New Jersey Hospital Loses Property Tax Exemption Case
For the past several years, Morristown Medical Center (“Medical Center”) has been involved in litigation with the Town of Morristown with respect to these property tax exemption issues. As a major employer in the area, employing more than 5,500 people and holding over 40 acres of real estate in Morristown, New Jersey, the Medical Center has always been exempt from property taxes; however, this status was recently challenged in a case brought before the Tax Court of New Jersey by town officials.
The Origin and the Issue
With laws originating as far back as 1851, hospitals have generally always been considered “non-profit, charitable entities,” exempt from property and other Federal, State and Local taxes. The Laws of 1913 restricted the language to include “qualified hospitals;” effectively allowing not-for-profit hospitals to retain their tax-exempt status until they would eventually gain similar protections under N.J.S.A 54:4-3.6. It is this particular statute that was challenged by the Town of Morristown and upon which Judge Bianco relied in rendering his adverse decision.
Challenges to N.J.S.A. 54:4-3.6 are not uncommon, and occurred notably in the 1980’s; particularly in 1984 in Paper Mill Playhouse v. Milburn Township 95 N.J. 503 (1984). There is a three-pronged test established under Paper Mill Playhouse v. Millburn Township, under N.J.S.A. 54:4-3.6 wherein, in order to obtain property tax exemption, the organization must demonstrate that:
- It is organized exclusively for the moral and mental improvement of men, women and children (Organizational Test);
- The subject property must actually be used for the tax-exempt purpose (Use Test); and
- The operation and use of the property must not be conducted for profit (Profit Test).
Paper Mill Playhouse was found to comply with all three tests and retained its property tax exemption; however, this case set a standard for property tax exemption in the State of New Jersey. It was this case, in particular, which Judge Bianco referenced in his decision on June 25th.
Applicability
Historically, property tax exemption has been a controversial topic in the State of New Jersey and elsewhere; particularly with respect to tax-exempt hospitals, hospital facilities and other tax-exempt organizations.
For example, in 2010, International Schools Services, Inc. was denied property tax exemption because it failed the first prong in the Paper Mill Playhouse three-pronged test.
Provena Covenant Medical Center (“Provena”), an IRC §501(c)(3) tax-exempt Catholic institution located in Champaign County, IL owns 43 parcels of real estate. Provena allows outside, for-profit entities to use these facilities to generate personal and/or corporate profit. The Champaign County Board of Review denied Provena property tax exemption ruling that the percentage of free care provided by Provena is inadequate and inconsistent with its claimed charitable purpose.
In August of 2011, the Illinois Department of Revenue denied property tax exemption to three hospitals based on their charity care levels. The State of Illinois utilizes five criteria which hospitals must meet in order to qualify as charities. In a widely known case, the court used that criteria to uphold a state decision that stripped Provena Covenant Medical Center of its property tax exemption for failing “to show by clear and convincing evidence” that it provided charity care to “all who needed it and applied for it” in 2002. Accordingly, utilizing the Provena decision, the Illinois Revenue Department denied requests for tax exemption from Northwestern Memorial’s Prentice Women’s Hospital in Chicago, Edward Hospital in Naperville, and Decatur Memorial Hospital.
Again, in early 2012, the Supreme Court of Pennsylvania affirmed the denial of real estate tax exemption in the case of Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals.
In a similar ruling denying property tax exemption in February of 2014, the New Jersey Tax Court held that a private country club was not entitled to property tax exemption for charitable use for its clubhouse citing that the Club’s purposes are dedicated to private purposes, the property is maintained for the private use of its members and there is minimal charitable use of the property.
The Ruling
After reviewing the facts in conjunction with the three tests established in the Paper Mill Playhouse case and hearing the arguments presented by both sides, Judge Bianco found that the Medical Center substantially passed both the organizational and use tests. He noted in his ruling that the Medical Center was able to prove that its tax-exempt parent, Atlantic Health System, existed for the sole purpose of owning and operating a hospital. The Medical Center was further able to prove that the property in question was held for the exclusive use and function of the Medical Center.
However, Judge Bianco ruled that the Medical Center did not successfully pass the profit test and it is on this basis that Judge Bianco determined that the Town of Morristown was justified in revoking the Medical Center’s property tax exemption. He indicated that the only properties that should be exempt from property taxes are the auditorium, fitness center and parking garage.
Conclusion
The Hospital was found liable for unpaid taxes for tax years 2006 through 2008; a potential tax liability of between $2.5 and $3 million per year. A similarly pending case is currently ongoing for the Medical Center for tax years 2009 through 2015, which could further the impact of the present court decision if a similar ruling is reached. Atlantic Health System is currently evaluating its appeal options.
Tax-exempt hospitals and other types of tax-exempt organizations should be aware of the possible long-term effects of this recent decision. First and foremost, Judge Bianco wrote in his decision that “today’s non-profit hospitals have evolved into labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities.”
The New Jersey Hospital Association (“NJHA”) issued a letter dated June 26, 2015 wherein the organization indicated that it has “significant concerns” about the decision and “potential repercussions” beyond just hospitals. NJHA stated in the letter that NJHA is “in the process of scheduling a Special Meeting of the NJHA Board via conference call to discuss the ramifications of the case.” Betsy Ryan, NJHA President and Chief Executive Officer, was quoted stating, “NJHA and its 72 member hospitals are most concerned with anything that creates additional obstacles to our mission of providing high-quality medical care to our communities in a cost-effective manner. The tax court decision that denied Morristown Medical Center’s property tax exemption will have repercussions beyond one hospital. The implications of this decision will be the topic of much further discussion and perhaps will need a legislative solution.”
The payment of property taxes can impact a tax-exempt hospital’s ability to further its mission and tax-exempt purposes and provide benefit to the community. The case, which was followed closely by various types of tax-exempt organizations, could potentially have regional, if not national, ramifications as it opens the door for other municipalities to challenge the tax-exempt status of hospitals, universities, and other types of traditionally tax-exempt organizations.
AHS Hospital Corp. d/b/a Morristown Memorial Hospital v. Town of Morristown
Ask Our Experts
Please contact a member of WS+B’s Healthcare Services Group at [email protected] for further questions or assistance.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
