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AHS Hospital Corp. v. Town of Morristown

25 N.J. Tax 374 (2010)

TAXATION; EXEMPTION — Professional offices located in a hospital, but used by physicians for profit-making purposes, and space used by a for-profit café are not exempt from real estate taxes as hospital active purpose properties because they are being used by private parties for profit-making purposes.

A hospital filed a tax appeal, arguing that the office space used by private physicians in the hospital’s cancer center and children’s hospital pursuant to a lease or timeshare arrangement was not subject to taxation and that space rented to a private café within the hospital was also not subject to taxation. The hospital also argued that the remainder of the hospital property was exempt from real property taxation. The municipality disputed the hospital’s arguments and both parties moved for summary judgment.

The Tax Court found that the portions of the hospital’s property that were used for professional offices and a café were not exempt from real estate taxes as hospital-purpose properties because they were used by private parties for profit making purposes. The Tax Court relied on N.J.S.A. 54:4-3.6, which provides three criteria for an exemption: (1) the owner of the property must be organized exclusively for the tax-exempt purpose (here, a hospital); (2) the property must be actually as and exclusively used for the tax-exempt purpose; and (3) its operation and use of its property must not be conducted for profit. The Tax Court found that the uses of the office spaces by private physicians and the use of a portion of the property by a private café were for-profit uses that did not meet the last threshold for a tax exemption.

The Tax Court noted that the private physicians who rented office space had staff privileges, were not employed by the hospital, and did not receive compensation from the hospital unless they held administrative positions. However, when a private physician used the hospital’s procedure rooms, the patient was billed separately by the hospital for the use of the room and by the physician for his services. According to the Tax Court, the fact that there was separate billing for the private physician’s services gave rise to a presumption that the physicians derived profit from their use of the office space. That failed the third prong of the statute which requires that the property cannot be operated for a profit.

The hospital’s argued that the cancer and children’s hospital were part of the hospital’s main campus, that the physicians who used offices in those spaces did so only for those patients, and that all the physicians were on staff and actually operated the facilities. The Tax Court rejected the hospital’s argument. It noted that while the hospital may have demonstrated that the use of the office space by those physicians was reasonably necessary for hospital purposes, even if the office space was reasonably necessary, the commercial use of the office space by the private physicians for profit failed the third prong of the statute.

The Tax Court also rejected the hospital’s argument that the café area was tax exempt. It found that the case was a profit making organization. The lease provided that, in addition to the rent, the hospital would receive 8% percent of the gross sales in excess of $375,000 in a given year. Since the lease provided for the possibility of shared profits between the café and the hospital, it failed the test for a tax-exemption for that portion of the hospital.

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