A New Jersey tax court judge has ruled that Morristown Medical Center, which is part of the Atlantic Health system, must pay back property taxes for the years 2006, 2007 and 2008. According to NJSPOTLIGHT, Judge Vito Bianco determined in his 88-page ruling that Morristown's for-profit and not-for-profit services were so intermingled it was impossible to distinguish one from the other. The hospital argued that it was merely following long-established practices that allowed both employed physicians and self-employed physicians with for-profit practices to work together to provide services. To which the judge responded, "If it is true that all nonprofit hospitals operate like the Hospital in this case, as was the testimony here, then for purposes of the property tax exemption, modern nonprofit hospitals are essentially legal fictions."
It is likely that Morristown will appeal the judge's ruling. "Last week's decision by Judge Bianco regarding property taxes is disappointing, and has serious consequences for both Morristown Medical Center as well as other healthcare systems in the state," an Atlantic Health spokesperson said in an e-mail. "After reviewing the decision in greater depth, we will evaluate our options and make a decision that is in the best long-term interest of the hospital, the patients we serve, and the greater community." The spokesperson also stressed that the judge's decision "is limited to the issue of property tax, and does not call into question the charitable status of the hospital." Morristown will continue to operate as a not-for-profit.
Implications for other New Jersey nonprofits
According to the Morristown Patch, New Jersey law currently requires that not-for-profit organizations be used exclusively for charitable purposes in order to qualify for the property tax exemption. So any portion of a hospital that turns a profit must pay taxes. Under the judge's ruling, Morristown's hospital's auditorium, fitness center and visitors' garage are the only portions that will remain exempt.
Judge Bianco also said if the property tax exemption for non-profit hospitals in New Jersey is to continue to exist going forward, is up to the legislature, rather than the courts, to define the terms and conditions. If this case goes to the state legislators, it wouldn't be the first time a new law had to be passed in order for nonprofits to continue to receive state tax exemptions. According to NJSPOTLIGHT, the Illinois legislature passed a law in 2012 making not-for-profit hospitals permanently exempt from property taxes by establishing minimal financial standards for providing community benefits that the hospitals would have to meet in order to qualify.
So what does all of this mean for other New Jersey non-profits and for not-for-profits nationwide? "While the [judge’s] decision is narrowly tailored to hospitals in some respects, it serves as a broader warning to non-profits of the impact and risk of commingling uses and activities between for-profit and non-profit entities," says David Wolfe, a New Jersey tax attorney and partner at law firm Skoloff & Wolfe. "The court was clear that property tax exemptions will be lost when there are 'significant and substantial commingling of effort and entanglement of activities and operations' on a property."
Wolfe says that this case is part of a larger trend, both within New Jersey and nationally, of increased scrutiny being applied to non-profit institutions that have historically been assumed to be exempt from local property tax. "This trend has included not only hospitals but also universities, religious and other charitable institutions," he says.