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Speakers: 'Taxing Nonprofits: Is it Inevitable?'

Jillian Swogier '17 Reports on a Seton Hall Conference


Jillian Swogier '17Seton Hall Law’s Center for Health & Pharmaceutical Law & Policy hosted a conference, Taxing Nonprofits: Is it Inevitable?, with leading academic and industry experts discussing the impact of recent case law and legislation on state property tax exemption for nonprofit hospitals, universities, and other charitable organizations. Jillian Swogier ’17, pictured, left, reports on each presentation:

Property Tax Exemption for Nonprofit Organizations: The State of States

Evelyn Brody, Professor of Law at Chicago-Kent College of Law, kicked off the conference by discussing the conflicts that surround deciding who sets the terms over property tax exemption. Professor Brody emphasized five key points. First, it is important to recognize that both parties involved in disputes over property tax exemption — the nonprofit institution and the municipality — are working for the community’s benefit. Second, states must follow their constitutional provisions before passing legislation. Seventeen states currently have a charity exemption mandated in their state constitutions. Third, property tax considerations are a zero sum game, insofar as the taxes that exempt organizations would have paid will increase the tax burden of non-exempt property owners. Fourth, property tax exemption and income tax exemption are based on different standards, so it is possible for an entity to be exempt for one but not the other. Finally, the choice is not necessarily between providing a property tax exemption or taxing nonprofit organizations like their for-profit counterparts. Instead, there are a variety of in-between solutions that are possible, such as payment in lieu of taxes (PILOTs), services in lieu of taxes (SILOTs), and other voluntary payment arrangements.

Morristown Hospital, Princeton University, and Beyond: Property Tax Exemption for Nonprofits in New Jersey

Susan Feeney, a Partner in the Tax and Employee Benefits practice group at McCarter & English, LLP and counsel for Morristown Memorial Hospital, discussed the New Jersey Tax Court decision, AHS Hospital Corporation d/b/a/ Morristown Memorial Hospital v. Town of Morristown. In this decision, the New Jersey Tax Court stripped Morristown Memorial Hospital of its property tax exemption, finding that the for-profit functions taking place on the hospital campus were not “readily ascertainable, and separately accountable for taxing purposes.

Ms. Feeney emphasized the importance of starting with the language of the state statute in a property tax exemption analysis. New Jersey’s pertinent exemption statute can be found at N.J.S.A. § 54:4-3.6. Cases interpreting this statute have applied the three-prong test set forth in Paper Mill Playhouse v. Millburn Township, which mandates that nonprofit hospitals: (1) are charitable organizations; (2) use their property for a charitable purpose; and (3) do not operate for profit. Ms. Feeney discussed the AHS Hospital Corporation decision at length, focusing on the seven areas of Judge Vito Bianco’s analysis: 1) relationships with private for-profit physicians; (2) relationships with affiliated and non-affiliated for-profit entities; (3) executive salaries; (4) employed physicians’ contracts; (5) third party agreements; (6) the gift shop; and (7) the auditorium, day care, fitness center, and cafeteria. The takeaway for nonprofit hospitals from this analysis is to focus on Paper Mill Playhouse’s third prong, the “profit” test.

Finally, Ms. Feeney turned to the most recent events in the nonprofit property tax realm by discussing the hospital contribution service fee bill enacted by the New Jersey legislature in 2015 but pocket vetoed by Governor Christie, as the Princeton University tax suits filed by third party taxpayers.

Point-Counterpoint: Is Nonprofit Property Tax Exemption Sound Public Policy?

John D. Colombo, Professor of Law at the University of Illinois College of Law, and Linda M. Czipo, Executive Director for the Center for Nonprofits, concluded the conference by presenting contracting perspetives on whether nonprofit property tax exemption is justified as a matter of public policy.

Professor Colombo argued that it should not be assumed that nonprofit entities necessarily alleviate a governmental burden or serve a community benefit. Professor Colombo suggested that some Fortune 500 companies might actually provide greater community benefits than nonprofit organizations. He gave the example of Microsoft, a company that bring thousands of jobs, infrastructure, and other socio-economic benefits to Redmond, Washington. Additionally, he argued that tax exemptions are not the appropriate mechanism for achieving policy goals such as providing free health care to the poor. He pointed out that we don’t give supermarkets tax exemptions in exchange for giving out free food; instead, we address the problem of food insecurity through direct policy initiatives like the Supplemental Nutrition Assistance Program (SNAP). Professor Colombo proposed that the only nonprofit entities that should be given tax exemptions are those that would be unable to survive in the private market without such a subsidy.

Linda Czipo argued that nonprofits provide many significant social and economic contributions that more than offset the taxes they do not pay, including mental health programs, disaster relief, housing, and senior care. Economic contributions nonprofits provide include providing jobs to communities, making towns attractive places to live, work, and visit, and providing services. Ms. Czipo emphasized that nonprofits that contract with the government frequently do not receive full compensation for their services, and that the tax exemption helps to offset this imbalance. She argued that the test for tax exemption should be based on the motive of the entity—whether it is structured for profit making or not.

Pictured above, from left, are Susan Feeney, Partner in the Tax and Employee Benefits practice group at McCarter & English, LLP, Linda M. Czipo, Executive Director for the Center for Nonprofits; John Jacobi, Dorothea Dix Professor of Law and Faculty Director, Seton Hall Law Center for Policy & Research, Kathleen M. Boozang, Dean and Professor of Law; John D. Colombo, Professor of Law at the University of Illinois College of Law; and Evelyn Brody, Professor of Law at Chicago-Kent College of Law. Not pictured is Carl H. Coleman, Professor of Law and Academic Director of the Division of Online Learning.