Settlement Reached in “Nonprofit Hospital as Legal Fiction” Case: The Property Tax Exemption Called to Question

The nonprofit hospital Morristown Medical Center yesterday settled a case with the town of Morristown, New Jersey, where it is located by agreeing to pay $15.5 million. This follows a ruling in June from New Jersey Tax Court judge Vito Bianco, who found that the hospital should pay property taxes on almost the entirety of its 40-acre property. The new settlement will have the hospital paying taxes on approximately a quarter of its property in the future but will bring it up to date for the years 2006–2015.

In his ruling, Bianco called the notion of modern nonprofit hospitals a “legal fiction,” pretty thoroughly questioning the whole practice of providing property tax exemptions for them based on their overall practices. “If the property tax exemption for modern nonprofit hospitals is to exist at all in New Jersey going forward,” he wrote, “then it is a function of the legislature and not the court to promulgate what the terms and conditions will be.”

“Clearly, the operation and function of modern nonprofit hospitals do not meet the current criteria for property tax exemption,” he wrote, calling them “labyrinthine corporate structures, intertwined with both nonprofit and for-profit subsidiaries and unaffiliated corporate entities.” In this case, he wrote, the hospital had failed to distinguish clearly between its profitmaking and nonprofit functions.

Bianco also had something to say about salary levels, in that the former Morristown Medical Center CEO was paid more than $5 million a year and a number of other administrators took home at least $500,000 a year in compensation. Bianco asserted that the hospital was unable to establish the reasonableness of these salaries.

Bianco will, by the way, also soon rule on Princeton University’s tax-exempt status-.—Ruth McCambridge