United States

New Jersey: Tax Court Upholds Denial of Hospital’s Property Tax Exemption

Jul 13, 2015
From KPMG TaxWatch

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In a recent, rather-lengthy opinion, the New Jersey Tax Court upheld Morristown, New Jersey’s denial of a nonprofit hospital’s property tax exemption. In a case of first impression in New Jersey, the court concluded that the Hospital generally operated as a for-profit business and therefore was not entitled to the property tax exemption. In reaching its conclusion, the court observed that the manner in which a modern hospital functions in no way reflects the way hospitals functioned in the 18th, 19th, and early 20th centuries. In its view, little support existed for the Hospital’s contention that contemporary non-profit hospitals operate today as they did when New Jersey first adopted a specific tax exemption for “[a]ll buildings actually used for… hospital purposes” in 1913.  

As the exemption has been interpreted over time in New Jersey, courts have developed a three-part test to determine whether a taxpayer qualifies for the property tax exemption. The first part looks to whether the property is owned by an entity organized exclusively for a tax exempt purpose. The second prong addresses whether the subject property is actually used for the exempt purpose. The third part of the test analyzes whether the activities being conducted on the property are done so for profit. In earlier rulings in this case, courts had held that the hospital met the first two tests. In this decision, however, the court concluded that the large majority of the Hospital’s premises did not qualify for exemption under the third test, the so-called profit test. Under this test, an entity claiming an exemption must establish that the operation and use of its property is not conducted for profit.

Notably, the court determined that it was unable to distinguish between the non-profit activities carried out by the Hospital and the for-profit activities carried out by private physicians on the same property. The court determined that the Hospital was seriously entangled with for-profit entities and conferred substantial benefits on these entities. Specifically, the Hospital owned and subsidized for-profit physician practices, had directors that also served on the boards of various related for-profit entities, and made interest-free loans to these entities. In the court’s view, the Hospital allowed its property to be used for forbidden for-profit activities, and therefore, failed to satisfy the profit test. The Hospital also failed to prove that its executive compensation packages were not excessive, which was another factor to be considered. Finally, the court reviewed the Hospital’s contracts with various third party vendors offering secondary services at the hospital to determine if they were operated with a profit motive. As a result, the court held that the property tax exemption should be denied for all areas save the auditorium, fitness center, and visitor’s garage which were not operated with a profit motive. For more information regarding AHS Hospital Corp v Morristown please contact Michael P Kenny, 212-872-3414.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.