Tax Court Rules Against Hospital in Morristown Property Tax Case; Legislative Action
Updated September 9, 2021, to reflect current status of legislation
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:
- it is organized exclusively for a charitable purpose (or other qualifying purpose enumerated in the statute);
- its property is actually used for such a charitable purpose (or the specific qualifying purpose applicable to that organization); and
- 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.
Third Party Standing Provision Enacted
Importantly for the broader non-profit community, the new law includes a provision that would help curtail arbitrary challenges to non-profits’ property tax exemptions by limiting the ability of third parties to appeal the property tax exempt status of other entities. This matters because of a court case involving a small group of Princeton residents who challenged the property tax exemption of Princeton University even though the municipality had already approved the exemption. In procedural rulings in the case, the tax court judge held not only that the residents had standing to bring the suit, but also that the non-profit (in this instance, the university) had the burden of re-proving its eligibility for property tax exemption, even when the challenge is brought by third parties. [Princeton University and the plaintiffs ultimately settled their case in 2016.]
Without this provision, these court rulings left 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. Limiting the ability of third parties to challenge non-profit property tax exemptions (while retaining that authority for local governments) protects organizations from being arbitrarily forced to re-prove their exemptions repeatedly and from needlessly siphoning resources away from charitable purposes. The Center for Non-Profits strongly supports this legislative solution.
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.
Court Challenge Launched to New Law
In April 2021, four municipalities launched a legal challenge to the new statute, claiming that the hospital elements violate the uniformity and tax exemption provisions of the State Constitution. Other parties may be seeking to join the suit as well.
The Center for Non-Profits is committed to promoting policies that preserve the ability of the non-profit community to provide the programs and services that people need. We believe that efforts to remove or curtail non-profit property tax exemptions are misguided and counterproductive, and that such proposals too often disregard the significant contributions non-profits make to the social and economic well-being of communities. (See our previous submission to NJBIZ and blog post explaining why.) Recognizing that hard choices must be made to resolve government fiscal crises, we will also support and encourage efforts for all stakeholders to work collaboratively toward comprehensive solutions.
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.
Text of Opinion:
AHS Hospital Corp. v. Town of Morristown
News coverage about the case:
NJ Spotlight – Ruling Could Put Nonprofit Hospitals on Hook for Millions in Property Taxes
NJ.com – Morristown Hospital Loses Property Tax Court Case
NJSpotlight – Deal Strips Morristown Medical Center of Some of its Tax-Exempt Status
NJ Spotlight – 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
Center for Non-Profits articles (most include links to additional resources)
- Princeton University Settles Property Tax Exemption Lawsuit
- Center Files Second Amicus Brief in Princeton University Property Tax Exemption Case
- Legislation to Protect Non-Profits from Arbitrary Tax Exemption Challenges by Third Parties Advances
- Localities look to Scale Back Property Non-Profit Tax Exemptions
- Front and Center blog: Non-Profits and Tax Policy: Not a One-Sided Equation
- Dodge Blog: Are You Watching the Court Rulings on Property Tax Exemptions? Maybe You Should
- “Is Non-Profit Property Tax Exemption Sound Public Policy?” Presentation slides of Center executive director Linda Czipo to 4/15/2016 Seton Hall University School of Law conference