Atlantic City Opera Theater v. City of Atlantic City ( 2021 )

NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
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ATLANTIC CITY OPERA THEATER, :
: TAX COURT OF NEW JERSEY
Plaintiff, : DOCKET NO: 013513-2018
:
v. :
:
CITY OF ATLANTIC CITY, :
:
Defendant. :
:
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Decided: December 16, 2021.
Jacob S. Perskie for plaintiff (Fox Rothschild, L.L.P., attorneys;
Robert P. Lang and Jacob S. Perskie, on the brief).
Anthony J. Marchese for defendant (Chiesa Shahinian Giantomasi PC,
attorneys).
CIMINO, J.T.C.
The issue in this matter is whether the property in question meets the
requirements for tax exemption. Since there are unresolved credibility issues, the
cross-motions for summary judgment are denied and the matter shall be set down
for a trial.
In 2014, Bette Lazzaro purchased Lot 3 of Block 697 of the tax map of the
City of Atlantic City located in the County of Atlantic. The property is commonly
known as 1619-17 North Mississippi Avenue and is located in the R-1 Residential
Zone. Atlantic City is a coastal resort community and the parties agree that there are
many properties utilized as vacation homes along the New Jersey coast.
The property assessment card provided by the City indicates that there is a
structure on the property described as a two-story colonial built in 1900. The
structure has 4 bedrooms, 2.5 bathrooms and a total of 8 rooms. There is 1980 square
feet on the first floor, 472 square feet on the upper floor and a basement area of 352
square feet. The total square footage of living space is 2,452 square feet. The size
of the lot is less than a quarter acre, and measures 13,500 square feet.
On July 31, 2017, Ms. Lazzaro hand-prepared a fill-in-the-blank quitclaim
deed. The deed transferred the property from her to “ATLANTIC CITY OPERA
THEATER who is identified as the GRANTEE. 1619-17 N. MISSISSIPPI AVE,
ATLANTIC CITY, NJ 08401 LIFE ESTATE WITH REMAINDER DEED, TO
HUMANE SOCIETY INTERNATIONAL.” The consideration for the transfer is
listed as one dollar. It is unknown whether the Humane Society International is a
profit or non-profit entity. Moreover, it is unknown whether Humane Society
International has accepted the deed or is even aware of the deed.
The Atlantic City Opera Theater purports to be an unincorporated association
formed by way of “Articles of Association.” Curiously, the printed date on the
Articles of Association is October 15, 2016, yet the handwritten date of signing by
Ms. Lazzaro is October 30, 2014. The Association also listed four other individuals
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as members. In addition, bylaws for the Atlantic City Opera Theater indicate
adoption and approval by the Board of Directors on October 15, 2016. However,
once again, the handwritten date of the signatures of Bette Lazzaro as President and
Joann Baiano as Secretary is October 30, 2014. The Atlantic City Opera Theater
obtained I.R.C. § 501(c)(3) exemption from federal income tax by way of letter dated
October 4, 2016. An application for a I.R.C. § 501(c)(3) exemption requires the
organizational documents and bylaws. 26 C.F.R. § 1.501(a)-1(b)(2), I.R.S. Form
1023, Part II (Rev. 12-2013). It is unknown whether there is a prior set of bylaws
that have a printed date earlier than the I.R.C. § 501(c)(3) exemption approval of
October 4, 2016, considering that the documents provided have a printed date of
October 15, 2016. Nevertheless, the effective date of the federal exemption is
October 30, 2014.
The Plaintiff asserts six performances were held at the property in 2017, nine
were held in 2018, and six were held in 2019. It is unknown how many performances
were held in 2020 and 2021, however, a curtailment of performances would be
understandable in light of the COVID-19 outbreak and subsequently enacted social
distancing measures which placed restrictions on certain public gatherings. See, e.g.,
Exec. Order No. 107 (Mar. 21, 2020); Exec. Order No. 152 (June 9, 2020).
In support of the appeal, the plaintiff submitted various pictures. In addition,
when the assessor conducted the inspection, various pictures were taken and
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provided to the court as well. On the outside, the property appears to be a two-story
bungalow with limited parking.
On the first floor there is one large room that is connected by a wide arched
doorway to another large room. Pushed against the walls of the room are the dining
room table as well as sofas and side chairs which are arranged for the viewing of
opera performances. Other furniture located in this space appears to be a grandfather
clock, mirrors, table lamps, vases, a dining room table, a china cabinet, and a chest
of drawers. In addition, there appears to be a multitude of different chairs - some
dining room chairs and some other chairs - that have been made available for seating
for about 15-20 people. Also, the photographs reveal fully furnished bedrooms with
fully made-up beds, nightstands, and chests of drawers.
The pictures provided by the taxpayer clearly depict opera performances
taking place before an audience. Many of the opera performers are in costume. To
the casual observer, it would appear that someone is having an opera performance
in their living and dining room. The only difference between this space and a lived-
in area is that many of the furniture items have been pushed to the side to allow for
greater seating capacity.
N.J.S.A. 54:4-3.6 which governs this case, provides in pertinent part:
The following property shall be exempt from taxation . . .
: . . . all buildings actually used in the work of associations
and corporations organized exclusively for the moral and
mental improvement of men, women and children . . .
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provided, in case of all the foregoing, the buildings, or the
lands on which they stand . . . are not conducted for profit.
. . . The foregoing exemption shall apply only where the
association, corporation or institution claiming the
exemption owns the property in question . . . .
[Ibid.]
This statute can be broken down into three primary criteria which are as
follows: (1) the organization must be organized exclusively for the moral and mental
improvement of men, women and children; (2) its property must be actually used for
the tax-exempt purpose; and (3) its operation and use of its property must not be
conducted for profit. Paper Mill Playhouse v. Township of Millburn, 95 N.J. 503,
506 (1984).1 ; see also Int’l Schs. Serv. v. Township of West Windsor, 207 N.J. 3,
16 (2011). In addition to these three primary considerations, the property must also
be owned by the non-profit entity. Savage Mills Enters. v. Borough of Little Silver,
29 N.J. Tax 295, 306 (Tax 2016) (exemption denied when a property leased by for-
profit entity to non-profit entity).
The first issue is whether the Atlantic City Opera Theater is organized
exclusively for the moral and mental improvement of men, women and children.
The organizational documents are quite curious. The organization is not
1
At the time Paper Mill Playhouse was decided, the property had to be actually and
exclusively used for a tax exempt purpose. See L. 1983, c. 224. Subsequently, the
Legislature in 1985 removed the exclusivity requirement. L. 1985, c. 395.
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incorporated as a not-for-profit entity. Rather, it is organized as an unincorporated
association with five members, including Ms. Lazzaro, listed as the association
members. Interestingly enough, New Jersey law requires an unincorporated
association to have at least seven members to have legal standing. N.J.S.A. 2A:64-
1. However, the organizational documents do indicate that the purpose is to provide
opera theater. Notably, the Paper Mill Playhouse decision was rendered by the
Supreme Court without any mention of the organizational documents. Rather, the
Court focused upon what the Paper Mill Playhouse did. Paper Mill Playhouse, 95
N.J. at 512-514. This does not mean that in the appropriate case a court cannot
examine the organizational documents as evidence towards establishing that the
organization is exclusively created for an exempt purpose. See, e.g., Planned
Parenthood v. City of Hackensack, 12 N.J. Tax 598, 604 (Tax 1992); Intercare
Health Syss. v. Township of Cedar Grove, 12 N.J. Tax 273, 275 (App. Div. 1991).
The next prong is whether the property is actually used for a tax-exempt
purpose. The taxpayer argues that it does not matter whether Ms. Lazzaro or
someone else stays at the property so long as the opera is being conducted. At
argument, counsel asserted that a summer long stay would not preclude finding an
exemption, but was unwilling to commit one way or another to 360 overnights as
precluding the exception.
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Whether Ms. Lazzaro or others stay at the property has not been squarely
addressed by either party. By way of certification dated January 14, 2021, Ms.
Lazzaro asserts “[t]here are no tenants (either owners or renters) at the Property.”
Read closely, this statement does not indicate whether there “were” ever any tenants
at the property prior to the date of signing of January 14, 2021, but only that there
“are” presently no tenants. Not only is the statement temporally unclear, but it is
vague in the use of the term “tenant.” While it may or may not be true that there are
not any tenants, whether there has been overnight guests, paying or not, has not been
addressed. See, e.g., N.J.S.A. 2A:18-61.1 (short term guests at guest house are not
tenants for purposes of Anti-Eviction Act.) Also, the indication that there are “no
tenants (either owners or renters)” is unclear since it is unknown how an owner can
be a tenant. In any event, it appears that the municipality admitted to this allegation,
but it is unclear what they admitted to based upon the vagueness of the statement.
The tax assessor asserts that in the past the property has been used exclusively
for residential purposes. The taxpayer asserts that the municipality has absolutely
no proofs that the property is being used for anything else but opera performances.
This raises some interesting issues as to the role of government in being able to rebut
an assertion that may necessarily require an intrusion upon a taxpayer’s privacy. In
this case, Ms. Lazzaro filed a suit seeking a tax exemption after the City rejected her
application. As part of the discovery process, the City requested to do an on-site
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inspection of the interior of the property. No one is disputing that such an on-site
inspection is appropriate considering that it was the taxpayer which brought the
action. See R. 8:6-1(a)(4) (inspection of premises allowed for small claims cases);
Standard Interrogatories to be Served on Taxpayer, N.J. Courts Form CN 10966
(Rev. 9/2008) (Question 23 dealing with inspections); R. 8:6-1(a)(5) (prescribing
use of standard interrogatories in standard track case); R. 8:11(a)(2) (exemption case
is not on small claims track).
The question that does arise is how far the government can go in trying to
establish the residential status of the property. On one hand, there is the general
interest of all taxpayers who would pay increased taxes if the property is
improvidently removed from the tax rolls. On the other hand, there are the privacy
concerns of the appealing taxpayer. Would it be appropriate for the taxing
authorities to set up surveillance cameras to track the comings and goings from a
property? While not possibly rising to the level of a constitutional concern, such
surveillance tactics may raise some eyebrows and may be an activity that the City is
reluctant to embark upon.2 See, e.g., ABA Standards for Criminal Justice Electronic
2
The court is not passing upon this issue. It should be noted that surveillance of
commercial taxpayers can be an important and appropriate part of the gathering of
evidence as to whether there is compliance with certain tax laws. See, e.g., Duncan
Truck Stop v. Dir., Div. of Tax’n, 4 N.J. Tax 367, 371, 375 (Tax 1982).
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Surveillance, Section B: (3rd ed. 1999) 64, 68-71 (discussing standard 2-9.3(b)
concerning public video surveillance).
The sanctity of private dwellings is ordinarily afforded the most stringent
Fourth Amendment protection. N.J. Dep’t of Env’t Prot. v. Huber, 213 N.J. 338,
358 (2012) (citing United States v. Martinez-Fuerte, 428 U.S. 543, 561 (1976)).
Moreover, the Fourth Amendment protects commercial buildings as well as private
homes. Marshall v. Barlow’s, Inc., 436 U.S. 307, 311 (1978). With that in mind,
once inside the premises, would it be appropriate for the assessor to start rifling
through the drawers and cabinets looking for clothing and personal effects such as
toothbrushes to establish the property is in residential use? While the drawers may
or may not contain relevant evidence, a search of same seems beyond the consent
which a taxpayer grants for an inspection as part of the discovery process regardless
of whether the property is residential or commercial. See State v. Younger, 305 N.J.
Super. 250, 257 (App. Div. 1997) (quoting Kevin G. Byrnes, N.J. Arrest, Search &
Seizure § 16.4 (1996)) (describing for example, how it would be unreasonable to
search desk drawers upon receiving consent to search for a stolen grand piano).
With the foregoing in mind, the Court is reluctant to grant summary judgment
determining all requirements for exemption are met just because the representative
of taxpayer says so. Looking at the photographs of the interior of the property, which
plainly reveal a residential living set-up as well as recognizing the concerns that a
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governmental entity may have confirming the extent of residential use of the
property, the decision here turns squarely upon the testimony of Ms. Lazzaro. Yes,
it is true that she does conduct opera performances, but these performances only
happen a handful of times each year. But for the sofas and chairs being rearranged
to allow more visitors, the furnishings are plainly residential and also include fully
furnished and outfitted bedrooms. As plainly stated by the Appellate Division:
Any issues of credibility must be left to the finder of fact.
That is so even where a witness’s testimony is
uncontradicted, as long as, when considering the
testimony in the context of the record, persons of reason
and fairness may entertain differing views as to its truth.
Summary judgment should be denied unless the right
thereto appears so clearly as to leave no room for
controversy.
[Akhtar v. JDN Props. at Florham Park, LLC, 439 N.J.
Super. 391, 399 (App. Div. 2015) (citations omitted).]
As said long ago by our Supreme Court “[w]here men of reason and fairness
may entertain differing views as to the truth of testimony, whether it be
uncontradicted, uncontroverted or even undisputed, evidence of such a character is
for the jury.” Ferdinand v. Agricultural Ins. Co., 22 N.J. 482, 494 (1956). “[A] trier
of fact ‘is free to weigh the evidence and to reject the testimony of a witness, even
though not directly contradicted, when it contains inherent improbabilities or
contradictions which alone or in connection with other circumstances in evidence
excite suspicion as to its truth.’” D’Amato by McPherson v. D’Amato, 305 N.J.
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Super. 109, 115 (App. Div. 1997) (citing In re Estate of Perrone, 5 N.J. 514, 521-22
(1950)).
Here, the taxpayer asserts that the only proofs are that the property is used as
an opera theater. More correctly stated is that the only testimonial proofs at this
stage indicate that the property is used as an opera theater. These testimonial proofs
have not been subjected to the rigors of cross-examination and an evaluation by the
trier of fact. Other proofs establish that the use of the property is residential in
character. There are the furnishings of the living room, including the sofas and side
chairs, as well as a dining room table and cabinet, and the fully outfitted bedrooms
with blankets and covers, drawers and such. Plaintiff argues that the court should
ignore the residential setup at the property. If plaintiff’s argument is correct, there
is the valid concern for mischief in that anyone who has a gathering a few nights a
year at a vacation home for purposes of moral and mental improvement may qualify
for a tax exemption. The types of gatherings which qualify would be boundless and
would include book clubs, exercise and yoga classes, certain knitting clubs making
goods for the needy, scouting meetings, and acting clubs. Certainly, this is not
something that the Legislature intended.
On the other hand, maybe Ms. Lazzaro truly is an aficionado of the arts, and
purchased this property to further the moral and mental improvement of individuals
by offering classical opera. Certainly, at the end of the day it turns upon a credibility
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determination and it would not be proper for this Court to make such a determination
on the papers alone. Since this matter turns on credibility, and credibility is not
susceptible by resolution by summary judgment, both party’s motions for summary
judgment are denied.
There is one other issue as to the ownership of the property. Ms. Lazzaro
transferred the property to the Atlantic City Opera Theater indicating a life estate
and then to Humane Society International. It is unsure as to whether the Humane
Society International is actually a non-profit. Moreover, it is unclear upon whose
life the life estate is measured. However, the question is whether a life estate
constitutes the type of ownership that qualifies for the exemption. The Legislature
plainly requires ownership of the property to obtain a tax exemption. N.J.S.A. 54:4-
3.6 (second sentence).
In Savage Mills Enters., the non-profit entity had a 99-year ground lease from
a for-profit entity. Savage Mills Enters., 29 N.J. Tax at 297. The court noted that
“the most obvious purpose of Section 3.6’s requirement that the nonprofit entity own
the property for it to be exempt is to prevent individuals or entities involved in
business from avoiding real estate taxes by leasing their property for customary
periods to entities which would otherwise qualify for the exemption.” Id. at 307
(citing Ctr. for Molecular Med. & Immunology v. Township of Belleville, 357 N.J.
Super. 41, 53-54 (App. Div. 2003)). The Court went on further to note that the whole
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idea of a tax exemption is to relieve the nonprofit entity from the burden of paying
taxes. If the property is actually owned by a for-profit entity with the statutory
burden of paying the taxes, the exemption would not serve its purpose. As a result,
the Court denied the tax-exempt status.
What we have here is not a 99-year lease but a life estate, which if based upon
the life of Ms. Lazzaro, would certainly be less than 99 years. There are two counter-
vailing arguments as to whether a life estate would constitute ownership. On one
hand, a life tenant has obligations to the remainderman including keeping the
property in good repair and paying the taxes. In re Estate of Roth, 139 N.J. Eq. 588,
596 (Prerog. Ct. 1947). Thus, even if the Atlantic City Opera Theater no longer had
a use for the property, it may face certain obligations before passing the property on
to the remainderman. The fact that the remainderman is a nonprofit entity or not is
of no consequence. In other words, the funds of the Atlantic City Opera Theater
could potentially be used to indirectly fund the owner of the remainder estate through
payment of repairs and taxes. This sort of entanglement of interest certainly weighs
against granting the tax exemption. Int’l Schs. Servs., 207 N.J. at 23.
On the other hand, this court stated early on that “[t]he right of the life tenant
to the undisturbed possession and enjoyment of the property during the continuance
of his life estate is substantially the same as that of an owner in fee (the only
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difference being that the life tenant cannot commit waste).” Sheppard v. Township
of Willingboro, 1 N.J. Tax 530, 534 (Tax 1980).
The problem is that both positions are anchored in archaic and ancient
authority dealing with issues such as life estates, waste, and what constitutes a
freehold estate. Rather than wander into the murky waters of ancient common law
real property concepts, the court will defer until it first determines the credibility
issue as to use of the premises as more fully set forth above.
CONCLUSION.
For the foregoing reasons, the motions for summary judgment filed by both
parties are DENIED.
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