After five years of litigation, West Windsor has emerged successfully in defending itself against Roszel Road-based International School Services Inc., which argued that it should not have to pay taxes to the township based on its nonprofit status.##M:[more]##
A loss in the matter would have cost the township over $1 million in retroactive tax payments that the ISS was seeking to get back from the township.
ISS is a nonprofit corporation that was founded in 1955 ostensibly to support overseas schools in which American children were enrolled and to serve those children by advancing the quality of their education. According to a memo sent to the council by Township Attorney Michael Herbert, the ISS acquired four parcels of real estate at 15 Roszel Road in 1989 and subsequently applied for tax exemption and the grounds that the property was organized “exclusively for moral and mental improvement of men, women, and children.”
At that time, a former township attorney issued an opinion that the ISS should be exempt under the statute. However, Township Tax Assessor Steve Benner and Herbert’s office re-examined the matter in 2002 and found that ISS was not qualified for the exemption, Herbert’s memo stated.
“This determination was made on the basis of the far-flung activities of ISS,” wrote Herbert in the memo. He explained that between 1997 and 2000, ISS generated a gross income of over $140 million from a vast array of services, ranging from financial management, facilities planning, consulting, foundation management, the maintenance of bank accounts for schools, and the marketing and provision of financial insurance products.
He also said he found that ISS was a subsidiary of a holding company, the International Schools Foundation, which was the parent, in turn, of a newly formed profit-making organization knows as the International Schools Group, Herbert wrote. “It was notable that ISS provides services on a contract basis to profit and nonprofit schools as well as to corporate clients such as Exxon, Mobil, Unocal, BP Amoco, Arco, Lockheed Martin, and Union Carbide,” he stated. “In fact, 45 percent of the income realized by ISS was derived from corporate clients.”
According to the state Supreme Court, there are three “prongs” that an organization must meet in order to be exempt from paying taxes. First, “it must be organized exclusively for the moral and mental improvement of men, women, and children. Second, it must actually and exclusively use the property for that purpose. Third, it cannot be operated for profit,” wrote Herbert.
Since the township found that the ISS property was not being exclusively used for charitable purposes, the township moved for summary judgment to avoid an expensive trial against ISS. In 2004 Tax Court Judge Gail Menyuk granted the summary judgment, but only based on the first prong. As a result, ISS had to pay back taxes of $357,”423.40 for the tax years 2002 through 2004, and has been paying annual taxes ever since, Herbert said.
However, in 2005, ISS appealed the decision, and the Appellate Division reversed the 2004 decision and sent the matter back for a trial by the Tax Court on the basis that the judge should have considered the additional prongs. Then, in 2007, Menyuk conducted a trial, and her decision was sent to the township this month.
In her decision, Menyuk described testimony given from a former president of the organization during the tax years in question. The former president highlighted the activities and programs with which the organization was involved, including production of two publications, a directory of schools, and a newsletter; the providing of school management services; procurement of school supplies; the providing of foundation management services; maintenance of a website; issuance of grants; and a program of owning and managing international schools.
Menyuk reiterated the finding in the original judgment. “ISS’s audited financial statements for the fiscal years ending June 1998 through 2003 indicated that its principal programs have consistently operated at a profit, although ISS frequently experienced substantial overall net losses from operations,” Menyuk wrote. “The opinion concluded that the losses were a consequence of relatively large general and administrative expenses.”
ISS officials provided testimony during the trial with regard to how the revenues and expenses for each of ISS’s major program areas were accounted for. Menyuk wrote that “during the organization’s inception, the founders clearly had a notion that assisting international schools to provide a first-rate American-style education to Americans and other expatriates living overseas would promote international understanding and as a by-product, world peace,” and that promotion of the organization’s programs might result in the moral and mental improvement of men, women, and children — to satisfy the first prong.
However, “I conclude that those services are not in the nature of important public services of the type that have been found eligible for the moral and mental improvement exemption.”
Further, “I find no evidence suggested that ISS promoted the goals set forth in its certificate of incorporation among the public at large or that ISS educated the general public about its purposes and concerns,” Menyuk wrote. None of the activities described by ISS officials, she added, provided any benefit to the general public.
Menyuk also said that there was no evidence that ISS promoted its activities among the public in general or that it educated the general public about its purposes and goals, “except to the limited extent that a member of the general public may have become aware of its newsletter or stumbled upon the ISS website.
“I also find that ISS operated and maintained the subject property for the purpose of making a profit,” she added.
Mayor Shing-Fu Hsueh said that township officials began investigating a handful of nonprofit organizations around the township after some residents came to them, saying that these organizations did not meet all of the nonprofit criteria. “The taxpayers in West Windsor were subsidizing all of the things they were doing,” he said. Officials began looking into all of the organizations, and found that ISS was one of those groups that should have been paying taxes, and the process to collect those taxes began.
“After six years, finally the tax court made that final decision that West Windsor won the case,” Hsueh said. “If we lost the case, we’d have to pay $1.2 million back.”
“This is a very important victory for West Windsor,” Hsueh said. “It sends the message that West Windsor will not allow anybody to get away with that.”
Hsueh said officials have been looking into other organizations, but would not say which ones. He said if the township received enough information that an organization is not paying its fair share of taxes, “we would take the same position to make sure they are in compliance,” he said. This is the first group that has contested through the tax court, he said.
