New Jersey State Court Rules Not-for-Profit Hospital Must Pay Property Taxes

In a June 25, 2015 opinion in AHS Hospital Corp. v. Town of Morristown, Judge Bianco of the New Jersey Tax Court ruled that the Morristown Medical Center ("MMC"), a not-for-profit hospital, does not qualify for a property tax exemption. This decision could mean that MMC would be liable for millions of dollars in local property taxes, and the logic of the decision could apply to other not-for-profit hospitals throughout New Jersey.

The case arose when AHS Hospital Corporation, the parent company of MMC, challenged Morristown Township’s denial of its property tax exemption for 2006-2008. The Tax Court ruled that to get a property tax exemption, the hospital must meet the profit test – the entity’s "operation and use of its property must not be conducted for profit."

Judge Bianco’s ruling stated that it was impossible to determine what parts of MMC were used for not-for-profit activities and which parts were used for for-profit activities. If a not-for-profit hospital used property in for-profit purposes, such as renting space to a private restaurant chain, the hospital would be charged property taxes on that portion of its property.

Judge Bianco described how MMC was using voluntary physicians in the community to service its patients. There were also references to some of MMC’s for-profit entities.

Judge Bianco’s description of how MMC treats patients by interacting with voluntary community physicians is the basis for most not-for-profit hospital business models. The State of New Jersey also exempts not-for-profit hospitals by statute. This makes Judge Bianco’s ruling surprising and could establish the need for further New Jersey legislation for non-profit hospitals.

The New Jersey Tax Court acted as a trial-level court. An appeal from Judge Bianco’s decision would go to the Appellate Division of the Superior Court, and from there to the New Jersey Supreme Court.