A New Jersey Tax Court judge has ruled that a nonprofit hospital in Morristown must pay property taxes on almost all of its 40-acre property.
The decision could change the landscape for nonprofit hospitals and other nonprofits in New Jersey like Princeton University.
Tax Court Judge Vito Bianco ruled Friday that the Morristown Medical Center failed to meet the legal test that it operated solely as a non-profit for the tax years 2006 through 2008. Only the auditorium, fitness center and the visitors’ garage should be exempt from property taxes, the judge said.
The decision could cost the hospital up to $3 million a year in property taxes.
Bianco questioned property tax exemptions for modern non-profit hospitals in his 88-page ruling, citing case law.
“If the property tax exemption for modern non-profit hospitals is to exist at all in New Jersey going forward, then it is a function of the legislature and not the court to promulgate what the terms and conditions will be,” he wrote. “Clearly, the operation and function of modern non-profit hospitals do not meet the current criteria for property tax exemption.”
New Jersey law dictates that properties owned by nonprofits must be used exclusively for charitable purposes to qualify for the exemption. Any portion of the property used for profit can be taxed.
Bianco said hospitals have changed from their early origins. Medical centers function similar to for-profit hospitals, operating as “labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities.”
Today’s non-profit hospitals, generate significant revenue and pay their professionals competitive salaries when compared with the for-profit world. The former Morristown Medical Center CEO was paid more than $5 million a year during the period at issue in the case. Several other hospital administrators received $500,000 a year or more in compensation.
Private physicians and medical practices there earn and retain income on the hospital’s property.
Bianco said the hospital failed to establish the reasonableness of the salaries it paid to executives. The hospital had interests in for-profit operations and failed to draw a clear line between those operations. The hospital also failed to show where its non-profit activity ends and where it for-profit activity with private physicians begins.
In 2010, Bianco ruled that the hospital’s Au Bon Pain cafe and office space it rents to physicians were taxable by the town.
In 2011, the New Jersey Supreme Court ruled in favor of West Windsor Township regarding the non-profit status of International Schools Services. The court ruled that the non-profit must pay taxes on its for-profit operations.
The Atlantic Health System, which operates the Morristown Medical Center, issued a statement Friday saying the decision was disappointing and has serious consequences for both Morristown Medical Center as well as other health care systems in the state.
Atlantic Health System has not decided whether to appeal the ruling yet.
Bianco is the same tax court judge who will rule on Princeton University’s tax exempt status in the case filed by a handful of residents a few years ago.
Princeton University asked Bianco to dismiss the case.
The school filed an appeal, asking an appellate court to throw the case out. The University claimed that the case should turn on whether making a profit is the organization’s “dominant motive.”
In April, a state appeals court ruled against Princeton University, allowing the case to move forward. The case could possibly go to mediation.