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NJ Tax Court Denies Nonprofit Hospital Property Tax Exemption

In a June 25 decision, AHS Hospital Corp. v. Morristown, the Tax Court of New Jersey ruled that nonprofit Morristown Memorial Hospital failed to qualify for a nonprofit property tax exemption under New Jersey law because the property is “being used substantially for profit.”

The Court previously found that Morristown Memorial Hospital qualified for tax-exempt status because it was organized exclusively for a tax-exempt purpose and nearly all of the hospital’s property is used for hospital purposes. However, the Court has now determined that the hospital failed the third test under New Jersey law – the “profit test” – because it “operated and used its property for a profit-making purpose.” In addition, the court noted that the hospital provided substantial loans, capital, and subsidies to for-profit entities, including the following:

  • for-profit voluntary physicians
  • contracted clinicians that practice in the hospital and bill separately for their services
  • employed physicians that are part of for-profit practices that are subsidiaries of the hospital

The Court also examined relationships with for-profit subsidiaries of the hospital’s parent company, loans made to non-affiliated, for-profit entities, and executive compensation.

While there are limitations to the applicability of this decision to other nonprofit hospitals and the decision can be overruled on appeal, this decision is indicative of the ongoing conversation at the state and federal level as to what nonprofit hospitals should do to maintain tax-exempt status. This decision also newly focuses on the corporate structure and operations of nonprofit hospitals, rather than the benefits that hospitals provide to the community.

If you have any questions or concerns, please contact Beth Feldpush, DrPH, senior vice president of policy and advocacy, at bfeldpush@essentialhospitals.org or 202.585.0111.

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