Nonprofit hospital executives and lawyers throughout the country have been taking notice of a recent tax court case out of New Jersey involving the Morristown Medical Center, in which Judge Vito Bianco agreed with the local town and denied the New Jersey hospital of its tax exemption for the majority of its properties.  Estimates put the annual dollar cost of this loss of property tax exemption for the hospital at between $2.5 million to $3 million.  The case has triggered national media attention from The Wall Street Journal, Modern Healthcare and other publications.

This decision is unique due to the analysis the judge undertook by specifically looking at the operations and organizational structure of the hospital system, along with its executive compensation in deciding to revoke the hospital’s property tax exemption.  This approach of “looking under the hood” is very different than what we have seen in other hospital property tax exemption cases in other states, such as Illinois, Pennsylvania and Ohio, among others. 

The analysis in those cases was the amount of charity care and other community benefit provided by the hospitals to the community and whether that amount justified the hospitals’ property tax exemption.  Many of the hospital’s practices cited by Judge Bianco in his decision – such as transactions between the hospital and physicians – are relatively common to nonprofit hospitals. The hospital's executive compensation, called out in the decision, was also not particularly unique.

Several weeks after the Morristown decision was released, the town and the hospital issued a public statement that they have requested a period of time to enter into negotiations to end the litigation, which the judge granted.  Without such negotiations taking place, the next step would have been an appeal by the hospital.  If the negotiations do end in a resolution between the parties, it may likely involve some form of payment by the hospital to the town in lieu of taxes (PILOT).

Although the Morristown decision was limited to New Jersey nonprofit and property tax law, Judge Bianco’s ruling raises questions that would  potentially reframe the nonprofit hospital landscape beyond New Jersey’s borders in several ways, including:

  • Is this a signal of more changes to come?
  • Does structure matter as much as what benefits are provided to the community? 
  • What role will legislators play in defining property tax exemption for nonprofit hospitals? 
  • What solutions are available to create more certainty around property taxes?