insight magazine

Tax Decoded | Fall 2016

What’s Exclusively Charitable?

Setting the standard straight for charitable hospital property tax exemption status.
Keith Staats, JD Executive Director, Illinois Chamber Tax Institute

Property taxes in Illinois are some of the highest in the nation, so who wouldn’t want to retain their exemption—especially if you’re a charitable organization? But like most things tax and law related in Illinois, the lines are often blurred.

Currently, there’s a property tax case sitting before the Illinois Supreme Court; it should be watched closely by units of local government and charitable nonprofit hospitals. At issue is the validity of a 2012 law that sets out detailed standards for determining whether a hospital is charitable and, as a result, entitled to an exemption from property taxes.

Earlier this year, the Fourth District Illinois Appellate Court ruled in The Carle Foundation v. Cunningham Township et al. that the hospital property tax exemption found at Section 15-86 of the Property Tax Code is facially unconstitutional. (In the interest of full disclosure I should note that I was part of the legal team representing Carle during my time at McDermott Will & Emery.)

A number of years ago, Carle brought an action in Champaign County to establish that four of its properties were exempt from real property taxes after the Champaign County Board of Review revoked their charitable property tax exemptions.

Carle challenged the Board of Review revocations in Circuit Court, invoking Section 23-25(e) of the Property Tax Code, rather than going through the ordinary procedure of challenging the denial in an administrative hearing held by the Illinois Department of Revenue.

No surprise, the Department of Revenue fought Carle’s attempt to challenge the denial, contending that the battle over the exemptions had to first be fought in a Department administrative hearing. This case has a particularly long procedural history. In an earlier trip to the Appellate Court on an interlocutory appeal, the Appellate Court determined that Carle could proceed with its action under Section 23-25(e) of the Property Tax Code rather than being limited to a hearing in the Department’s administrative hearings division.

Subsequent to that earlier Appellate Court decision, and before the Circuit Court of Champaign County issued its decision on the substance of Carle’s exemption claims, the Property Tax Code was amended. Public Act 97-688, among other things, enacted Section 15-68, which established a formula for determining whether a hospital is entitled to property tax and sales tax exemptions.

Prior to the enactment of Section 15-68, charitable hospitals were required to demonstrate that they were “exclusively charitable” under standards articulated by the Illinois Supreme Court over the past century. For example, the court has defined “exclusively” charitable to mean “primarily” charitable, and in the case of Provena Covenant Medical Center v. Department of Revenue, set a difficult and rather murky standard for this determination.

The second trip to the Appellate Court that resulted in the current case before the Illinois Supreme Court was triggered when the local Circuit Court ruled in favor of Carle on a motion for partial summary judgment. The Court determined that the parcels at issue were exempt based on Carle's compliance with the new hospital property tax exemption law.

Needless to say, the local taxing bodies and the Department of Revenue appealed.
In that appeal they argued, among other things, that Section 15-86 is facially unconstitutional as it violates Article IX, Section 6 of the Illinois Constitution—the constitutional provision that establishes the property tax exemption for charitable entities.

The Appellate Court agreed, concluding that Section 15-86 is unconstitutional on its face because it purports to grant a charitable exemption on the basis of an unconstitutional criterion.

The Appellate Court determined that Section 15-86 ignores the requirements of Article IX, Section 6 of the Illinois Constitution because it doesn’t require a determination that the entity is "exclusively charitable" as that term has been defined by the Illinois Supreme Court. The Appellate Court remanded the case back to the Circuit Court for further proceedings.

However, because of the impact of the Appellate Court’s ruling (that Section 15-68 is unconstitutional), the case was appealed to the Illinois Supreme Court. The parties are currently at the briefing stage, which will be followed by oral argument.  

The outcome will have a lasting impact on our state’s charitable nonprofit hospitals. If the law is upheld, all charitable nonprofit hospitals granted exemptions under the law will retain those exemptions, and the hospital properties will remain untaxed. If the Supreme Court upholds the Appellate Court’s ruling that the law is unconstitutional, all the charitable nonprofit hospitals with property tax exemptions likely will be required to reapply for exemption. Those new exemption applications then will be evaluated under the standards in the existing case law.  

If this is what comes to pass, I believe that many hospitals could be unable to demonstrate that they’re ”exclusively charitable” under the strict standards set forth by the Supreme Court in Provena v. Department of Revenue. That means these hospital properties would go back onto the tax rolls, and local governments would reap the rewards.

It should be noted that this case deals only with the hospital property tax exemption procedures found in PA 97-688, which also contains procedures for the sales and use tax charitable exemption for hospitals, an income tax credit for for-profit hospitals, and a severability clause. These other provisions should be unaffected by the Carle decision.

It’s likely that a ruling on hospital property tax exemption law validity will be handed down sometime early next year.

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