On April 16, in a case that could have significant implications for Princeton University and for local taxpayers, a state appeals court declined to hear an appeal of a lower court’s ruling in favor of four Princeton residents who are challenging the University’s status as a tax exempt non-profit organization.

Public interest lawyer Bruce I. Afran, brought the suit in 2011 on behalf of Kenneth Fields, Mary Ellen Marino, and Joseph and Kathryn King.

In February, tax court judge Vito L. Bianco denied the University’s request to have the lawsuit thrown out. In an attempt to reverse Judge Bianco’s decision, the University had taken the “unusual” step of appealing even before the case had been decided.

“The trial court denied our motion to dismiss the case, but in doing so made no judgment about the merits of the case,” said Robert K. Durkee, Princeton University’s vice president and secretary in an email Friday. “We asked the appeals court to review the trial court decision not to dismiss the case. We knew it was unlikely that the court would hear the appeal, but we believe the law is so clear that we thought it was worth asking for a ruling now.”

Mr. Durkee added that the University would not be appealing the recent higher court’s decision to the state Supreme Court but would instead be preparing for trial.

Mr. Afran, said Friday that the appeals court had also ruled against the University’s attempt to challenge Judge Bianco’s ruling that the University would have to show that it deserved the tax exemption.

“This is hugely significant because the University has to prove that it qualifies for tax exempt status as a non-profit organization and that might be difficult for it to do,” said Mr. Afran. “As a non-profit group it would not be allowed to distribute profits to people with whom it holds patents. The University is involved in a lot of commercial activities, setting itself up as a profit-based business, especially in the sciences and technology. It is using its science and engineering facilities to market products. This is of course a perfectly legal activity, but it is a commercial activity.”

However, in a letter to the editor of the Daily Princetonian last year, which Mr. Durkee said Friday contains a summary of the University’s position with respect to the lawsuit, the University vice-president claimed that it was up to plaintiffs to persuade the court that Princeton [University] has ceased to be an educational institution and instead has become an entity whose dominant motive is to make a profit. “No one can argue in good faith that Princeton’s dominant motive is anything other than to be the best educational institution it can possibly be,” he said.

Citing the federal Bayh-Dole Act (or Patent and Trademark Law Amendments Act), which provides guidance for research universities, Mr. Durkee’s letter stated: “Princeton’s mission is to educate students and generate new knowledge and new ideas. It does these things not only for their own sake, but to serve the public good by preparing and encouraging students from a broad range of backgrounds to aspire to positions of leadership and lives of service, and by making discoveries that lead to advances in a broad range of fields that have a direct impact on the broader society, fields ranging from medicine and the environment to technology and public policy …. Both state and federal tax policies enable educational institutions to maximize the extent to which their revenues can be used to support their missions. The University also generates a small fraction of its budget through patents and royalties, and it similarly invests those revenues to advance its educational mission.

“Even with a successful patent, the revenues that come to the University are dwarfed by the investment the University makes in creating the conditions that allow our faculty to do the research that leads to the ideas that eventually lead to the patent.

“A number of the practices that are being challenged by the plaintiffs in the lawsuit are specifically required by Bayh-Dole, and they are followed by research universities throughout the country.”

“This issue is not likely to be concluded in a New Jersey Tax Court,” said Bernie MIller, president of Princeton Council when asked for comment, adding that he would rather not speculate on the outcome and it’s impacts on higher education in the United States or on communities like ours that host major research universities.”

Mr. Afran, however, remains confident. Asked whether he thought the lawsuit could have implications for other university towns and/or for educational institutions claiming tax exempt status across the state and even across the country, he said “Yes, although the potential impact on the taxpayer is hard to know since old assessments are no longer accurate.”

“The issue is not whether the taxpayer will win but how much of the University’s tax exempt status will remain if this goes to trial,” said Mr. Afran. “If the entire campus were valued for tax purposes, this could amount to some $60 million a year; even if only the science facilities were to be taxed, this could be some $30 million a year in taxes. For the average Princeton taxpayer, this could possibly mean a reduction of between 30 and 50 percent on their tax bill.”

“I believe that there is widespread support for this action. There is increasing awareness that today’s universities are “hedge funds masquerading as educational non-profit organizations.” Isn’t it ironic that Princeton University has hired one of the world’s most expensive law firms to defend its non-profit status. They charge about $1200 an hour.”

The University has hired Simpson Thacher & Bartlett. The challenge to its property tax exempt status will be tried in New Jersey tax court, most likely in the early part of 2016.