Property Tax Challenge
Tax Court Rules Against Hospital in Morristown Property Tax Case; Legislative, Gubernatorial Action

Updated October 17, 2016

In a closely watched property tax case with significant financial and policy implications for hospitals and possibly the broader non-profit community statewide, a Tax Court of New Jersey judge on June 25, 2015, ruled that Morristown Medical Center is not entitled to tax exemption on nearly all of its property in Morristown.  The ruling was issued by Judge Vito Bianco, who was also presiding over the Fields v. Trustees of Princeton University property tax case, in which a small group of residents of Princeton challenged the entire property tax exemption of Princeton University. (Note: on October 14, 2016, Princeton University announced that it had reached a settlement with the plaintiffs without admitting any liability. See below for additional updates regarding legislation to reaffirm the hospitals' property tax exemption while providing for community service contributions to municipalities, a proposed a two-year moratorium on property tax challenges and  study commission, and proposed legislation to limit the ability of third parties to challenge non-profit property tax exemptions.)

Among the noteworthy elements of the Morristown decision:

  • Except for some very narrow exceptions such as its parking garage, auditorium and fitness center, almost all of the hospital’s property was deemed to be taxable for failing the “profit” test (see below) because non-profit and for-profit activities were significantly commingled and conferred substantial benefits on the for-profit entities as a result. 
  • Compensation was a significant factor in the opinion.  Although IRS guidelines have for years allowed exempt organizations to establish the reasonableness of compensation under federal law by analyzing compensation levels against those of comparable organizations, the judge dismissed such a standard as insufficient because the hospital failed to also verify that the compensation at the other comparable institutions was itself also reasonable.  In essence, this ruling disregards the IRS framework for reasonableness of compensation in use by thousands of charities nationwide. 
  • In his conclusion, the judge stated that if all hospitals in their current form are structured like Morristown then none are justified in receiving property tax exemption, and it’s up to the legislature to enact statutory changes that would change this framework. 

On November 11, 2015, a settlement was announced between Atlantic Health System (the parent of Morristown Medical Center) and the Town of Morristown, in which the hospital agreed to pay $15.5 million in back taxes and penalties, plus annual property taxes on 24 percent of the hospital's property from 2016 to 2025.

New Jersey’s Property Tax Exemption Framework
The New Jersey State Constitution provides that property tax exemption may only be granted through general laws.  It further protects property tax exemptions for property “used exclusively for religious, educational, charitable or cemetery purposes, as defined by law, and owned by any corporation or association organized and conducted exclusively for one or more of such purposes and not operating for profit.” 

Generally speaking, New Jersey law states that real property “owned by” a charitable organization and used “exclusively for” charitable purposes is entitled to tax exemption.  The statute also allows for property tax exemption to be prorated if a portion is used for a nonexempt purpose.

New Jersey courts have established a three-part test that, in essence, provides that for an organization to be entitled to property tax exemption, it must show that:

  1. it is organized exclusively for a charitable purpose (or other qualifying purpose enumerated in the statute);
  2. its property is actually used for such a charitable purpose (or the specific qualifying purpose applicable to that organization); and
  3. its use and operation of the property is not for profit.

There have been numerous court cases over the years in which exemption has been denied or upheld, either in whole or in part, based on the determination of whether an organization meets these tests.  The Tax Court decision focused on the third test, which the judge ruled was not met by the hospital in most respects.

In New Jersey and across the country, cash-strapped local governments have become increasingly aggressive in mounting challenges to non-profit property tax exemptions – some for no other reason than an organization charging fees for services – in an attempt to generate revenue from non-profit property owners of all sizes.  For many organizations, already straining under the weight of rising demand for services without a commensurate growth in resources, these challenges can significantly erode their ability to provide the programs that communities need.

In the wake of the Morristown decision, municipalities have initiated property tax challenges against at least 35 non-profits hospitals across New Jersey, and New Jersey legislators have been working on legislative solutions that they say will provide clarity for hospitals and revenue for the municipalities.

Legislative and Gubernatorial Action

On January 19, 2016, Governor Christie pocket vetoed legislation passed at the end of the 2014-2015 legislative session that would have required hospitals that have profit-making operations to provide some level of payment to their host communities.  S-3299 (Sweeney/Singer/Vitale) / A-4903 (Burzichelli/Pintor Marin) would have allowed non-profit hospitals that have certain for-profit activities to retain their property tax exemptions but would have established a formula-based mechanism for those hospitals to make mandatory payments to their host municipalities.  The fee-based formula under the bill would have been $2.50 per day per bed, or $250/day for satellite facilities (amended from $750/day). The bill also provided for certain circumstances, such as a negative operating margin, in which a hospital could apply for an exemption from the assessment. The bill also would have established a “Nonprofit Hospital Community Service Contribution Study Commission,” to study and make recommendations regarding the community service contribution system created by the bill.    Read the Center's analysis of S-3299/A-4903 here.

Since the start of hte 2016-2017 legislative session, several new bills have been introduced in an effort to address the situation:

  • A-1797 (Burzichelli/Pintor Marin), which is a reintroduction of A-4903 from 2015 (read our summary of A-1797)
  • S-1878 (Sacco), which is similar to A-1797, but would also apply to nursing homes owned by hospitals (read our summary of S-1878)
  • S-1306 (Vitale), which would tie the property taxation of a non-profit acute care hospital to the percentages of community benefit expenses and community building activities out of total hospital expenses that the hospital reports to the Internal Revenue Service on Schedule H of its Form 990 (read our summary of S-1306)

A-1797 has been referred to the Assembly State and Local Government Committee, S-1306 is in the Senate Community and Urban Affairs Committee, and S-1878 is in the Senate Health, Human Services and Senior Citizens Committee.

Moratorium, Study Commission Proposed
On March 18, 2016, Governor Christie proposed  a 2-year moratorium on property tax lawsuits and the appointment of a study commission to examine the issue.  That exact proposal has not yet been introduced in the Legislature, but on April 14, Assemblyman Herb Conaway introduced A-3635, a slightly narrower version that would apply only to hospital exemptions and which would freeze only property tax challenges against hospitals. A-3635 has been referred to the Assembly Housing and Community Development Committee.

Third Party Standing Legislation Advances
Legislation that would help curtail arbitrarily challenges to non-profits' property tax exemptions by limiting the ability of third parties to appeal the property tax exempt status of other entities has been advancing in the New Jersey Legislature. S-2212 (Singer) and A-3888 (Gusciora) would address a significant concern that has arisen in light of the property tax challenges to Morristown Medical Center and Princeton University. The Center for Non-Profits supports these bills.

In the Princeton case, wihich was settled in October 2016 by the University and the plaintiffs without any admission of liability, a challenge to the property tax exemption of Princeton University was brought by a small group of residents who disagree with the exemption already granted by the municipality. The municipality was also named a defendant in that suit.

In the case against Princeton University and the municipality, Tax Court of New Jersey Judge Vito Bianco in a procedural action held not only that the residents have legal standing to challenge the municipality’s determination that the University is tax exempt, but has also ruled that the non-profit (in this instance, Princeton University) has the burden of re-proving its eligibility for tax-exemption, even when the challenge is brought by third parties. This ruling leaves thousands of non-profit property owners of all sizes – particularly those that might be unpopular or controversial – vulnerable to arbitrary legal challenges by residents that would be extremely costly and time-consuming to defend, diverting scarce resources away from essential programs and services.

Amending the existing statute to limit the ability of third parties to challenge non-profit property tax exemptions would help to protect organizations from being arbitrarily forced to re-prove their exemptions repeatedly and from needlessly siphoning resources away from charitable purposes.

Non-profit organizations are straining under the weight of skyrocketing demand for services and resources that have not kept pace with the steadily escalating costs of providing programs and services that our communities need. Clarifying that third parties do not have standing to challenge the property tax exemption of non-profits, while preserving the authority of local governments, would provide needed assurance and protection for thousands of non-profit property owners throughout the state.

A-3888 was amended and reported out of the Assembly State and Local Government Committee on September 19, 2016, and is now awaiting action in the Assembly Appropriations Committee. S-2212 is awaiting consideration by the Senate Community and Urban Affairs Committee. See the latest updates on A-3888/S-2212.

The Center continues to track the court decisions, legislation, and other developments closely for their potential ramifications for New Jersey hospitals, the broader charitable community and beyond. We are committed to promoting policies that preserve the ability of the non-profit community to provide the programs and services that people need.  We are evaluating additional next steps from both a technical assistance and advocacy standpoint, and we will share more updates as they become available. 

If you have questions or would like more information about the Center's involvement in this or any other non-profit issue, contact Linda Czipo at the Center.

 

More information:

Text of Opinion:

AHS Hospital Corp. v. Town of Morristown
http://www.njnonprofits.org/AHS_TaxCourtOpinion_FINAL_06252015.pdf  

News coverage about the case:

NJ Spotlight - Ruling Could Put Nonprofit Hospitals on Hook for Millions in Property Taxes
www.njspotlight.com/stories/15/06/28/ruling-could-put-nonprofit-hospitals-on-hook-for-millions-in-property-taxes/

NJ.com – Morristown Hospital Loses Property Tax Court Case
www.nj.com/morris/index.ssf/2015/06/morristown_medical_center_loses_tax_case_raising_f.html

NJSpotlight - Deal Strips Morristown Medical Center of Some of its Tax-Exempt Status
www.njspotlight.com/stories/15/11/11/agreement-strips-morristown-medical-center-of-some-of-its-tax-exempt-status/

NJ Spotlight - Morristown Medical Center Tax Ruling Ripples Through Garden State
www.njspotlight.com/stories/15/11/16/morristown-medical-center-tax-ruling-ripples-through-garden-state/

The Record/NorthJersey.com - North Jersey Towns Reassess Tax-Exempt Status for Hospitals After Key Ruling
www.northjersey.com/news/north-jersey-towns-reassess-tax-exempt-status-for-hospitals-after-key-ruling-1.1461487?page=all

Center for Non-Profits articles (most include links to additional resources)

 

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