NJ Courts Deny Property Tax Exemption

by: Richard De Angelis
12 Jun 2010

In two recent separate cases, both the Appellate Division of the New Jersey Superior Court and the New Jersey Tax Court have denied local property tax exemptions to not-for-profit organizations.

In International Schools Services, Inc. v. West Windsor Township, 412 N.J. Super 511 (App. Div. 2010) the Appellate Division held that a 501(c)(3) tax exempt organization did not qualify for a local property tax exemption under N.J.S.A. 54:4-3.6. The plaintiff, International Schools Services (“ISS”), challenged the Township’s property tax assessments on plaintiff’s office condominium units, contending that they were tax-exempt under N.J.S.A. 54:4-3.6. The Tax Court granted summary judgment in favor of the Township, determining that ISS was not eligible for exemption based solely on the first prong of the three-prong statutory test for exemption articulated in Paper Mill Playhouse v. Millburn Township, 95 N.J. 503 (1984), i.e., that a claimant must demonstrate: (1) it is organized exclusively for the moral and mental improvement of men, women and children; (2) the property must be actually used for the tax exempt purpose; and (3) the operation and use of the property must not be conducted for profit. International Schools Services, Inc. v. West Windsor Township, 21 N.J. Tax 553 (Tax 2004), rev’d, 381 N.J. Super. 383 (App. Div. 2005). The Tax Court concluded that N.J.S.A. 54:4-3.6 did not contain an exemption for an organization having general educational purposes. 21 N.J. Tax at 569. After reversal and remand, the Tax Court again granted summary judgment to the Township this time holding that ISS was not eligible for a tax exemption based on the second and third prongs of the test for exemption. The Tax Court found that a non-profit organization whose stated goals included “aiding, promoting and encouraging” educational associations “by all appropriate means” actually used the subject property for the “moral and mental improvement of men, women and children”, did not satisfy the second prong for an exemption. On appeal,  the Appellate Division disagreed with the holding of the Tax Court as to the second statutory prong. However, the appellate court affirmed the denial of the exemption, agreeing with the Tax Court that ISS failed to satisfy the third statutory prong — that the operation and use of the property was not conducted for profit — as the record showed that a portion of its profit subsidized the operations of its profit-making affiliates.

Shortly after the Appellate Division’s decision in International Schools Services, the Tax Court denied an exemption to a hospital for certain office space and a café rented in the main hospital building. In AHS Hospital Corp. d/b/a Morristown Hospital v. Town of Morristown, 2010 N.J. Tax LEXIS 7 (Tax 2010) (Approved for Publication), plaintiff, a non-profit corporation that operated a hospital, sued the Town challenging the denial of its claim for a property tax exemption under N.J.S.A. 54:4-3.6. Both parties filed motions for partial summary judgment. The Town sought partial summary judgment declaring that office space in the hospital’s cancer center and children’s hospital, and cafe space rented in its main hospital building were not tax-exempt. The hospital sought a partial summary judgment declaring that its main hospital building, cardiovascular institute, and garage were tax-exempt. The Tax Court granted the Town’s motion and denied the hospital’s motion. The court held that in order to claim an exemption, a property owner must show that the operation and use of its property was not conducted for profit. It found undisputed evidence that the office space in the Cancer Center and Children’s Hospital and the café space in the main hospital building were in fact used for profit during the tax years under appeal. The court found that the office space was used by private physicians, not employees of the hospital, to conduct their private practices, which gave rise to a presumption that the private physicians derived pecuniary profit from their use of their office space. The court also found that the café space was leased to a “profit making organization” and therefore was also subject to taxation. With regard to the hospital’s motion regarding the remainder of the property, the court found that the Town had put forth material facts that raise genuine issues as to whether the subject property is operated for profit.