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Princeton University file photo.

PRINCETON — A lawsuit challenging Princeton's University's tax-exempt status could possibly be resolved through mediation, officials said Friday.

The university in February was denied an attempt to dismiss one of the pending lawsuits related to its tax exemption. Tax Court Judge Vito Bianco asked the attorneys for both sides to decide whether it would be helpful to engage a mediator, University Vice President Robert Durkee said.

"As a result of the judge's request, there have been emails back and forth, beginning in February, about what kind of mediator might be acceptable to both sides, and those email exchanges are continuing with no agreement so far on that question," Durkee said.

Last month, the state appellate division rejected the school's request that the court hear an appeal of Bianco's decision before a trial took place.

"Our focus at this point is on preparing for trial, with every confidence that both the law and the facts of the case will support continuation of the university's property tax exempt status on properties that support its educational mission," Durkee said.

University officials contacted Bruce Afran, an attorney representing the plaintiffs, to see if his clients were interested in exploring mediation as a way of possibly resolving the suit, he said.

"The university initiated this, and we think this is a hopeful sign of resolving this," Afran said.

Both parties will exchange a list of possible mediators next week, Afran said.

"It's a big step offered to mediate a tax dispute," he said. "It's to Princeton's credit that they're willing to do this."

LAWSUIT

Afran's clients — four Princeton residents — argue among other things that because Princeton is earning millions of dollars in patent royalty income and distributing some of that money to faculty, it is therefore involved in commercial enterprise and isn't entitled to its tax exemption.

The residents also contend the university is engaged in other "commercial conduct" through its ownership of the Princeton Forrestal Village in Plainsboro and Princeton Forrestal Center in South Brunswick, Afran said.

"Though they do great work educationally, they're not really an exempt institution," Afran said. "They morphed into a commercial enterprise, despite the good work they do."

Under state law, property tax exemptions are granted to non-profit colleges, universities and schools, houses of worship, non-profit hospitals, and other charitable organizations, unless it is proven their dominant motive is to earn a profit.

"We continue to believe that 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," Durkee said.

Attorney David Wolfe, representing commercial and residential taxpayers in property tax matters and corporate and individual clients in civil litigation, said the outcome of the case could pose major implications for other nonprofit entities.

"I think Princeton has a very strong argument that it is entitled to its exemption," he said. "While I appreciate that taxpayers have the right to challenge these exemptions, the issue of where the burden lies in these cases is something the courts need to deal with because it raises real-world problems for nonprofits."

Wolfe said he wouldn't be surprised if the case was resolved through mediation or by a settlement "to simply avoid the litigation costs."

"Until this is decided, it is likely that other nonprofits could potentially have third party challenges be filed against them and be forced to litigate them," Wolfe said. "Most nonprofits don't have the resources like Princeton. It can be the difference between surviving as a nonprofit and not surviving."

HISTORY

In June 2013, Bianco also denied a university motion challenging a related suit in 2011 specifically challenging the exempt status of 19 buildings on campus, saying that they have non-academic or commercial uses.

Princeton University is the largest tax-exempt organization and the largest taxpayer in town. The university leaves certain properties, such as non-dormitory graduate student housing, on the tax rolls, even though university officials say those could qualify for exemption from property taxes under state law.

The university's annual property tax payment last year was $10.1 million, with $2.2 million going to the town.

"The university is on solid ground," Wolfe said.

University and municipal officials agreed to a deal last April in which the school will pay the town $21.7 million over seven years to help cover the cost of local government and other services.

"This has to be a real settlement," said Afran, noting the university's tax-exempt status is costing residents tens of thousands of dollars.

Nicole Mulvaney may be reached at nmulvaney@njadvancemedia.com. Follow her on Twitter @NicoleMulvaney. Find The Times of Trenton on Facebook.