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Princeton University's Tax-Exempt Status is Challenged

A group of Princeton University's neighbors think it should lose its tax exempt status under New Jersey law. In the law suit, Plaintiffs argue that Princeton University violates the provisions of its tax-exempt status because it is earning hundreds of millions of dollars in patent royalty income and is distributing some of that money to its faculty. They claim that Princeton should be put back on the property tax rolls since it is acting like a business.

The suit has survived a motion for summary judgment. A state trial judge, Judge Vito Bianco, has ruled that the case can continue.

Princeton made a deal with Eli Lily to license the university-developed cancer drug Alimta. The development of the drug was based in part on the patented research of a former Princeton professor, Edward C. Taylor. The university has made hundreds of millions from Alimta and has shared portions of that revenue with Mr. Taylor. It shares revenues from other patents with other professors as well. The Plaintiffs' position is that the money should have gone to the university departments to further research - not to individual professors. Distributing profits in this fashion is against the New Jersey law which defines a non-profit.

Further, Princeton University went to court to keep another drug maker, Teva Pharmaceutical Industries, from making a generic version of Alimta. They are acting like an aggressive pharmaceutical company, not a non-profit anxious to make a cancer drug available to the public.

No one suggests that Princeton's faculty should not share in the money the university makes from Alimta, or other products. The argument is that the university cannot have it both ways under New Jersey's exemption laws -- it cannot claim exemption as a non-profit organization that does not distribute profit, while intentionally commercializing its intellectual property for profit and sharing the profit with its faculty.

The Plaintiffs are represented by Bruce Afran who teaches constitutional law at Rutgers University as well as a seminar on corruption law. Legal costs are being paid by a bequest from the late Eleanor L. Lewis, a borough resident. "Before she died, she entrusted funds to me to bring this lawsuit to relieve the tax burden on residents," Afran said.

In addition to the profit sharing, Plaintiffs claim that more than 20 campus buildings host extensive commercial activity. Examples are First Campus Center and McCarter Theatre which sell tickets to the general public for many events and performances and the university also operates retail food establishments.

The Princeton University Press lost its non-profit status in 1961 because it used its presses for commercial as well as academic purposes. "Princeton University Press is a private, independent publishing company occupying university land," said Plaintiff's attorney, Bruce Afran. "They publish blockbuster best sellers. The building they occupy is assessed at $9.5 million but no taxes are being paid on it."

Another example of a business is McCosh Infirmary, which Afran says operates just like private medical offices in the borough of Princeton, charging a fee for its services, accepting insurance payments, and offering a student health plan to students. "Though the University owns it, it's simply a medical practice," he said. The building, assessed at $7.5 million, could generate $150,000 in municipal taxes if its exemption were overturned, he said.

The lawyer for the Plaintiffs told the Times of Trenton that, "People in Princeton pay at least one-third more in taxes because the university has been exempt all of these years. If all of the school's property were taxed, the bill would come to roughly $28 million a year."

Other cities that are strapped for cash and have millions of dollars of property off the tax rolls because they are owned by non-profits are also moving on this issue.

In March the mayor of Pittsburgh sued the University of Pittsburgh Medical Center on grounds that the teaching hospital had a "profit motive" and, therefore, shouldn't be tax exempt. The city sought to recover payroll as well as property taxes going back to 2007. The medical center filed a countersuit, claiming the city's actions violated the due process and equal protection clauses of the Constitution because it singled out the hospital among all of Pittsburgh's nonprofits. The litigation is ongoing.

The mayor of Providence, R.I. is going after Brown University. "Our taxpayers already subsidize the tax-exempt institutions in this city," Mayor Angel Taveras said. "It takes the revenue collected from 19,000 taxpayers" to account "for the $38 million in property taxes not paid by Brown University."

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