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International Schools Services, Inc. v. West Windsor Township

412 N.J. Super. 511, 991 A.2d 848 (App. Div. 2010)

TAXATION; EXEMPTIONS — Even though a parcel may be exempt from real estate taxation because its owner is a non-profit entity organized for otherwise exempt purposes, if the property is used for non-exempt profit making purposes, the exemption from taxation may be denied.

A non-profit corporation that provided services for schools located abroad challenged its property tax assessments for the 2002 and 2003 tax years. It owned office condominium units. The units housed the corporation’s home office staff of fifty people, of which ten were senior staff who oversaw or supervised the development of the service programs and recruitment programs at international schools. The remaining forty were support staff. A three prong statutory test exists for tax exemption – the corporation must prove that it was organized exclusively for the moral and mental improvement of men, women, and children; the property must actually be used for the tax exempt purpose; and the operation and use of the property must not be conducted for profit. The corporation alleged that the property was exempt from taxation as it was actually used for non-profit purposes by a corporation organized exclusively for the moral and mental improvement of men, women, and children.

In the two tax years, the corporation’s mission, as explained on its website, was to promote support of schools around the world that were providing an education to Americans and those requiring an American-style education in English. The corporation provided educational staff and purchased discounted school supplies for the schools, provided services to businesses to manage schools for the dependents of their employees, and provided assistance in financial management and cash management functions to the schools and their foundations.

During these two years, the corporation formed alliances with for-profit providers of services that were marketed to the international schools by its own for-profit affiliate. The president of the non-profit also served as president and chairman of the board of the for-profit affiliate during the two tax years. One telephone number listed for the for-profit affiliate was listed by the non-profit on its letterhead for its headquarters at the subject property. During the years at issue, the non-profit extended an unsecured line of credit to the for-profit affiliate extending.

The affiliate partnered in the second tax year with another for-profit to form a third for-profit entity. This third for-profit company kept a regional sales and marketing office at the non-profit’s headquarters, and paid below market rent to the non-profit property owner. Other tenants paid a shared market value rent and for actual utilities consumed.

The Appellate Division held that the corporation satisfied the first prong, finding that the moral and mental improvement exemption did encompass a general educational purpose. Notably, the Court said the corporation’s statement of purpose arguably suggested a general public purpose in promoting its ideas which had, as a benefit, the moral and mental improvement of men, women, and children. On remand, the Tax Court entered a judgment denying the exemption on the grounds the property was not used for the corporation’s stated public purpose, and was maintained to make a profit. The corporation appealed again.

The Appellate Division first ruled the evidence supported the corporation’s stated public purpose. It said a property may qualify for this exemption without direct proof that the undertaken activities improve any particular individuals morally or mentally. The Court said the activities had the benefit of attracting people to countries where might not otherwise relocate and supported foreign schools in the teaching of democracy and independent thinking. These activities were conducted by trained staff at the subject property.

However, the Court upheld the denial of the exemption solely based upon its conclusion that the property was used for the non-exempt purpose of making a profit. It concluded that a portion of the corporation’s profit was used to subsidize operations of its profit-making affiliates through below-market rents by way of unsecured loans. The corporation also lent its name and reputation to promote joint profit-making ventures operating out of the same building as the non-profit enterprise. The Court also found that the staff at the non-profit company had provided start-up accounting services, the cost of which was not charged back to the profit-making entities.

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