The New Jersey Tax Court has issued a decision that could have broad implications for a majority of New Jersey’s hospitals.  In AHS Hospital Corp vs. Township of Morristown, Dockets Nos. 010900-2007 et als., the Tax Court held that a majority of Morristown Memorial Medical Center’s property was subject to property tax, even though the Medical Center is a federally tax exempt organization and was formed as a non-profit corporation under New Jersey law.  N.J.S.A 54:4-3.6 provides for exemption from property taxes for “all buildings actually used in the work of associations and corporations organized 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 . . “The Tax Court found that because the Medical Center was used by non-employed Medical Staff members and Hospital-based physicians who were not employed by the Medical Center, the Tax Court was unable to discern the difference between the Medical Center’s non-profit activities and the for-profit activities of physicians. 

The Tax Court also scrutinized the Medical Center’s relationship with its captive professional corporation, for-profit affiliates and captive insurer, as well as its loans to several non-affiliated for-profit entities.  In addition, the Tax Court found that the Medical Center failed to meet its burden of proof concerning the reasonableness of the compensation paid to some of its senior executives, and that the productivity incentive payments contained in the Medical Center’s contracts with its employed physicians “demonstrated a profit-making purpose.” Finally, the Tax Court found that the Medical Center’s management contract with Aramark Corporation to manage the Hospital Cafeteria evidenced a profit-making purpose.

The activities which the Tax Court found to be evidence of a “profit-making purpose” are activities in which federally tax-exempt hospitals have routinely engaged throughout the United States..  At the present time, the decision is only applicable to Morristown Memorial Medical Center, which has the right to appeal the decision.  If Morristown Medical Center elects not to appeal the decision, or if it is ultimately upheld on appeal, the decision could have broad implications for many New Jersey hospitals if other municipalities elect to challenge the property tax exemption of hospitals within their borders.