Settlement Update on New Jersey Tax Court’s Closely-Watched AHS Hospital Decision

Several months ago, this blog reported on Judge Vito Bianco’s denial of Morristown Memorial Hospital’s (the “Hospital”) property tax appeal. While this was only a Tax Court decision, it was closely-watched because it had the potential to eviscerate the property tax exemption for modern integrated hospitals, and potentially for other nonprofit organizations with complicated corporate structures or relationships.

On November 11, it was reported that the Hospital entered into a global settlement with the town of Morristown, pertaining to a dispute over the Hospital’s property tax bill from 2006-2015. Under the agreement, the Atlantic Health System (“Atlantic Health”), owners of the Hospital, agreed to pay the town of Morristown $15.5 million dollars — including an upfront payment of $10 million — over the next 10 years. While Judge Bianco’s decision held that nearly the entire Hospital property was taxable, save for the limited exceptions of a visitor parking garage, fitness center, and auditorium located on site, under the settlement agreement, Atlantic Health will begin making annual tax payments on only approximately 25% of the Hospital’s property.

Additionally, if the Legislature alters the tax exemptions, resulting in greater tax liability, Atlantic Health is responsible for the increased amount. But, if the tax exemptions are amended to reduce the Hospital’s property tax liability, Atlantic Health still must honor the payment terms of the agreement.

With the case now settled, the Tax Court decision will stand and property tax exemptions for non-profit hospitals can be expected to be challenged by other municipalities employing the same arguments that were successful in this case. Until there is a legislative fix, property tax exemptions for non-profit hospitals will stand on shaky ground. Betsy Ryan, New Jersey Hospital Association CEO and president, has indicated that lobbying efforts will take place to bring certainty to hospitals on this issue. Stay tuned to this blog for future updates.

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