In a 91-page decision, the New Jersey Tax Court recently held that a large, major nonprofit hospital is not entitled to a property tax exemption. AHA Hospital Corp. v. Town of Morristown. The decision was based on the Court’s conclusion that the entire one-million-square-foot, 700-bed hospital was operated for profit and was thus (with few very minor exceptions) ineligible for any exemption. The decision is significant since it involved the entire hospital rather than just specific functions within the hospital.

The Court reviewed the history of nonprofit hospitals, finding that they “have changed significantly … from their early origins as charitable alms houses providing free basic medical treatment to the infirm poor,” and are now “sophisticated centers of medical care … providing a litany of medical services regardless of a patient’s ability to pay.” The Court concluded that “nonprofit hospitals today bear little, if any, resemblance to hospitals in the 18^th, 19^th, and early 20^th centuries” and thus do not “operate today as they did as the time New Jersey first adopted a specific tax exemption” for hospitals in 1913.

The Court analyzed the hospital’s relationship with private, for-profit physicians and found that those physicians were not limited to any particular area of the hospital. Rather, the physicians could operate throughout the entire hospital and “use the Hospital facility to generate private medical bills to patients.” Citing the rule that exemption is unavailable when there is significant commingling and entanglement of for-profit and nonprofit activities and operations, the Court concluded that “it was unable to discern between the nonprofit activities carried out by the Hospital … and the for-profit activities carried out by private physicians.”

The Court, likewise, analyzed the hospital’s numerous relationships with both affiliated and non-affiliated for-profit entities. The Court concluded that by “entangling its activities and operations with those for-profit entities, the Hospital allowed its property to be used for profit. This commingling of effort and activities with for-profit entities was significant, and a substantial benefit was conferred upon for-profit entities as a result.”

The Court concluded that since the entire hospital operation “was conducted for a for-profit purpose and advanced the activities of for-profit entities,” the hospital was ineligible for exemption.

The New Jersey Tax Court decision can be appealed and in any event, will have no precedential effect in Wisconsin, Illinois, Utah or any other state even if it becomes final since each state’s exemption law is different. Nonetheless, the decision is potentially significant since prior disputes involving exemptions for nonprofit hospitals have largely focused on those portions of modern nonprofit hospitals, which were not historically part of a hospital, such as outpatient clinics. Such disputes generally have not reached into those portions of the hospital in which core functions which have always been historically conducted in hospitals, such as inpatient surgery, were located. By reaching into those portions of the hospital and by considering the entire hospital operation as a single integrated operation in which the nonprofit and for-profit activities could not be separated, the New Jersey court has possibly opened the door for assessors in other jurisdictions to consider broader challenges to the exemptions of nonprofit hospitals.