Morristown Hospital Settles Property Tax Case with Town for $15.5 Million

Judge BiancoA case that called into question the tax-exempt status of a nonprofit hospital in Morristown has been settled, with the hospital agreeing to pay the town $15.5 million.

Earlier this year, a New Jersey Tax Court judge ruled that the Morristown Medical Center must pay property taxes on almost all of its 40-acre property.

The decision and settlement could change the landscape for nonprofit hospitals and other nonprofits in New Jersey like Princeton University.

The town of Morristown will receive $10 million up front, and another $5.5 million in penalties and interest in annual installments over the next 10 years. The payments will settle hospital tax appeals spanning the years 2006-2015.

Going forward through 2025, approximately one-quarter of the property will be taxed at an assessed value of $40 million. The deal is expected to yield another $1.05 million per year in tax payments to be split with the town and the public school district.

Tax Court Judge Vito Bianco ruled in June that the Morristown Medical Center failed to meet the legal test that it operated solely as a nonprofit 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.

Bianco questioned property tax exemptions for modern nonprofit 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 nonprofit 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 nonprofit activity ends and where it for-profit activity with private physicians begins.

The hospital decided not to appeal Bianco’s ruling. The settlement ends a legal battle between the town and hospital that dragged on for nine years.

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 nonprofit must pay taxes on its for-profit operations.

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.