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International Schools Services Inc. v. West Windsor Township

24 N.J. Tax 453 (2009)

TAXATION; EXEMPTIONS — A property owner, although having a certificate of incorporation setting forth the corporation’s goals of aiding, promoting, and encouraging education organizations by all appropriate means, will not be entitled to an exemption from property taxation if it cannot demonstrate that the use and operation of its specific property is not for a profit.

A company served as the business or management arm of schools outside the United States that serviced expatriate Americans or foreign nationals. The company owned four office condominium units in a particular municipality. The company claimed its real property was exempt from taxation pursuant to N.J.S.A. 54:4-3.6 because the property was used in the work of an association or corporation organized exclusively for the moral and mental improvement of men, women, and children. In order to be eligible for such a tax exemption, a taxpayer must demonstrate that: (a) it is organized exclusively for the moral and mental improvement of men, women, and children; (b) the property is actually used for the tax exempt purpose; and (c) the use and operation of the property is not for profit. The Tax Court concluded that the company did not meet the first requirement.

On appeal, the Appellate Division reversed, finding that the Tax Court too narrowly construed the company’s organizational documents. The Court found that the company’s certificate of incorporation’s goals of aiding, promoting, and encouraging educational organizations by all appropriate means could qualify under the first prong of the test for tax exemption. Thus, the Court remanded the case back to the Tax Court to determine if the taxpayer actually operated to achieve those goals and if the other two prongs were met.

On remand, the Tax Court held that the moral and mental improvement exemption was applicable to organizations that directly seek to uplift the general public morality and mentality. In this case, the Tax Court found that the company did not provide such services. Rather, it concluded that the company essentially provided support services for existing institutions by providing management services, procuring school supplies, and the like. It noted that while the company did provide valuable services to the schools it serviced, those schools provided the services that would be eligible for a tax exemption. Therefore, the company was not entitled to a tax exemption.

The Tax Court also found that the company was not entitled to an exemption because it failed to demonstrate that the use and operation of the property was not for a profit. The exemption statute provides that the real property cannot be used for profit, excluding cases where the charitable work is supported partly by fees received from or on behalf of beneficiaries using the buildings so long as the building is wholly controlled by, and its entire income used for, charitable, benevolent or religious purposes. In essence, a court must inquire where the funds go. If the property generates income and it goes into someone’s personal pocket, then the organization would not be entitled to an exemption. Salaries for organizational directors, if reasonable, would not negate the exemption. In this case, the Tax Court found that the company provided space to some related for-profit entities at below market rentals and subsidized the charges for space to those entities. The Tax Court concluded, based on the facts, the company was using its name to promote joint profit-making ventures with related entities. Therefore, the property was not being used exclusively for nonprofit purposes and was not entitled to an exemption.


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