Three Superior Court judges have upheld a state Tax Court decision in West Windsor’s case against Roszel Road-based International School Services Inc., which requires it to pay taxes, despite its nonprofit status.
The decision, handed down on April 20, comes after six years of back-and-forth litigation. Appellate judges Francine Axelrad, Clarkson Fisher, and Paulette Sapp-Peterson ruled that ISS failed to prove that the operation and use of its property was non-profit.
Referencing an earlier tax court decision, the Appellate Court ruled that “the judge had ample basis in the record to conclude that a portion of ISS’ profit was being used to subsidize the operations of its profit-making affiliates through the provision of professional services that were not ‘charged back,’ below-market rents, and unsecured loans that do not appear to have been timely repaid.”
Further, the decision stated, “although ISS has an educational mission, it has lent its name and reputation to promote joint profit-making ventures, as evidenced, in part, by its creation of ISG [International Schools Group] and ISSFIN [its financial network] which operate out of the same building as ISS and share officers and staff,” as well as its website mission statement that promotes ISSFIN’s “money and asset management products.”
A loss would have cost the township over $1 million in retroactive tax payments that the ISS was seeking to collect from the township.
ISS is a “multi-million dollar corporation that provides services to school overseas, but a good percentage of those schools are run by major oil companies and other corporations,” said Township Attorney Michael Herbert. “Also, we found that it is in partnership with an insurance company and was engaged in profit-making activities, and on that basis, the court found that they were engaged in profit-making, and therefore did not qualify for tax exemption.”
“They had a gross annual income of over $35 million a year,” Herbert added.
ISS is a nonprofit corporation 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, township officials said. The ISS acquired four parcels of real estate at 15 Roszel Road in 1989 and subsequently applied for tax exemption on 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 re-examined the designation in 2002 and decided that ISS was not qualified for the exemption.
They came to the conclusion after finding that 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. Officials also argued 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.
“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,” Herbert wrote in a prior memo. “In fact, 45 percent of the income realized by ISS was derived from corporate clients.”
According to a state Supreme Court decision, 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.
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 in favor of the township, ruling that ISS failed to meet the dictates of 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 an Appellate Court reversed the 2004 decision and remanded the matter back to the Tax Court on the basis that the judge should have considered the additional prongs.
In 2007, Menyuk conducted a trial, handing down a ruling in 2009. Menyuk reiterated the finding in the original judgment — that its 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. 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, she found 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, she found no evidence suggesting 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. None of the activities described by ISS officials, she added, provided any benefit to the general public.
She also found that ISS operated and maintained the subject property for the purpose of making a profit.
Herbert said that ISS will now have to pay about $820,000 in taxes from 2002 to 2010. “Had we lost, because they would have been able to get interest, it would have been an impact of over $1 million to West Windsor,” Herbert explained.
“We’re relieved and very pleased by the decision of the Appellate Division, which is unanimous, and we hope that it’s going to be some relief to property owners in the town,” Herbert said.
ISS has the ability to appeal to the Supreme Court by filing a petition for certification. “They have to do that within 20 days; I don’t know whether they’re going to do that,” Herbert said. “The decision is very fact-sensitive, it’s well-grounded, and we believe it would sustain any appeal.”
