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Hospitals’ Tax Status

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Martin AllenMartin Allen, head of the firm’s Real Property Tax Appeals Department, was quoted in a recent article in the NJ Law Journal entitled “Battle Over Hospitals’ Tax Status Heats Up.”


As speculation proved true that a 2015 Tax Court decision providing for taxation of nonprofit hospitals would result in a wave of litigation, lawmakers are once again trying to solve the problem in Trenton. The Senate Budget and Appropriations Committee has twice taken up S-3243 recently, but twice declined to move it.

Meanwhile, the issue might get a shakeout in court. According to committee testimony, 41 of the state’s 58 nonprofit hospitals are involved in tax litigation. (The Administrative Office of the Courts does not specifically track hospital-related cases in the Tax Court, spokesman Peter McAleer said.)

It was a June 2015 decision by Tax Court Judge Vito Bianco that opened the door. Bianco, in AHS Hospital v. Morristown, held that nonprofit Morristown Memorial Hospital was properly denied tax-exempt status based on the existence of numerous profit centers within the facility. The parties later settled, requiring the hospital to pay $10 million up front, $5.5 million in deferred payments over 10 years and future annual payments of about $1 million.

For the Tax Court, however, it was just the beginning.

“When municipalities saw the decision, they started to, I’m sure, believe that they would be remiss in not taxing the hospitals,” said Alan Hammer of Brach Eichler in Roseland, which represents about two-dozen nonprofit hospitals in tax appeals, including on behalf of RWJBarnabas Health. “I don’t think a Tax Court decision should have this kind of impact,” Hammer added. “I’ve never seen a case have such an impact at the trial level.” The parties to those suits are “largely trading paper,” with “occasional meetings” and “a lot of waiting,” he said.

Tax appeals have been lodged by hospitals who received assessments, but in many cases, the municipalities are the ones filing, when their tax assessors decline to revoke a hospital’s tax-exempt status, according to Martin Allen of DiFrancesco Bateman Kunzman Davis Lehrer & Flaum in Warren, who represented Morristown in its dispute with the hospital. The firm currently represents eight municipalities in tax disputes, including North Bergen, Rahway, Red Bank and Summit.

“The assessor is put in an awkward position,” Allen said—if he denies tax-exempt status, the hospital is not obligated to pay during the pendency of tax litigation, and “he creates a large—sometimes huge—hole in the municipal budget.”

Lawmakers acted fast in the wake of Bianco’s ruling, introducing legislation in December 2015 and passing it weeks later with only nine “no” votes in both chambers of the Legislature. But it was met with a pocket veto by Gov. Chris Christie in January 2016, as did many other bills pushed through with the end of the legislative session looming.

The latest attempt at a legislative solution is moving more slowly. S-3243, introduced May 25, would impose “community service contributions” on nonprofit hospitals—in order to defray the costs of services in the host municipalities—but allow them to retain a tax-exempt status. The bill originally provided for payments to be routed through the Department of Health; a recent amendment requires that municipalities be paid directly, though the assessment would still come from the Department of Health.

“We really couldn’t find a vehicle for the municipality to make this assessment,” the primary sponsor of S-3243, Sen. Paul Sarlo, D-Bergen, said in a June 15 hearing. “We wanted to avoid the whole property tax issue. … We thought this was a clean way of doing it.”

DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis, Lehrer & Flaum PC (http://www.dbnjlawblog.com) is a full service law firm in New Jersey which provides a broad range of legal services.

The information contained in this blog is intended solely for informational purposes; it is a advertising publication of DiFrancesco, Bateman, Coley, Yospin, Kunzman, Davis, Lehrer & Flaum P.C.This publication is intended to alert recipients of developments in the law and is not intended to provide legal counsel, advice or opinion on any specific facts or circumstances. The contents are intended as general information only. You are urged to consult a member of this firm or your own attorney concerning your particular situation and any specific legal questio.