United States: Illinois Supreme Court Property Tax Decision Carries Implications for Charitable Organizations

Illinois hospitals, as well as other charitable organizations in and outside of Illinois, should consider the impact of the Illinois Supreme Court's decision upholding the Illinois Department of Revenue's determination that Provena Hospitals, an Illinois nonprofit corporation that owns and operates Provena Covenant Medical Center, was not entitled to a charitable or religious exemption from real property taxes.

On March 18, 2010, the Illinois Supreme Court decided an appeal of an Illinois Appellate Court decision that upheld the Director of the Illinois Department of Revenue's determination that Provena Hospitals, an Illinois nonprofit corporation that owns and operates Provena Covenant Medical Center, was not entitled to exemption from real property taxes. A majority of the Court agreed with the appellate court that there was no basis for overturning the director's denial of the property tax exemption. The director denied the exemption based on a determination that Provena did not demonstrate eligibility for exemption as an institution of public charity that owned property used in an exclusively charitable manner, or in the alternative, that the property was exempt because it was used exclusively for religious purposes.

A majority of the Court concluded that Provena had not established that the property was in "charitable ownership," but the opinion does not express clear guidance by a majority as to the standards for establishing charitable ownership. A plurality of the Court articulated their view of the standards. The concurring opinion by two members of the Court agreed with the majority that Provena did not establish charitable ownership, but the concurring justices did not expressly adopt the reasoning of the plurality.

In evaluating the existence of charitable ownership, the plurality seemed to emphasize the second Korzen factor: the requirement that a charitable institution derives its funds mainly from private or public charity. Click here for discussion of the Korzen factors. If a majority of the Court adheres to the plurality opinion's view that the literal language of this factor requires that funds must be derived "mainly" from private or public charity, this would be an almost insurmountable barrier to the overwhelming majority of nonprofit hospitals.

A majority of the Court did not concur on the remaining issue of whether Provena demonstrated the "charitable use" of the property. A plurality of the Court concluded that Provena had not demonstrated charitable use. Two justices dissented from that opinion, and two other justices did not take part in the decision. The dissenting opinion criticized the plurality's reasoning that led to its conclusion that Provena's use of the property was not a charitable use. The dissent put forth its own analysis, and the two methods are diametrically opposed.

The plurality's discussion of its view of the charitable use standards is troubling in a number of respects, including the plurality's refusal to consider the dollar value of the community benefit activities engaged in by Provena, and the plurality's rejection of consideration of the Medicare and Medicaid shortfalls in the calculation of the amount of charity given by Provena. The plurality's discussion of Provena's charity care application process and billing and collection practices, and its strict focus on percentages in determining the sufficiency of the provision of charity care are troubling.

For a detailed summary of the opinion, click here . For a copy of the opinion in Provena Covenant Medical Center et al. v. The Department of Revenue et al., click here . This On the Subject highlights the broader implications of the Provena decision and enables hospitals and other charitable organizations to think about next steps.

National Implications

The Court's decision in Provena has national significance. First, it may embolden local taxing authorities across the United States to accelerate challenges to property tax exemptions for charitable organizations, including hospitals. Cash-strapped governmental bodies may be motivated to consider the use of strict standards in the application and enforcement of state and local property tax exemption laws as a method of filling budget gaps by attempting to subject previously exempt organizations to real property taxation. Second, the decision serves to underscore the continuing challenge for nonprofit hospitals to clearly distinguish themselves and their operations from those of their for-profit counterparts. Third, the decision comes on the eve of enactment of health reform legislation, a portion of which would implement a substantial change to or expansion of the federal "Community Benefit" standard required for hospitals to be tax-exempt charitable organizations under section 501(c)(3) of the Internal Revenue Code.

Local Implications

It is known only that the Court concluded that Provena did not establish that it was entitled to a real property tax exemption. Hospitals in Illinois did not find in the Court's decision the clarifying guidance they were awaiting. This lack of guidance makes it difficult for both hospitals and the Illinois Department of Revenue, to know what would constitute satisfactory evidence of charitable ownership and use, or religious use. Many statements made in the plurality opinion, if adopted by a majority of the Court, would make obtaining a property tax exemption an uphill challenge for a modern day hospital, and would provide the department and lower courts plenty of ways to interpret charitable ownership and use in a very restrictive manner.

It is also known that the Court concluded that Provena did not satisfactorily establish that it was entitled to a religious exemption. However, it is not known whether a majority of the Court concluded that a hospital operated by a religious order may never qualify for the religious exemption, which would seem to be the conclusion of the plurality. In the concurring opinion, two members of the Court agreed with the majority that Provena did not establish religious use, but the concurring justices did not expressly adopt the reasoning of the plurality.

The department has been holding a number of pending hospital property tax exemption applications pending the decision in Provena, and the department may move forward with its review of the pending applications even though Provena provides little guidance. Decisions on these pending applications may send some early signals as to how the department will interpret the decision.

The department will likely continue to take a hard line on exemption applications, consistent with its position in Provena, despite the fact that it did not receive bright line guidance. Hospitals with applications pending with the department should review their applications carefully in light of the analysis provided by the plurality of the Court in Provena. Hospitals may wish to supplement pending applications to address those issues the plurality of the Court has determined are critical to evaluating whether an entity has established charitable ownership and use.

For years, most nonprofit hospitals in Illinois and across the country have taken significant steps to increase and quantify their charitable activities. However, in light of Provena, nonprofit hospitals should continue to undertake the following efforts:

The Court was clear that its decision related to only property tax exemption, but whether the opinion has implications on other tax exemptions in Illinois remains to be seen.

In light of the lack of guidance provided by the Court, it is also possible that the department and hospitals could attempt to address this issue through legislation. Legislation could be drafted to provide greater clarity as to the standards that will be used to determine charitable ownership and use, although constitutional challenges may lie ahead for any such legislation. Nonprofit hospitals in Illinois may not receive clear guidance for some time.

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