Princeton Loses Appeal in Bid to Dismiss Tax-Exemption Suit

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Princeton University
Princeton is the fifth-richest U.S. university and among the most selective. Photographer: Craig Warga/Bloomberg

Princeton University must face a lawsuit challenging its New Jersey property-tax exemption, a state appeals court ruled in clearing the way for a trial that could affect the tax status of all nonprofit colleges.

Four residents of the town of Princeton sued to revoke the school’s tax exemption, in part because it shares royalties with faculty, mostly from a patent that Eli Lilly & Co. turned into the cancer drug Alimta. The university appealed Tax Court Judge Vito Bianco’s rejection of its claim that the case should turn on whether making a profit is its “dominant motive.”

“This is really a repudiation of the university’s claim that it’s immune from challenge to tax exemption,” Bruce Afran, an attorney for the residents, said in a telephone interview.

Princeton, the fifth-richest U.S. university and among the most selective, said it will now prepare for trial and won’t appeal further. The April 17 ruling by the state appellate division rejected the school’s request that the court hear an appeal of Bianco’s ruling before a trial takes place.

“We knew that it was unlikely that the appeal would be accepted,” spokesman Martin Mbugua said in a phone interview.

The university had previously said that arguments by the residents “potentially jeopardize” all nonprofit institutions, including schools, hospitals, charities and houses of worship. The school said Bianco’s ruling may encourage many other taxpayer groups to sue nonprofits.

License Income

Filing arguments in support of Princeton were Rutgers University, the Association of Independent Colleges and Universities in New Jersey, the Center for Non-Profit Corporations and the New Jersey Association of Independent Schools.

Princeton patented a compound by a chemistry professor that Lilly used to create Alimta. The school reaped $524 million in license income from 2005 to 2012, mostly from Lilly, according to court records. It used part of the money to build a new chemistry building and pay $118 million to faculty through 2011 beyond their salaries.

In court papers, Princeton cited a 1949 court ruling, claiming that a challenger to an exemption must show that a school’s “dominant motive” is making a profit.

“Established New Jersey law is crystal clear that a university’s exemption can be voided in its entirety only if the school’s dominant motive is profit,” university lawyers wrote.

Settled Law

Princeton argued that Bianco arbitrarily “rejected settled New Jersey law” that dominant motive is to be used to weigh challenges to a school’s property-tax exemption.

“Aside from the marked lack of respect the tone of this argument shows toward a senior tax judge who has sat for 15 years without being reversed, this hyperbolic arguments has one primary problem: none of it is true,” Afran said in a filing in response to Princeton’s argument.

In 2011, the state Supreme Court ruled “expressly, directly and without equivocation” that the 1949 decision is “not controlling” in cases challenging tax-exempt status, he wrote.

The case is Fields v. Trustees of Princeton University, 5904-14, Tax Court of New Jersey (Morristown).

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