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Tax Court Finds that Non-Profit Hospital Does not Qualify for Property Tax Exemption

Posted: 07/08/2015
Industries: Health Care


Summary

In a June 25, 2015 opinion in AHS Hospital Corp. v. Town of Morristown, Judge Bianco of the New Jersey Tax Court ruled, as a matter of first impression, that the Morristown Medical Center ("MMC"), a non-profit hospital, does not qualify for a property tax exemption under N.J.S.A. 54:4–3.6. If unchallenged, this decision could mean that MMC would be liable for millions of dollars in local property taxes, and the logic of the decision could apply to other non-profit hospitals throughout New Jersey.

The case arose when AHS Hospital Corporation, the parent company of MMC, challenged Morristown Township’s denial of its property tax exemption for 2006–2008. The Tax Court ruled that to secure an exemption under the statute, an entity must meet three criteria; the third element is known as the profit test – the entity’s "operation and use of its property must not be conducted for profit." The claimant has the burden of proving tax exempt status, and the court noted that MMC had the duty to conduct its business so that the taxing authority could determine its eligibility for an exemption. The Tax Court ruled that MMC failed to meet its burden. It is somewhat unclear, however, whether the Tax Court made its decision based solely on a failure of proof or, as stated at the end of the opinion, on findings that the property was "being substantially used for profit."

The crux of Judge Bianco’s ruling was that it was impossible to determine what parts of MMC were used for non-profit activities and which parts were used for for-profit activities. Under the standard analysis, non-profit hospitals have been exempt from property taxes by statute, N.J.S.A. 54:4–3.6, which states that buildings used for "hospital purposes" are exempt from property taxes. However, if a non-profit hospital used property for clearly for-profit purposes, such as renting space to a private restaurant chain, the hospital would be charged property taxes on that portion of its property. For instance, in an earlier decision from 2010, Judge Bianco ruled that MMC had to pay property taxes on space it leased to Au Bon Pain Co., Inc. for the operation of a restaurant.

In his June 25, 2015 ruling, Judge Bianco found that it was impossible to draw a distinction between MMC’s non-profit functions and its for-profit functions. Judge Bianco noted that a majority of the physicians who treated patients at MMC were private, "voluntary physicians" (as opposed to physicians employed by MMC) with admitting privileges, charging patients directly for their own services. The Court also noted that 83 percent of the patients admitted to MMC were admitted by voluntary physicians. These voluntary physicians are allowed to see patients throughout the hospital facilities at all times; there is no limiting factors as to when and where they use the MMC facilities. Judge Bianco also scrutinized MMC’s relationship with its for-profit affiliates, the salaries and bonuses given to its executives, and its incentive contracts with its employee physicians and even with Aramark, its food service and laundry provider. All of these factors pointed to a profit-making, as opposed to charitable, purpose.

The Tax Court acted as a trial-level court. An appeal from Judge Bianco’s decision would go to the Appellate Division of the Superior Court, and from there to the New Jersey Supreme Court. Alternatively, this decision could be superseded by legislation, which is a possibility that Judge Bianco acknowledged in his Opinion. In the meantime, non-profit hospitals could become attractive targets for municipalities and school districts looking to boost their tax revenues.

Saul Ewing attorneys are well-versed in the federal and state laws and regulations affecting the health care delivery system. For more information on this Client Alert, please contact the authors or the attorney at the firm with whom you are regularly in contact.