitled to receive corporate operating profits. But this petitioner’s method of organization is such that, in the unlikely event that there be future profits, no individual will be entitled to take them. It has always been held (see Matter of Mary Immaculate School, 188 App. Div. 5, 7; People ex rel. Manlius School v. Adams, 143 Misc. 459, 466, affd. 232 App. Div. 869, affd. 257 N. Y. 549) that the right to exemption must be determined upon the facts as they exist at the time of making the assessment in question. Using that test here, it would be absurd to say that Mrs. Semple or anyone else was, in 1952 when these assessments were made, receiving or entitled to receive any operating profits from the school.
The “ profits ” referred to by the court below were, assuming that they existed at all, not operating profits but a supposed profit to the vendor on the sale of the realty, in 1950, by Semple Realty Corp., wholly owned by Mrs. Semple, to petitioner, the newly chartered educational corporation. The sale price was $150,950, paid as follows: $39,204 by means of the assumption by petitioner of a mortgage held by an outsider, and $111,746 by means of the giving by petitioner to the old corporation of an unsecured bond in that amount (later assigned by the old corporation to Mrs. Semple) with 5% annual interest payable in the discretion of petitioner’s trustees if funds should be available therefor, the interest to be waived or forgiven if not paid within twelve months from its due date. This transaction, so held Special Term, resulted in a “ profit ” to Mrs. Semple, apparently because the court thought, although it did not expressly so find, that the real property was at that time worth less than $150,950. We reject the idea that any such theoretical difference could conceivably be the ‘ ‘ profit ’ ’ referred to in the statute. As was pointed out in the Manlius School decision (see 143 Misc. 459, 466, supra), the case in this respect is the same whether the property be sold for cash or bonds. If petitioner corporation here had borrowed $111,746 from an outsider and had paid it in cash to Mrs. Semple or her old corporation, would anyone assert, in the following year, that *395the realty as owned by the new nonprofit educational corporation was taxable because someone was receiving or entitled to receive a “ profit from the operations ”? In actual fact, this record does not even show that there was a profit in the sense of a capital gain. Here are the figures:
Paid by Mrs. Semple for the property in 1930. .$200,000.00
Paid by petitioner in 1950.................... 150,950.00
Appraisal by petitioner’s expert before 1950 sale 167,933.34
Assessed value in 1950....................... 145,000.00
Petitioner’s expert who made the appraisal at $167,933.34 testified, at the trial, to the same value (his appraisal went into evidence without objection) and, as the Special Term itself pointed out, no one was called by the city to refute this and it “ thus stands uncontradicted ”. The court pointed out that future operating profits, if any, could not benefit Mrs. Semple, since they could not be used ‘ ‘ for * * * anything other than the reasonable expenses for maintaining the school and the purchase price of the property ”. In other words, the court itself found and held that there could not be any “ profit ” in the sense in which the statute uses that word, but then denied exemption on a mistaken definition of the word “ profit ”. We find it unnecessary, therefore, to analyze the figures listed above to show that they do not establish even the kind of capital gain which the court apparently had in mind. Nor is it necessary to analyze the qualifications of petitioner’s expert witness above referred to, particularly since the record shows no objection by the city to the receipt in evidence of his uncontradicted appraisal.
The decision about to be made by this court is strikingly inconsistent with that made, on similar facts, in the Manlius School case (257 N. Y. 549, supra). But it is even more important to point out that this decision is a departure from New York’s ancient, liberal tax exemption policies for educational institutions. That policy is as old as the 1823 statute cited in the first paragraph of this opinion, and its application is as recent in this court as People ex rel. Doctors Hosp. v. Sexton (295 N. Y. 553) and People ex rel. Clarkson Memorial Coll. v. Haggett (300 N. Y. 595). The People of the State approved it in 1938 when they adopted section 1 of article XYI of the State Constitution. In 1897 this court had written: “Indeed the *396state has no policy against institutions of charity or learning. Throughout its history it has shown a deep interest in promoting such objects and in encouraging its citizens to help them. Aid to education has always been a prominent feature in its legislation ” (Amherst Coll. v. Ritch, 151 N. Y. 282, 334-335). Court decisions abound with statements of the reasons underlying such tax exemptions (see, for instance, Matter of Huntington, 168 N. Y. 399, 407). One of the best such expressions is this from Justice Imrie’s opinion at Special Term (191 Misc. 621, 624) in the Clarkson case (supra): “ Education is declared to be a function of the State. The State may, and does, provide many of the educational processes. It also may, and does, delegate its function in that respect to private corporations under suitable regulations. In such instances, real property of the delegatee, used for the purposes of its charter, is, in fact, devoted to a public purpose and thereby becomes quasi-public in nature. Nontaxation of public buildings and properties is not an act of grace but is a basic principle of our law; it is the rule and not the exception. Thus, school and college properties may be said to receive their rights of tax exemption, not as acts of grace from the sovereign, nor as personal exceptions to the rule that all real property bear its share of the cost of government, but both upon the principle of nontaxation of public places and as a quid pro quo for the assumption of a portion of the function of the State. Such a situation calls for a reasonable construction of the exemptive statute, ' so as to give full effect to the policy declared ’. (Yale University v. Town of New Haven, 71 Conn. 316, 333; People ex rel. Trustees of Mt. Pleasant Academy v. Mezger [98 App. Div. 237, affd. 181 N. Y. 511], supra; St. Barbara’s R. C. Church v. City of New York, 243 App. Div. 371.) ”
The order should be reversed and the prayer of the petition granted, with costs in all courts.
Conway, Ch. J., Dye and Fuld, JJ., concur with Van Voorhis, J.; Desmond, J., dissents in an opinion in which Froessel, J., concurs; Burke, J., taking no part.
Order affirmed.