The state Supreme Court has upheld an Appellate Court decision in West Windsor’s case against Roszel Road-based International School Services (ISS) Inc. which will require ISS to pay about $1 million in taxes to the township.
The Supreme Court handed down the decision on July 6, which requires ISS to pay taxes, despite its former nonprofit status. According to Township Attorney Michael Herbert, “the decision has great significance to West Windsor Township.”
“As a result of the determination made by the township to remove the ISS property from its tax exempt status, the township will have received over $1 million in taxes for the 10-year period between 2002 and 2011,” stated Herbert in the memo to the mayor and council. “Had the township not prevailed, the liability to the township would probably be well in excess of that amount, when interest is included.”
As of 2010, ISS paid $97,137.99 in taxes for the property, which has been tax exempt prior to 2002, said Herbert. “Obviously, this will be a significant ratable for years to come,” he said.
The decision — delivered by Justice Jaynee LaVecchia and joined by Chief Justice Stuart Rabner, and Justices Virginia Long, Barry Albin, and Helen Hoens — comes after seven years of back-and-forth litigation. Justice Roberto Rivera-Soto dissented.
The decision essentially marks the end of this case, as the state Supreme Court is the final step in the process since the case does not contain any federal questions, confirmed Herbert.
In the most recent decision on July 6, the Supreme Court judges affirm the earlier Appellate decision. They also discussed an amendment to the state law that eliminated the “exclusivity-of-use requirement for buildings and property of associations and corporations organized exclusively for the mental and moral improvement of men, women and children.”
“That change 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 stated and accounted for and so long as the non-exempt use is never subject to the property tax exemption,” the decision states.
“The question in this case is whether the legislature’s elimination of the exclusivity requirement would allow 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,” stated the decision. “We doubt that the legislature ever envisioned that result.”
The Supreme Court also stated that “to permit a nonprofit entity to claim a property tax exemption when it has become inseparably entangled with for-profit entities would allow indirect taxpayer subsidization of those entities. In other words, a competitive advantage would be conferred on those for-profit entities at the expense of the taxpaying public.”
In the earlier Appellate decision, 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.”
Herbert has said in the past that 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. 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.”
Township officials also found that ISS “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 known 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.”
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.
That first Tax Court decision was reversed by the Appellate Division in 2005 because the Tax Court had not reviewed all of the “prongs” which had to be examined in determining tax exemption.
Then in June, 2007, a three-day trial was conducted on remand by the Tax Court, which issued a second decision in March, 2009 — again determining that the ISS property did not qualify for a tax exemption. That decision was unanimously affirmed in April, 2010, by the Appellate Division, which was affirmed by the Supreme Court.
“We are happy that the question of taxes with ISS is resolved,” said Mayor Shing-Fu Hsueh. “This property will now remain a significant ratable for the Township for years to come.”
