Will Town tax hospital?


Could Clara Maass Medical Center turn into a cash cow for the Township of Belleville?

It’s possible – now that a judicial decision that permits a partial taxation of Morristown Medical Center has opened the doors for radical revenue surgery at hospitals around the state by cash-hungry municipalities, as reported by The Star-Ledger last week.

Martin Allen, an attorney with the Warren-based law firm of DiFrancesco Bateman, is currently representing Belleville and six other communities in different parts of the state in tax appeals challenging the tax-exempt status of hospitals in those areas.

It was Martin who persuaded N.J. Tax Court Judge Vito Bianco last summer to lift the exempt status for most of the Morristown hospital, which is part of Atlantic Health System, leading to a settlement in which the hospital – in lieu of an appeal – agreed to pay $15.5 million in back taxes and penalties in addition to annual taxes on part of its property from now to 2025.

In his decision, Bianco found that the Morris hospital – except for its parking deck, auditorium and employee fitness center – failed to qualify as tax-exempt because it functions much as for-profit facilities, operating as “labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities.”

In fact, he noted, non-profit hospitals now realize “significant revenue and pay their professionals – and administrators – salaries that are competitive even by for-profit standards” and these hospitals host private doctors and practices who derive their income working on hospital property.

Therefore, he concluded, these institutions should be paying taxes.

Acting on the basis of that premise, Martin has, thus far, launched similar challenges to the tax-exempt status of non-profit hospitals in Rahway, New Brunswick, Summit, Long Branch, Freehold, Raritan and Belleville.

In Belleville’s case, Martin is filing appeals of “omitted assessments” of Clara Maass for 2014 and 2015 and an appeal for the current year, for which the filing deadline is April 1.

The hope, he said, is that the township and hospital can resolve that the property should be taxed and, following that, “the second stage’’ would be to decide, “what is it worth?”

Kevin Esposito, the township’s assessor, said that the township typically places a “paper” assessment on tax-exempt properties and that the 6.4 acres of Clara Maass property was last assessed in 2007, which is when the township did its last property revaluation.

That assessment was fixed at $89,405,600, which, based on last year’s township tax rate, would account for approximately $3,311,600 in taxes if the entire portion of land were deemed taxable, Esposito said.

“More than likely,” he added, a court will rule that only portions of the property will be taxable. But, he added, “that doesn’t include” the improvements under way at Clara Maass, including upgrades to the emergency room and “additional hospital beds.” How those improvements would factor into the tax equation, if at all, also remains to be seen.

And even if the township’s efforts are successful, it could still end up as a negative to the hospital’s clients, opined Councilman Steven Rovell.

“It’s always nice to have an additional source of revenues in town to defer costs,” he said, “but on the other side, it could be a double-edged sword because Clara Maass could end up passing along the cost to its patients.”

Still, Rovell held out hope that the legislature may find a way to balance the tax burden in a fairer way, despite Gov. Christie’s recent pocket veto of a bill that would have taxed non-profit hospitals under a formula that would apply across-the-board to all such institutions.
But if the lawmakers and the governor can’t get together on a follow-up proposal, and the issue continues to play out in the form of tax appeals, that process could be bottled up for years, predicted Clara Maass attorney Alan Hammer, a member of the Roseland law firm Brach Eichler, which is representing other non-profit hospitals on the same issue.

“There’s a backlog of four years in Tax Court,” he said.

While the Morristown case ended up as a settlement, Hammer said there’s a good possibility that the next case involving a hospital tax issue could end up going to trial, with the aggrieved party asking the appellate court to hear an appeal, and then, on the state Supreme Court.

That being the case, hypothetically, “it could be six, seven years” before an outcome is known, Hammer said. “In the meantime,” he added, “hospitals and municipalities don’t know how to budget” because of this legal uncertainty.

For this reason, Hammer said, it’s likely that either the governor will invite the legislature to send him another bill offering a possible remedy or “the municipalities and hospitals are going to have to negotiate a settlement.”

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