Are Hospital Exemptions in Jeopardy?

Yet another Tax Court decision applying N.J.S.A. 54:4-3.6 (the Exemption Statute) was issued that should give pause to New Jersey’s Medical Centers.  Before the court in AHS Hospital Corp v Town of Morristown, were cross-motions for summary judgment, pretrial motions seeking to dispose of the case by means in lieu of a lengthy trial.  Morristown succeeded in securing a favorable decision on its issues but the Hospital did not.  As summarized by the Tax Court’s website:


“The court found that portions of buildings owned by Morristown Hospital and used as offices and a café were not exempt from local property taxes as hospital purpose properties because the spaces were used by private physicians and other private third parties for profit making purposes.  The court also found that there exists a genuine issue of material fact as to whether the use or operation of the remainder of the subject property was conducted for profit.”



This decision is another in a long line of cases that underscore the fact-sensitive nature of exemptions and the contests over whether they are validly claimed.  Noting the three-prong test for exemption, the court here found that space leased to physicians and a café were subject to profit-based agreements and thus taxable as real estate in failing to meet the third (or “profit motive”) prong.   Moreover, the tax exempt status of the entire medical center was called into question by the Judge’s denial of the Hospital’s cross-motion based on disputed material facts.  In defeating the Hospital’s motion, Morristown pointed to the Hospital’s Form 990 declaring “unrelated business income” in the amount of $3,371,000 and its Form 990-T which disclosed income for lab services to non-patients.  Further, it showed that the Hospital had $1,100,000,000 in income-producing activity and paid its senior executive official roughly $2,850,000 in annual compensation, placing him in the top 20 of hospital senior executives throughout the country.


It is recommended that further proceedings in this matter be followed by the hospital industry.  The court’s ruling is troubling as it appears to give an opportunity to municipalities to question the entirety of a hospital’s operations and call its exempt status into question. 



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