International Schools Services, Inc. v. West Windsor Township

July 12, 2011 by Justia

The issue before the Supreme Court in this case was whether plaintiff International Schools Services, Inc. (ISS) was properly denied a tax exemption for 2002 and 2003 under the state tax code. ISS has owned and occupied the West Windsor Township property at issue in this case since 1989. ISS is a nonprofit corporation and maintains a tax-exempt status under the Internal Revenue Service Code. 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 found that ISS had not satisfied the first prong of a three-part test (the "Paper Mill Playhouse" test) 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. On remand, the Tax Court held that ISS had not satisfied the second prong of the 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 some of its for-profit affiliates, 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 test, but found that ISS failed the third prong due to the subsidies it provided to its affiliates. Upon review, the Supreme Court found that West Windsor Township properly denied a property tax exemption to ISS for the tax years 2002 and 2003 because the commingling of its effort and entanglement of its activities and operations with 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.