On certification to the Superior Court, Appellate Division, whose opinion is reported at
The opinion of the court was delivered by: Justice LaVECCHIA
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
International Schools Services, Inc. v. West Windsor Township
LAVECCHIA, J., writing for a majority of the Court.
In this local property tax appeal, the Court considers whether plaintiff International Schools Services, Inc. (ISS) was properly denied a tax exemption for 2002 and 2003 under N.J.S.A. 54:4-3.6.
ISS has owned and occupied the West Windsor Township property at issue in this appeal since 1989. ISS is a nonprofit corporation and maintains a tax-exempt status under the Internal Revenue Service Code. It was founded in 1955 for the purpose of ensuring that American children living overseas receive a quality education. As of 2002 and 2003, ISS had served approximately 800 schools in 185 countries. It assists the schools by selecting qualified teachers, procuring school supplies, providing management operations, and making grants to promote educational curricula. Between 1998 and 2004, ISS operations ran at a net loss in every year except one. A Board of Directors governs ISS, while daily management responsibilities are handled by paid staff.
ISS maintains interrelationships with a number of nonprofit and for-profit corporations. With regard to the for-profit corporations, Independent Schools Group, Inc. (ISG), provides insurance and investment services to the educational community abroad. ISS provided start-up funding for ISG and extended to ISG an unsecured line of credit. ISG made interest payments on the credit account, but the record does not suggest that ISG made principal payments when they came due. ISG entered into an agreement with the financial services entity of Raymond James Financial Services, allowing that organization to service the international education community on behalf of ISG. ISG leased office space from ISS on its property. The lease agreement appears to reflect below-market rates for office space. The president of ISS served on ISG's Board and was its interim president for a brief period of time. Another for-profit corporation, ISS Financial and Insurance Network, Inc. (ISSFIN), was founded to offer insurance products to the educational community abroad. ISSFIN was a joint creation of ISG, which had a fifty-one percent interest, and Gables Financial Group, Inc., which had a forty-nine percent interest. ISS's president served as ISSFIN's chairman of the Board during the relevant period, and ISSFIN leased space from ISS at one-third to one-quarter of what ISS could charge for the space on the open market.
Although West Windsor Township granted ISS a property tax exemption from 1990 through 2001 for the portions of ISS's property that it actually occupied, the exemption was denied for 2002 and 2003 based on the Township's review of ISS's activities. ISS appealed to the Tax Court, which applied the three-prong test set forth in Paper Mill Playhouse v. Millburn Township, 95 N.J. 503 (1984), and found that ISS had not satisfied the first prong requiring that the entity seeking tax exemption be "organized exclusively for the moral and mental improvement of men, women, and children." The Appellate Division reversed that decision, and remanded for the Tax Court to address the remaining prongs of the test. 381 N.J. Super. 383 (App. Div. 2005).
On remand, the Tax Court held that ISS had not satisfied the second prong of the Paper Mill Playhouse test because the schools, not ISS, were performing the activities sufficient for tax exemption, and ISS was merely assisting them. Focusing on the rates charged for rent to ISG and ISSFIN, the unsecured loan to ISG, and other activities, the Tax Court found also that ISS had not satisfied the third prong of the test.
The Appellate Division disagreed with the Tax Court with regard to the second prong of the Paper Mill Playhouse test, but found that ISS failed the third prong due to the subsidies it provided to ISG, ISSFIN, and to Gables Financial through its ownership interest in ISSFIN. 412 N.J. Super. 511 (App. Div. 2010). The Supreme Court granted ISS's petition for certification. 203 N.J. 96 (2010).
HELD: West Windsor Township properly denied a property tax exemption to International Schools Services, Inc. (ISS), a nonprofit entity, for the tax years 2002 and 2003 because the commingling of effort and entanglement of activities and operations by ISS and its profit-making affiliates was significant and substantial, with the benefit in the form of direct and indirect subsidies flowing only one way-from ISS to the for-profit entities.
1. N.J.S.A. 54:4-3.6 exempts from taxation a building actually used by an entity "organized exclusively for the moral and mental improvement of men, women and children," but provides that any portion of the property that is leased to a profit-making organization will be taxed. Property tax exemption statutes are strictly construed and the party seeking exemption bears the burden of proving entitlement to the exemption. In Paper Mill Playhouse, the Court delineated three criteria that an entity must satisfy in order to obtain an exemption under the statute: 1) it must be "organized exclusively for the moral and mental improvement of men, women and children"; 2) its property must be actually and exclusively used for the tax-exempt purpose; and 3) its operation and the use of its property must not be conducted for profit. A legislative amendment to the statute subsequently eliminated the second prong's exclusivity requirement. The statute presently permits an exemption for property that is "actually used" in connection with tax-exempt functions. The Paper Mill Playhouse test has been adjusted accordingly. (Pp. 16-21)
2. The Court reviews prior opinions addressing whether an organization was conducted for profit. Those cases are not controlling because they differ in kind, factually, from this matter by focusing on whether the exempt entity engaged in forbidden profit-making activity for itself. The cases demonstrate, however, that the proper application of the Paper Mill Playhouse test depends on the facts. (Pp. 21-28)
3. The Legislature's amendment of the statute to eliminate the exclusivity-of-use requirement means that property of a nonprofit exempt-entitled entity can be used for non-exempt purposes so long as the two purposes can be separately accounted for and so long as the non-exempt use is never subject to the exemption. The question here is whether the Legislature's elimination of the exclusivity requirement allows a nonprofit entity to conduct for-profit activities in a commingled fashion on its owned and occupied property, and not just to support for-profit activities of the entity but also to support the for-profit activities of others. The Court is persuaded that the Legislature never intended to allow a nonprofit entity to avail itself of the benefits of the non-exclusivity clause of prong two and engage in for-profit activities that are not conducted so as to be evident, readily ascertainable, and separately accountable for taxing purposes. Rather, the legislative change presumes an ability to identify, segregate and measure any for-profit activity. That way, the public policy of requiring all non-exempt property to bear its fair share of the tax burden will be achieved. Permitting a nonprofit entity to claim an exemption when it has become inseparably entangled with for-profit entities would confer on the for-profit entities an advantage at the expense of the taxpaying public. (Pp. 28-30)
4. The burden is on the claimant to establish the right to the exemption. The claimant has the corollary duty to conduct its affairs in such a fashion as to allow local taxing authorities to readily determine its eligibility for exemption. Here, the inability to discern between the nonprofit activities on ISS's owned and occupied property and its activities in that location that were in furtherance of the interests of various for-profit entities is the fault of ISS. Because ISS commingled its financing and operations with ISSFIN and ISG, for-profit benefits are flowing from ISS to related (and unrelated) for-profit entities, including through below-market rents, unsecured loans that apparently were not timely repaid, and other activities. Based on the record, the commingling of effort and entanglement of activities and operations by ISS and its profit-making affiliates were significant and substantial. And, all of the benefit in the form of direct and indirect subsidies flowed one way: from the exemption claimant ISS to the for-profit entities. On this set of facts, the Appellate Division properly affirmed the denial of the tax exemption to ISS for tax years 2002 and 2003. (Pp. 30-32)
The judgment of the Appellate Division is AFFIRMED.
JUSTICE RIVERA-SOTO, DISSENTING, agrees that the commingling by ISS is undisputed, but asserts that the amount and extent of the commingling should be established to avoid needlessly denying the tax exemption for the entire property, rather than just the portion used for profit-making purposes.
CHIEF JUSTICE RABNER and JUSTICES LONG, ALBIN and HOENS join in JUSTICE LaVECCHIA's opinion. JUSTICE RIVERA-SOTO filed a separate, dissenting opinion.
Argued January 4, 2011 Decided July 6, 2011
JUSTICE LaVECCHIA delivered the opinion of the Court.
In this local property tax appeal, we review a judgment that denied International Schools Services, Inc. (ISS) a tax exemption under N.J.S.A. 54:4-3.6. ISS challenged the 2002 and 2003 property tax assessments imposed on its office condominium units in West Windsor Township (Township), claiming it was entitled to exemption for property actually used in the work of a nonprofit corporation "organized exclusively for the moral and mental improvement of men, women and children." N.J.S.A. 54:4-3.6. For many years prior, the portion of the property owned and occupied by ISS had been exempted from local property taxation on that basis; ISS had not claimed an exemption for those portions that it did not occupy and that were dedicated to the operations of its related for-profit affiliates. However, in tax years 2002 and 2003, based on a review of ISS's recent activities, the Township denied the exemption for the ISS-occupied property.
ISS appealed, first to the Tax Court and thereafter to the Appellate Division. Both courts applied the statutory test for determining whether buildings used by associations and corporations organized for the moral and mental improvement of men, women and children are entitled to exemption from taxation, as that test has been explicated in Paper Mill Playhouse v. Millburn Township, 95 N.J. 503 (1984). Although their reasoning was not perfectly aligned, both courts reached a common determination: ISS had conducted itself in a manner that entangled its activities and operations on its property with the advancement of for-profit activities of other related and unrelated for-profit entities. That commingling of effort and entanglement of activities and operations by ISS and its for-profit affiliates was found to be significant and it all flowed to the benefit of the for-profit entities. Thus, both courts concluded that because ISS allowed its property to be used for profit, it was not eligible for exemption during the tax years in issue.
In this appeal ISS claims that the judgment of the Appellate Division is in error for holding that its owned and occupied real property was not entitled to exempt status. It also requests clarification of the statutory test's application in these circumstances.
We granted ISS's petition for certification, International Schools Services, Inc. v. West Windsor Township, 203 N.J. 96 (2010), as much to settle the analysis that pertains in these circumstances as to review the holding against ISS. We now affirm the judgment of the Appellate Division.
I. A. The following description of the property and activities of ISS is drawn from the full and detailed record developed by the Tax Court in this matter.
The property whose status is the subject-matter of this appeal (Property) is located at 15 Roszel Road in West Windsor Township. ISS has owned and operated the Property, consisting of four office condominium units, since 1989, and has located its own central office at the Property since that time. During the years at issue, ISS employed approximately fifty people in its central office. It also leased portions of the space available at the Property to other organizations, including two organizations with which it was affiliated. For each year from 1990 through 2001, the Township granted ISS a property tax exemption, pursuant to N.J.S.A. 54:4-3.6, for the portions of the Property actually occupied by ISS. ISS paid property tax on those portions of the Property which were vacant or were leased to other tenants. On October 6, 2003, the Township revoked ISS's property tax exemption for the tax years 2002 and 2003 and ISS filed suit.
B. ISS is organized as a nonprofit corporation and maintains a tax-exempt status under Section 501(c)(3) of the Internal Revenue Service (IRS) Code. See 26 U.S.C.A. § 501(c)(3). It was founded in 1955 by Arthur Sweetser, whose goal was to ensure that American ...