Reasonable comp ensnared in growing tax woes at nonprofits

BVWireIssue #167-4
August 24, 2016

Last year, we alerted you to a case of a nonprofit hospital in New Jersey that lost its property tax exemption because of overly lavish compensation of its executives, improper deals with physicians, and other factors (prior coverage here). We pointed out that this case could trigger similar actions from other municipalities—and that is just what has happened.

On the bandwagon: Almost half of the state's nonprofit hospitals (26 out of 62) are now caught up in tax court cases over property tax exemptions, according to Last year’s case has set a precedent, and it’s a certainty that the issue of reasonable compensation is under the microscope in this new wave of legal actions.

Last year, the Morristown (NJ) Medical Center lost its property tax exemption because its activities were so intermingled with for-profit doings and questionable deals with physicians that it no longer resembled a charitable institution. Plus, the hospital failed to establish that executive salaries were reasonable. Its CEO was paid $5 million in 2005, including perks such as an automobile stipend, a cell phone plan, and a golf club membership. The hospital’s attempt to show that its salaries closely compared to other similar hospitals fell short and was labeled as "wholly self-serving" by the court. The hospital now faces a property tax liability of $2.5 million per year.

Of course, not only nonprofit hospitals are at risk here—nonhealthcare organizations are being targeted. For example, Princeton University is in court over this same issue after it failed to get the case against it dismissed. "The whole country is watching New Jersey in this area," says David Thompson, vice president of the National Council of Nonprofits.

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