Are You Watching the Court Rulings on Property Tax Exemptions? Maybe You Should

Posted on by Linda M. Czipo, Center for Non-Profits
Morristown Medical Center Courtesy of Creative Commons | Ekem

Morristown Medical Center Courtesy of Creative Commons | Ekem

In June, the Tax Court of New Jersey ruled that, with only narrow exceptions, Morristown Medical Center is not entitled to property tax exemption on most of its property in Morristown.

It’s one of several prominent cases involving property tax exemptions of large institutions that have attracted attention in the press and in legal and policy making circles. (Another closely watched case, involving Princeton University, is still making its way through the courts.) If you’re not among those paying attention, you might want to start.

Dollars and Sense

The property tax exemption is an essential part of the public/private compact between government and non-profits, an accommodation in exchange for the public benefit function that non-profits serve. For those organizations that do own property, the exemption is an essential way to stretch scarce resources in order to provide the programs and services for the public good.

As Center for Non-Profits surveys consistently document, demand for non-profit services continues to rise faster than the resources needed to provide them.

Meanwhile, it’s no secret that cash-strapped municipalities are leaving few stones unturned as they seek to fund their own budgets. With property tax caps and other policies limiting their options, it’s not surprising that they would look at non-profits.

In localities from Camden to Red Bank, Lawrenceville to Newton, and of course, Princeton and Morristown and many others in New Jersey and across the country, local officials are viewing non-profits as potential targets. They worry about the foregone tax revenue, and claim that non-profits are “not paying their fair share” for municipal services.

But there’s another side that’s being ignored by too many local leaders: the significant, yet often under-recognized and under-appreciated, economic contributions that non-profits make to communities. Far from a one-sided consumption of massive amounts of government dollars and services, non-profits actually save the government countless dollars by providing job training; health services, food, shelter, counseling and preventive care; and by leveraging human and financial resources with private donations and volunteers.

Just as important, non-profit organizations are significant employers and purchasers, pumping billions of dollars into New Jersey’s economy every year.  Non-profits employ nearly 10 percent of our state’s private workforce, generating payroll and income taxes, and helping to reduce public assistance and unemployment rolls.

Non-profits purchase goods and services from local businesses; pay utilities, telecommunications and related taxes; and provide vital services to people in the community. Their employees live, pay taxes and patronize merchants in the area.

Too many local officials don’t recognize this vital economic component, and we need to be sure they understand it.

Size Doesn’t Always Matter.

Most non-profits don’t approach the scale and complexity of a hospital or university – so what do those rulings have to do with the rest of us? The efforts by localities to curb or remove non-profit property tax exemptions extend far beyond large institutions down to non-profit property owners of all sizes. Indeed, when Camden tax officials tried a couple of years ago to revoke the property tax exemptions of dozens of organizations (on very shaky legal grounds), the non-profits targeted were primarily community-based organizations providing child care and other social services. A number of property tax cases involving small non-profits have been invoked as precedent in both the motions and the actual rulings.

Structure DOES matter.

In the Morristown Medical Center ruling, the judge pointed to a complex structure in which non-profit and for-profit interests were inextricably intertwined. Most non-profit structures and agreements are far less complicated than those in a hospital environment, but non-profits should be examining all of their agreements with non-exempt entities, whether firms or individuals, especially any involving profit-sharing, in order to gauge any potential vulnerabilities.

Safe harbors may not be so safe.

Executive compensation was a significant factor in the ruling against Morristown Medical Center. Although IRS guidelines have for years allowed exempt organizations to establish the reasonableness of compensation under federal law by analyzing compensation levels against those of comparable organizations, the judge dismissed such a standard as insufficient because the hospital failed to also verify that the compensation at the other comparable institutions was itself also reasonable. In essence, this ruling disregarded the IRS framework for reasonableness of compensation in use by thousands of charities nationwide.

Burden of Proof

An important question in some of the property tax cases is who has the burden of proof to justify tax exemption. The burden clearly rests with non-profits in their initial application and required re-applications to the municipality to demonstrate that they meet the criteria to qualify for property tax exemption. But in the Princeton University case, it’s not the municipality contesting the university’s exemption but a small group of residents who disagree with the decision of the municipal tax assessor. This matters because if non-profits are forced to re-prove their eligibility every time a single resident contests it, then thousands of organizations – particularly those that might be considered controversial – will be vulnerable to legal challenges that would be extremely costly and time-consuming to defend, siphoning scarce resources away from vital non-profit missions.

Legislative remedies?

In his ruling in the Morristown Medical Center case, Judge Vito Bianco characterized modern non-profit hospitals as “essentially legal fictions,” and said it is up to the Legislature to develop a framework that would make property tax exemptions permissible for these entities. Legislative leaders have expressed an interest in exploring changes to the law, and all non-profits have a stake in how any legislative remedies are shaped.

Our state’s fiscal challenges demand thoughtful, deliberate discussion and comprehensive solutions. Non-profits need to be at the table to lend their voices, expertise and creativity to this vital discussion.

Linda M. Czipo is executive director of the Center for Non-Profits, New Jersey’s statewide umbrella organization for the charitable community. Through advocacy, public education, technical assistance and cost-saving member services, the Center works to build the power of New Jersey’s non-profit community to improve the quality of life for the people of our state.

 

 

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