Ackerman, John A., J.s.c.
This matter presents for the first time in this State the question whether the granting of a property tax exemption under the newly enacted exemption statute for fraternal organizations, N.J.S.A. 54:4-3.26, adopted in 1971, to an Elks Lodge which adheres to or is governed by an "all-white" membership policy is violative of the 14th Amendment to the Federal Constitution and Art. I, pars. 1 and 5, of the 1947 State Constitution.
The action has been drastically changed and limited in its scope since it was instituted late in 1970 and some reference thereto is desirable in order to understand the scope of the relief sought by plaintiffs. It was originally designed as a class action attacking all tax exemptions and all liquor licenses granted to all Elks lodges in the State of New Jersey. The complaint was filed by 21 individuals, 8 being citizens and taxpayers of Nutley in Essex County and 13 being citizens and taxpayers of Rutherford in Bergen County, suing on behalf of themselves and "all other citizens of other municipalities * * * similarly situated." Defendants specifically named were the Nutley and Rutherford Elks Lodges and Corporations,*fn1 the municipal governing bodies and tax assessors of both municipalities, the Essex and Bergen County Boards of Taxation, the Acting Director of the Division of Taxation, and the Director of the Division of Alcoholic Beverage Control, all of whom were served and answered. Also named as defendants were "all other Municipal Tax Assessors,
County Boards of Taxation, Municipal Governing Bodies [and] Elks Lodges similarly situated."
The gravamen of the complaint with respect to taxes was that there was no statutory authority for exemptions granted to Elks lodges, either under the charitable exemption section, N.J.S.A. 54:4-3.6, or under the fraternal organization exemption section, N.J.S.A. 54:4-3.26, as it then stood. Plaintiffs charged that Elks lodges were not exempt under N.J.S.A. 54:4-3.6 because their properties were not exclusively used for charitable purposes nor were they organized exclusively for charitable purposes. They further charged that any exemptions purportedly granted to Elks lodges under N.J.S.A. 54:4-3.26 as it then existed were absolutely nugatory since that statute had been held in Rutgers Chapter of Delta Upsilon Fraternity v. New Brunswick, 129 N.J.L. 238 (Sup. Ct. 1942), aff'd 130 N.J.L. 216 (E. & A. 1943), not only to be unconstitutional, as violative of the "uniformity of taxation" provision of the then 1844 State Constitution because it excluded exemptions for college fraternities, but also to be void in its entirety because the exclusion of exemptions for fraternities was an integral part thereof. It was further asserted that, in any event, any exemptions granted to the Rutherford and Nutley Lodges and to other Elks lodges in the State were violative of the State and Federal Constitutions because such local lodges were a part of a national organization which expressly excluded non-whites from membership and because said lodges in fact followed the policy and practice of excluding non-whites. Relief sought with respect to taxes was not only the withdrawal of exemptions for the current tax year 1971 as well as for future years, but also the recovery of back taxes from each Elks Lodge. With respect to liquor licenses, plaintiffs sought the revocation of such licenses granted to the Nutley and Rutherford Lodges and to all other Elks lodges on the ground that the same were unlawfully granted in view of their racially discriminatory membership policies and practices. [128 NJSuper Page 72] Following a preliminary pretrial conference to work out a schedule for the further conduct of the litigation and for the determination of challenges to the ability to maintain a class action and to the right to some portions of the relief sought, the court heard certain motions and issued an unpublished opinion in which it ruled that a class action as contemplated by plaintiffs could not be maintained and that, unless taxpayers of other municipalities were added as named plaintiffs and additional Elks lodges were named as direct defendants, plaintiffs would be limited to attacks on the exemptions and liquor licenses of the Nutley and Rutherford lodges alone.*fn2
I also made rulings with respect to the necessity of exhaustion of administrative remedies by plaintiffs. In view of the nature of the tax questions involved and the fact that different county tax boards would be involved with the possibility of diverse decisions and multiple appeals, I held that exhaustion of administrative remedies with respect to the tax matters would be waived and jurisdiction would be exercised by the court. Farmingdale Realty Co. v. Farmingdale, 55 N.J. 103, 112 (1969); Matawan v. Monmouth Cty. Board of Taxation, 51 N.J. 291, 296-297 (1968). With respect to the matter of liquor licenses, however, since the Director was the sole administrative agency involved and there was no danger of conflicting decisions from his office, and since he had broad powers to initiate suspensions if he deemed them warranted, see Liptak v. Division of Alcoholic Beverage Control, 44 N.J. Super. 140 (App. Div. 1957), and to consolidate cases and take other steps to simplify hearings, see Pleasantville Taxpayers v. Pleasantville, supra, 115 N.J. Super. at 90, I ruled that administrative remedies before the Director had to be resorted to and exhausted.
Following this ruling the plaintiffs decided not to add any new parties plaintiff or defendant and, accordingly, only the tax matters with respect to the Rutherford and Nutley Lodges remained before the court.
In the latter part of 1971, after much public discussion, the Legislature enacted a new exemption for fraternal organizations, applicable to the tax year 1972 and thereafter, and amended N.J.S.A. 54:4-3.26 to read as follows:
All real and personal property used in the work and for the purposes of one or more fraternal organizations or lodges, or any association or society organized on the lodge plan, or affiliated associations, whether incorporated or unincorporated, shall be exempt from taxation under this chapter, if the legal or beneficial ownership of such property is in one or more of said organizations, lodges, associations or societies, and no part of such property is used for pecuniary profit, provided that each such organization, lodge, association or society is also organized and operated in substantial part for charitable or educational purposes and demonstrates these aims in its programs and activities.
Apart from the provision excluding exemptions for college fraternities, which was eliminated, the new statute contained exactly the same language as the predecessor statute except for the added proviso that, in order to qualify for exemption, a fraternal organization must be organized and operated in substantial part for charitable or educational purposes and demonstrate these aims in its programs and activities. In December 1971 the Division of Taxation issued guidelines for the implementation of the new statute to assessors and county tax boards. These provided in part as follows:
2. With respect to the requirement that such organizations must be organized and operated in "substantial part" for charitable and educational purposes, the following guidelines have been established for interpreting the qualifying phrase "substantial part" as it relates to income:
(a) The financial statement of an applicant must substantiate the fact that a minimum of 33 1/3% of its net income and at least 10% of its gross income from all sources for the pretax year has been applied to charitable or educational purposes.
As stated above, the proviso requiring substantial charitable activities by qualifying fraternal organizations added a new element which was not required for exemption under the terms of the old statute. It had been held under the old statute, prior to the decision in the Rutgers case in 1943, that it was void in its entirety, that an Elks lodge was entitled to exemption so long as its property was not used for pecuniary profit. Hoboken v. Hoboken Lodge No. 74, B.P.O.E. of
America, 123 N.J.L. 506 (Sup. Ct. 1939); Elk Realty Co. of Nutley v. Nutley, 18 N.J. Misc. 691, 16 A.2d 202 (St. Bd. Tax App. 1940); Trenton Lodge No. 105, B.P.O.E. v. City of Trenton, 18 N.J. Misc. 513, 15 A.2d 97 (St. Bd. Tax App. 1940); see Camden v. Camden Cty. Board of Taxation, 121 N.J.L. 262 (Sup. Ct. 1938), aff'd 122 N.J.L. 381 (E. & A. 1939). Any problems arising from mistaken but continued application of the old exemption statute after the Rutgers case and from lack of strict adherence to the law after that decision by local assessors (See Report of Commission to Study the Laws of New Jersey Exempting Real Property Held by Religious, Educational, Charitable, and Philanthropic Organizations and Cemeteries from Taxation (January 30, 1970), 18-21, 41) were avoided and rendered moot by the adoption of the new statute, at least so far as the future was concerned, and it was clear that from 1972 on a fraternal organization had to be organized and engaged in substantial part in charitable or educational work in order to qualify for an exemption.
In view of the new enactment and doubts as to the extent to which plaintiffs would be entitled to recoupment of back taxes, even if they were successful, the court made a suggestion, to which all parties agreed, that the issues be moulded to eliminate plaintiffs' challenges to past exemptions and their attempts to recover past taxes and to focus their attacks on current exemptions granted or to be granted to the Nutley and Rutherford Lodges and to test the applicability and constitutionality of the new exemption statute with respect to those two lodges. In May 1972 the original complaint was dismissed. An amended complaint was filed asserting that neither the Nutley nor the Rutherford Lodge was entitled on the facts to an exemption under either N.J.S.A. 54:4-3.6 or the new exemption statute, N.J.S.A. 54:4-3.26, and charging that any such exemptions, if granted, were unconstitutional because of the racially discriminatory Elks' membership policies and practices. No relief was sought with respect to past exemptions or past taxes, nor was there any
attempt to maintain a class action affecting other Elks lodges. No relief was sought as to liquor licenses, and the Director of Alcoholic Beverage Control was not made a party to the amended action.
Thereafter the action was further limited. It was determined that the Nutley Elks Lodge had not been granted an exemption for the tax year 1972. The action was therefore dismissed as to that lodge, the tax assessor and Board of Commissioners of Nutley, and the Essex County Board of Taxation. Subsequently, the eight Nutley plaintiffs were withdrawn from the case. The case thus resolved itself into one involving only the Rutherford Lodge. After extensive discovery and denials of motions for summary judgment, the matter came on for trial. Prior to trial the action was dismissed by consent as to the Director of the Division of Taxation. In addition, although the current tax exemption for the Rutherford Lodge had been applied for and granted only under the charitable exemption section, N.J.S.A. 54:4-3.6, and not under the new fraternal organization exemption statute, all the parties agreed at the trial that, if the lodge were in fact entitled to an exemption under the terms of the latter section, even though not under the charitable exemption section, the court should so find and rule upon the constitutional issue. The issues were thus finally drawn so that the constitutional issues were presented if the ladge met the terms of either exemption statute.
On the basis of the evidence at the trial, I have made certain findings which are set forth hereinafter, and it is apparent therefrom that determination of the constitutional issues cannot be avoided. See Peters v. Hobby, 3 ...