On March 18, 2010, a majority of the Illinois Supreme Court held that a religiously affiliated Illinois hospital was not entitled to an exemption from property tax because it failed to establish that it was a charitable institution. In addition, a plurality of the Court determined that the hospital failed to demonstrate that its property was actually and exclusively used for charitable purposes.1

Background

For a charitable organization to receive an exemption from property tax in Illinois, section 15-65 of the Illinois Property Tax Code requires both (1) charitable ownership of, and (2) charitable use for the subject property.2

Provena Hospitals ("Provena") owns and operates six hospitals, including Provena Covenant Medical Center ("PCMC"), a full-service hospital located in the city of Urbana, Illinois, contained within 43 parcels of land. As the owner of the land in the PCMC complex, Provena applied to the Champaign County Board of Review to exempt all 43 of the parcels in the PCMC complex from property taxes for 2002.3 The Board of Review recommended the denial of Provena's application, and the Illinois Department of Revenue agreed, concluding that the property "was not in exempt ownership" and "not in exempt use." Provena brought litigation to reverse the decision, under which the Sangamon County circuit court decided for Provena, but the Illinois Court of Appeals later found for the Department, culminating in the Illinois' Supreme Court's consideration of the matter.

Majority of Illinois Supreme Court Holds Provena is Not a Charitable Institution

To determine whether an organization is a charitable institution, Illinois courts have developed the following five-factor test, considering whether the organization:

  • has no capital, capital stock, or shareholders;
  • earns no profits or dividends but rather derives its funds mainly from private and public charity;
  • dispenses charity to all who need it and apply for it;
  • does not provide gain or profit in a private sense to any person connected with it; and " does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses.4

The court found that Provena's funds were not derived from charity and held in trust for charitable purposes, but rather through providing medical services for a fee. In addition, Provena could not show that it satisfied the third and fifth factors listed above.5 Accordingly, a majority of the Court held that Provena failed to satisfy the five-factor test. Consequently, Provena failed to satisfy the first requirement of section 15-65 of the Property Tax Code, charitable ownership, for a charitable exemption from property tax in Illinois.

Plurality of Illinois Supreme Court Holds Provena's Subject Property Failed to Satisfy the Illinois Charitable Use Requirement

Despite the finding that Provena did not meet the charitable ownership requirement, negating Provena's claim for the charitable organization exemption from Illinois property tax, the Court also analyzed the charitable use requirement necessary to obtain such exemption. A three-judge plurality of the Court held that the property owned by Provena and located on the PCMC campus failed to satisfy the charitable use requirement.6

For the property of an organization to satisfy the charitable use requirement, the organization must establish that the property is "actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit."7 The Court noted that "exclusively used" means that charitable purposes are the primary purposes for which the property is utilized.

Before examining the charitable use requirement, the plurality addressed a threshold requirement for a charitable exemption from property tax in Illinois, specifically, that "those seeking a charitable exemption be able to demonstrate that their activities will help alleviate some financial burden incurred by the affected taxing bodies in performing their government functions." With regard to Provena, the Court held that no such conclusion was made or could be made based on the record in the case.

As for the charitable use requirement, the plurality concluded that "Provena failed to meet its burden of showing that it used the parcels in the PCMC complex actually and exclusively for charitable purposes." First, according to the facts contained in the record, PCMC's total revenues in 2002 were $113,494,000. In contrast, the cost of health care Provena provided to PCMC patients under the facility's charity care program totaled $831,724, the equivalent of only 0.723% of its revenue. Second, during 2002, only 302 of PCMC's 110,000 total patients benefitted from the charity care program, the equivalent of only .27% of the facility's total patients that year. The plurality stated that these amounts were "de minimus." Furthermore, Provena's failure to advertise the availability of charitable care at PCMC was problematic in the plurality's view.

In addition, the plurality dismissed the method by which Provena administered its charity care program. Provena automatically referred unpaid bills to collection agencies, and "[h]ospital charges were discounted or waived [under the charity care program] only after it was determined that a patient had no insurance coverage, was not eligible for Medicare or Medicaid, lacked the resources to pay the bill directly, and could document that he or she qualified for participation in the institution's charitable care program." The plurality compared Provena's determination of eligibility for the charity care program to the way a "for-profit institution would write off bad debt."

Provena argued that its treatment of Medicare and Medicaid patients should be taken into account in determining whether the property satisfied the charitable use requirement because the payments it receives treating such patients do not cover the full costs of care. The plurality rejected this argument because while participation in Medicare and Medicaid is optional, it is in an organization's financial interests to participate in these programs in order to receive a reliable stream of revenue and to qualify for favorable treatment under federal tax law.

In addition, the plurality rejected Provena's argument that the Court should take into account its community support and subsidies for worthwhile health services because, for property tax purposes, "[t]he critical issue is the use to which the property itself is devoted, not the use to which income derived from the property is employed."

Commentary

The majority opinion holding in this case dealing with the charitable ownership requirement upheld the use of the five-factor test used to determine whether an organization satisfies the charitable ownership requirement for an exemption from property tax in Illinois. This relatively uncontroversial aspect of the holding rested on a failure by Provena to prove that it was a charitable organization under the five-factor test, in part because of a lack of information in the record concerning Provena's charitable revenue and expenditures.

However, the plurality opinion addressing whether Provena's property on the PCMC campus satisfied the charitable use requirement for an exemption from property tax in Illinois raises questions about what sufficiently constitutes charitable use for property owned by charitable institutions, especially hospitals, in Illinois. The Provena case does not provide adequate guidance for other charitable organizations seeking exemptions from property tax in Illinois because the plurality merely stated that Provena provided a de minimus dollar amount of charity care to a de minimus number of uninsured patients at its PCMC facility.

To ensure that property owned in Illinois by charitable organizations is exempt from property tax, charitable organizations in Illinois should be mindful of the amount of charitable services they provide and the manner in which they provide such services. Already, Illinois lawmakers are discussing how to address the lack of guidance provided in Provena. Specifically, lawmakers may define a minimum amount of charity care that hospitals must provide to ensure application of the Illinois property tax exemption for charitable organizations.8

We believe the Provena decision may have further implications for charitable organizations. First, Illinois may seek to extend the "charitable percentage rule" to other tax exemptions, such as sales and use taxes. Second, other states with similar property tax exemption provisions may adopt the Illinois standard to granting and sustaining exemptions in the future. We see these outcomes as realistic possibilities that may gain more traction given the states' current fiscal problems.

Footnotes

1 Provena Covenant Medical Ctr. v. The Dept. of Revenue, No. 107328, Mar. 18, 2010.

2 35 ILL. COMP. STAT. 200/15-65.

3 It should be noted that Provena was exempt from Federal income taxation pursuant to Internal Revenue Code section 501(c)(3), and was also exempt from all Illinois sales and use taxes.

4 See Methodist Old Peoples Home v. Korzen, 39 Ill.2d 149, 156-157 (1968).

5 Proving detrimental to Provena's property tax exemption claim, much of the information contained in the record of the case pertained to the operations of PCMC, not Provena, the actual owner of the parcels.

6 The plurality invoked a deferential standard of review by concluding that the Department of Revenue's finding on this issue was not "clearly erroneous." In her partial dissent, Justice Burke noted that the plurality's discussion regarding charitable use did not command a majority of the court and, therefore, is not binding.

7 35 ILL. COMP. STAT. 200/15-65.

8 Benjamin Yount, Illinois Statehouse News, Lawmakers Split on Charity Care Rules, http://illinois.statehousenewsonline.com/2402/lawmakers-split-on-charity-care-rules / (accessed Mar. 19, 2010).

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