The Dangers of Commingling 

I’m no lawyer, but it would seem that the New Jersey Tax Court put some interesting handwriting on the wall that all nonprofits need to read and think about.  The Tax Court ruled that a one-million square foot, 700 bed nonprofit hospital was not exempt for property tax purposes because it was, essentially, running a for-profit business (AHS Hospital Corp. v. Town of Morristown).  Nice payday for Morristown!  (Actually, if the ruling holds, the hospital will need to pay Morristown $2.6 million for each of three years, 2006-2008.)

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How did the Court reach this conclusion?  Rather simply, actually.  First, the Court looked at the history of nonprofit hospitals and concluded that such hospitals today are nowhere like their predecessors, who really were providing free medical services to the poor.  Today, hospitals provide a full array of medical services to clients regardless of their ability to pay and that, according the Court, is not consistent with the tax exemption for nonprofit hospitals that New Jersey adopted in 1913.

Second, since the hospital allowed for-profit, private doctors to use any space in the hospital and could conduct business in that space that would be billed to their for-profit practices, the hospital was violating the “substantial commingling” of for-profit and nonprofit business–another no no.  (In addition to having private medical practices use their hospital space, not an uncommon phenomenon, it seems, health system of which Morristown Memorial Hospital is a part, has an “offshore, captive insurance company” (I have no idea what that is), interests in some “health related business interests,” and other for-profit ventures.)  All of this signaled to the Court that the hospital was engaged in making a profit.

Princeton University is facing a similar challenge that started in the courts in 2013 and is working its way through the system.  A group of residents challenged the University’s tax exempt status claiming it, too, was making big profits by, for example, leasing campus owned building space to for-profits companies (think restaurants and shops on ground floors of buildings that housed University offices above) and through the patents won by its faculty.  That’s a lot of commingling, it would seem, but I don’t know if it is “substantial commingling,” and that only the Courts can decide.

You don’t have to be a hospital or institution of higher education to worry about this notion of commingling; you simply have to be a nonprofit trying to survive.  There isn’t a jurisdiction in this country that doesn’t want, and probably need, more income.  Property taxes are a relatively easy way to score that income.  (Notice I didn’t say a way without controversy.)  Pulling that exemption from nonprofits can be a very lucrative source of those increased dollars, depending upon how many nonprofits own how much property in that jurisdiction.  One of the ways that many nonprofits make a little extra income is by renting out unused office space to others; sometimes that other is another nonprofit, sometimes not.  Commingling?  Sometimes, nonprofits rent out their space for conferences and parties and weddings, oh my!  Commingling?  What about that part-time counselor who uses the nonprofit’s phone to make appointments with private clients, whom he might see at the nonprofit offices or elsewhere?  Or that nonprofit that puts leases its land for a cell tower?  Commingling?

We all need to make a profit if we want to be sustainable for the long haul.  This new ruling – despite the fact that the decision could be appealed and that the ruling holds no sway outside of New Jersey – should make us all think a bit more carefully about how we run our mission-driven businesses.