October 24, 2014
October 23, 2014
October 22, 2014
Tax-Exempt Hospitals: Recent New Jersey Court Decision May Impact Property Tax Exemptions
This case involves a tax-exempt hospital that leased office space in its cancer center and children’s hospital to private physicians on its medical staff at fair market value and provided free parking in its garage to those physicians. The hospital also rented space in its main hospital building to a private food vendor at a rental which included 8% of gross sales above $375,000.
The statutory property tax exemption excludes portions of hospital property that are either leased to for-profit entities or used for purposes not exempt from taxation. The Tax Court ruled that the physician office space was not exempt from property tax because it was used by private physicians on a for profit basis. The court noted that the office space was used by private physicians to conduct private medical practices and that many were incorporated as for-profit entities, thus giving rise to a presumption that the space was used to generate a profit.
The most important aspect of the case was the Tax Court’s refusal to grant summary judgment to the hospital on the issue of whether the remainder of the hospital’s property was exempt from property tax. The Tax Court stated that various information contained in the hospital’s Form 990 (filed annually with the IRS) -- the level of executive compensation paid to hospital officials, the amount of unrelated business income earned by the hospital, and the proportion of charity care provided by the hospital in comparison to its total revenues -- all raised an issue of material fact as to whether the hospital as a whole was being operated for profit.
In light of current economic challenges, local governments can be expected to aggressively challenge, in whole or part, the real estate tax exemptions enjoyed by nonprofit hospitals. In addition to piecemeal attack on portions of hospital property leased to profit-making entities or individuals, this case demonstrates that municipalities may increasingly challenge, on a more global basis, property tax exemptions of hospitals based on the level of their executive’s compensation, as well as the proportion of charity care they provide relative to their overall revenues.
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