For the lawyers, from Lexology:
Pretty sure that hospitals and doctors don’t need to have subsidized property taxes.
The New Jersey Tax Court’s decision in AHS Hosp. Corp. v. Town of Morristown, DOCKET Numbers.: 010900-2007, 010901-2007, 000406-2008 (Decided June 25, 2015), has triggered widespread concern among hospital enterprises and other non-profit entities benefiting from property tax exemptions. The issue in the case was whether Morristown Memorial Hospital (MMH) should benefit from the New Jersey real property tax exemption for non-profit organizations. The town of Morristown contended that MMH’s use of the property did not fit the definition of tax exempt activities under N.J.S.A. 54:4-3.6, which provides an exemption from real property tax for:
all buildings actually used in the work of associations and corporations organized exclusively for hospital purposes, provided that if any portion of a building used for hospital purposes is leased to profit-making organizations or otherwise used for purposes which are not themselves exempt from taxation, that portion shall be subject to taxation and the remaining portion only shall be exempt … . (emphasis added).
The court embarked on a lengthy discussion of the history of hospitals in the United States, which concluded that hospitals largely have evolved from eleemosynary institutions for the poor that were by definition charitable into fee based profit-making enterprises bearing little resemblance to their predecessors. The court then reviewed the statute under existing precedent, and delved into whether three criteria were satisfied:
(1) [the owner of the property] must be organized exclusively for the [exempt purpose]; (2) its property must be actually and exclusively used for the tax-exempt purpose; and (3) its operation and use of its property must not be conducted for profit.
(citations omitted). The court held that in and of itself, an exempt purpose (i.e. operation of a hospital) is not sufficient to support an exemption. The entity also must demonstrate that the property for which the exemption is granted is “exclusively used for the exempt purpose” and does not undertake “for profit” activities.
New Jersey and New York are among a number of states where municipalities, struggling to find needed funds, are looking for ways to raise revenue. The AHS decision is particularly damaging to claims for property tax exemption. It remains to be seen whether appellate review or legislative action will alter the decision. While the New York statute appears more advantageous for hospitals, Crouse Health seems to open the door to the distinction between hospital activity and the commercial private practice of medicine. It thus behooves hospitals to review how their real estate is used and, to the greatest extent possible, be prepared to demonstrate what portion of a property is used exclusively by the hospital and what portions are used by physicians engaged in private practice. Undoubtedly, the question of what constitutes for profit activity is going to become a prevalent aspect of tax exemption cases. Hospitals must clearly separate traditional hospital activities from those that may be more akin to profit making enterprises and take care to ensure that there is no commingling of assets. Furthermore, hostpitals will need to be prepared with a thorough analysis to support that executive compensation is not excessive and that physician compensation is linked to measurements that will not be characterized as demonstrating a “profit-making purpose.”