In a case of first impression, in a decision issued on Friday, June 26, the Tax Court of New Jersey invalidated the real property tax exemption of Morristown Memorial Hospital, a facility which is part of the Atlantic Health Care System. The town of Morristown had rejected the hospital's claims for property tax exemptions for the 2006, 2007 and 2008 tax years. The hospital had sought a continuation of its exemption as a nonprofit hospital for those tax years.

Under New Jersey law, generally only nonprofit entities are entitled to tax exemptions. While the Tax Court concluded that virtually the entire property was being used for an exempt purpose, i.e., a hospital use, the key issue was whether the health care activities at the hospital were being conducted for profit.

Following a trial, the court concluded that the hospital maintained relationships with a number of affiliated and unaffiliated for-profit entities, as well as owning all the stock in several for-profit professional corporations for physician practices. The employees of these entities were employed by the hospital, and the hospital provided loans termed "working capital" to these practices. There were also other for-profit affiliates, including an insurance company which maintained a line of credit guaranteed by the hospital.

Based on these and other facts, the court found that "By entangling its activities and operations with those of for-profit entities, the Hospital allowed its property to be used for a profit. This commingling of effort and activities with for-profit entities was significant, and a substantial benefit was conferred upon for-profit entities as a result."

The court also found that the hospital failed to meet its burden to establish the reasonableness of compensation paid to its executives, in contravention of New Jersey Supreme Court precedent, which requires that to maintain a tax exemption nonprofit salaries should be reasonable and not excessive. Moreover, the Tax Court found that physicians' contracts entered into by the hospital demonstrated a profit-making purpose. Hence, the court concluded that, with few exceptions, the town's denial of the hospital's property tax exemption was affirmed.

The value of the hospital for property tax purposes was also challenged, and now that the exemption denial was affirmed, the town will have to defend the hospital's real property tax assessment, which approximates $63 million. The name of the case is AHS Hospital Corp. d/b/a Morristown Memorial Hospital v. Town of Morristown, Docket Nos. 010900-2007, 010901-2007 and 000406-2008. The decision has been approved for publication.