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View looking into the upper floors down the long atrium of Princeton University's new Frick Chemistry Laboratory where one of several sculpture pieces entitled "Resonance" by Kendall Buster hang from the ceiling. The lab is a state-of-the-art $380 million glass building built entirely with the university's proceeds from the invention of the blockbuster cancer drug Alimta.
(Tony Kurdzuk/The Star-Ledger)
PRINCETON — A lawsuit that argues Princeton University violates the provisions of its tax-exempt status survived a university-led attempt to throw the case out Thursday.
Plaintiffs in the case argue that, because Princeton is earning hundreds of millions of dollars in patent royalty income and is distributing some of that money to faculty, the school is deeply involved in commercial enterprise and isn’t entitled to its tax exemptions.
The suit also takes aim at campus buildings that host extensive commercial activity, such as the Frist Campus Center and McCarter Theatre, which sells tickets to the general public for many events and performances.
Public interest lawyer Bruce Afran, who represents a handful of Princeton residents in the case, said yesterday that tax court judge Vito Bianco said the case had merit, and the potential precedent it could set was so far-reaching that the case was too important to be dismissed.
"This is the first time this type of challenge has been filed in any state," Afran said.
"This is an extremely important case. People have been watching this."
A university official yesterday said that questions raised by the lawsuit would prompt the school to reconsider whether certain buildings should be considered tax-exempt, but that despite the school’s lucrative revenues it remained well within the bounds of a tax-exempt, nonprofit institution.
“We are very confident that the tax court is not going to eliminate tax exemption,” university Vice President Bob Durkee said.
“I think if there are going to be any discussions, it would be about whether or not there are any specific buildings to make an adjustment to. And if there are any at all, it will be quite modest,” he said.
The suit alleges the university has violated its exemption status since 2005, the year it started sharing patent royalties with faculty. It challenges the exempt status of 19 buildings on campus, saying that they have non-academic or commercial uses.
Afran said yesterday that while changes in building exempt status could force the university to pay additional taxes to the town, the school’s policy of sharing patent royalties with faculty could deprive the university of its overall nonprofit status — costing the university an additional $20-30 million in taxes a year.
Since the university started sharing royalty profit with faculty in 2005, it has given out $118,493,000 in profit sharing to faculty members, Afran said.
Between fiscal year 2010 and 2011, the university’s annual patent license income increased from $95,948,000 to $115,206,000, according to the university’s annual research report.
In 2011 alone, the university doled out about $35 million to faculty, one-fourth of its total royalties of $117.5 million for the year, according the report. The year before, it distributed about $29 million to faculty and brought in nearly $99 million in patent income, the report said.
An example of the university's biggest financial score was its licensing agreement with The Eli Lilly & Co. for the cancer-fighting drug Alimta.
In an attempt to protect its financial stake in Alimta, in 2009 Princeton joined Eli Lilly in filing a lawsuit against Israeli drug company Teva Pharmaceutical Industries to block them from manufacturing a generic version of the drug.
The product’s commercialization is indicative of the university’s heavy focus on commercial enterprise, argues Afran.
“If they wanted to act like a traditional university they would put the patent into the public domain, and let everyone benefit from it equally,” he said. “Once they choose the route of commercializing their patent, they are now a commercial entity and need to pay their taxes like any other commercial entity. The university can’t have it both ways.”
Durkee said Princeton University’s profit-sharing mechanism is in conformance with the Bayh–Dole Act, which allows schools and other nonprofit institutions to share ownership of intellectual property. “What sort of business are we running? We are conducting business that is engaged in teaching and research,” Durkee said.
He acknowledged the lawsuit would prompt the university to take a closer look at its operations, but said that the school’s opponents were exaggerating the strength of their case.
“I wouldn’t want anyone to put any stock into the large numbers that they are throwing around. I would be very, very surprised if any action was taken to completely eliminate the tax exemption.”
“What we do is consistent with other universities. The way it’s been done is the way it’s been done for a very long time,” Durkee said.
Afran said he believes the case has the potential to set a far-reaching precedent.
“The case has to start somewhere, and it’s starting with Princeton,” he said.
The suit challenges the exempt status of 19 university properties, including the McCarter Theatre, McCosh Health Center and Frist Campus Center.
Afran argues in the suit that the buildings are not tax-exempt because they have non-academic or commercial uses.
“This could completely revamp the tax structure,” Afran said. “People in Princeton pay at least one-third more in taxes because the university has been exempt all of these years.”
“They are one of the wealthiest entities of humankind and they are refusing to pay their property taxes,” Afran said.
Last year the university paid about $7.7 million in taxes to the town, Durkee said. Of that, $2.5 million was based on buildings that could be tax exempt, but have not been classified as such by the university, he said.
In addition to that payment, the university also made a $2.48 million voluntary contribution to the town.
Now with new leadership at the helm, the town and gown are set to begin talks about a new agreement for future voluntary contributions to the town.
Those talks are expected to begin sometime this summer, town and university officials have said.
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