Friday, March 19, 2010

Some Final Thoughts on Provena

Now that I've had a day to cogitate (love that word!) on the Provena case, here are a few final thoughts about things.

First, the impact in Illinois.  While I (and probably many others) are disappointed that there was no definitive ruling on the question of what constitutes charitable use of property by a hospital (e.g., whether a substantial charity care program is required or not), the fact of the matter is that the Provena decision leaves intact a body of appellate case law (cases from the 1st, 2d, 3d, and 4th districts, including the Provena 4th District appellate opinion) that all have concluded that substantial charity care is a requirement, and all have rejected the federal community benefit test as a standard for exemption.  All these cases also agree that contractual discounts (e.g., Medicare/Medicaid shortfalls) do not "count" for purposes of computing charity care, and have accepted the Department of Revenue's position that charity care must be measured against a hospital's average costs as opposed to customary charges.  On top of this, we know that at least 3 justices of the Illinois Supreme Court agree with this body of law; while that might not be a majority, it certainly would be foolish for any hospital to "bet the house" on a final, majority decision coming out the other way - after all, all the plurality needs is for one of the two justices that recused themselves to agree with their position, while the two dissenters would have to pick up both of the recusals to become the majority.  So if I were an attorney advising an Illinois hospital, I'd tell them that they need to have a fairly generous charity care policy; that such policy needs to be advertised and proclaimed from the rafters, that they need to be extremely careful with how they treat debt collection (a relatively new Illinois law, passed a couple of years ago, addresses that anyway, and the federal health care bill that might actually pass Congress this weekend also might have something to say about that issue) and that they shouldn't count on "community benefit" expenses (like running health fairs or prenatal care seminars) to count for much. And if I were a tax assessor in Illinois, I wouldn't be shy about challenging nonprofit hospitals in my assessment district to document their charity care before handing out exempt status.  On a practical note, however, I expect this is mostly water under the bridge.  Illinois hospitals, including Provena, have already substantially changed the way they do business with respect to charity patients.  Where it was once difficult to find out about charity policies, today you can't walk in the front door of a hospital without being bombarded by information about charity policies.  The folks at the desks have pamphlets, forms, pens and paper.  The hospitals have already throttled back on the use of collection agencies.  In short, it would be an awfully stupid hospital that hasn't already made major adjustments in its operations to take into account the trend of Illinois case decisions.

With respect to the national picture, I still think the impact of Provena will be muted.  That's not to say that the decision won't have any impact at all - far from it.  Tax assessors in other states certainly will have a tool and a blueprint for arguing that charity care is the key to local property tax exemption.  But it will be hard for these folks to claim that such is the law in Illinois - in other words, they will not have a direct, strong precedent to cite. It will be interesting to see, for example, whether Provena plays much of a role in the current litigation in Ohio that pits the state department of revenue against Cleveland Clinic with respect to a satellite care facility that itself provided no charity care.  Ohio is Ohio, and Illinois is Illinois, but I wonder if the lawyers representing the Department of Revenue in Ohio will try to use Provena as a precedent to bolster their case.  I think that is going to be hard to do, since the counterargument is that there is no precedential value to Provena even in Illinois.

And finally, I will reiterate what I said yesterday.  If states are going to go down a "strict charity care test" road, the proper place for this is the state Legislature.  The dissenters in Provena are correct about one thing: we don't know for sure in Illinois how much charity care is required to be exempt, nor do we know for sure how to calculate it.  These are technical issues that need legislative attention.  But as to the underlying policy, both the community benefit test and the "strict charity care" approach to tax exemption for nonprofit hospitals are wrong-headed.  We should be asking what nonprofit hospitals "bring to the table" that their for-profit competitors do not.  Instead of asking "how much charity care do you offer?," we should be asking "What services do you bring to your community that people cannot get from the private market?"  Nonprofits should be "gap fillers" - that is, they should be providing services that are not otherwise provided by the private sector or the government.  That is ultimately why nonprofits exist.  It would not be so difficult to apply this theory to nonprofit hospitals, and doing so would both relieve the "straitjacket" of a strict charity care test, while requiring real accountability from hospitals regarding their services.  No more claims that "community building" expenses are "community benefits" that support tax exemption - tell me you operate a major burn center at a loss, and we'll talk.  I know that trying to get the debate on this issue refocused at this point probably is futile, but I intend to die trying.


March 19, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 18, 2010

Analysis of Provena Decision

Well, I now have the opinion (you can find it here), I have read it, and it is . . . complicated.  Here’s why.  The Illinois Supreme Court consists of 7 justices; two of the 7 justices recused themselves in this case, meaning that only 5 participated in the final opinion.  All 5 agreed that Provena should not get the tax exemption; however, two of the justices agreed only on a technical procedural basis: these two felt that Provena had failed to prove its case because the property that was exempt was owned by Provena Hospitals (Provena Covenant’s parent), but the evidence on charitable use all related to Provena Covenant (the subsidiary).  Accordingly, two of the justices concurred only because they believed the record contained no information regarding the charitable activities of the actual owner of the property.  Or put another way, they believed that the record all contained evidence of charitable use by the wrong party.

So, I can say definitively that Provena lost.  But that's all I can say.  Because only three of the five justices considering the case agreed on the substantive analysis of what constitutes “charitable use” (e.g., is charity care required, and if so, how much), the case does not actually resolve this issue for the future – as one of the concurring/dissenting justices pointed out (page 37 of the slip opinion), the plurality’s views on the substantive tests for charitable use are not entitled to stare decisis (e.g., are not entitled to be viewed as controlling precedent for future cases), because a majority of the court (e.g., four justices) did not agree on the substantive test. [I should note that all 5 justices agreed that Provena could not claim exemption as a religious organization, an argument I’m not going to discuss here].

So,  the case did not actually provide a definitive answer to what hospitals are required to do in order to get property tax exemption in Illinois.  But it is worth examining the conclusions of both the plurality and dissenters on the substantive issue, because their views are a microcosm of the national debate on tax exemption for nonprofit hospitals.

So first, let’s look at the plurality.  The plurality of the court soundly and completely rejected the “community benefit” test that has been the cornerstone of federal tax exemption for nonprofit hospitals since 1969.  The language of the plurality on page 26 of the opinion could not be clearer:

Provena Hospitals asserts that assessment of its charitable endeavors should also take into account subsidies it provides for ambulance service, its support of the crisis nursery, donations made to other not-for-profit entities, volunteer initiatives it undertakes, and support it provides for graduate medical education, behavioral health services, and emergency services training. This contention is problematic for several reasons. First, while all of these activities unquestionably benefit the community, community benefit is not the test. Under Illinois law, the issue is whether the property at issue is used exclusively for a charitable purpose.  (Slip opinion at 26, emphasis added).

Instead, the plurality adopted the approach of the 4th District Appellate opinion: in Illinois, charity is defined as a “gift.”  Treating patients for a fee is not a “gift”; only charity care is a “gift” in this context and the evidence showed that Provena’s true charity care was less than 1% of its revenues.  The plurality characterized this amount as “de minimis.”  Accordingly, Provena failed to prove appropriate charitable use of the property in question.  The plurality also clearly was not pleased with Provena’s handling of poor patients: it commented extensively on Provena’s failure to advertise its charity care programs, its practice of automatically billing all patients, turning accounts over for debt collection, and so forth.  While it is unclear how much this activity contributed to the plurality’s view that Provena was not engaging in charity, it was clearly a factor.

In reaching its conclusion, the plurality adopted some very interesting analysis.  First, the plurality adopted the “relief of government burden” theory as the basis for why tax exemption is appropriate.

Conditioning charitable status on whether an activity helps relieve the burdens on government is appropriate. After all, each tax dollar lost to a charitable exemption is one less dollar affected governmental bodies will have to meet their obligations directly. If a charitable institution wishes to avail itself of funds which would otherwise flow into a public treasury, it is only fitting that the institution provide some compensatory benefit in exchange. While Illinois law has never required that there be a direct, dollar-for-dollar correlation between the value of the tax exemption and the value of the goods or services provided by the charity, it is a sine qua non of charitable status 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 governmental functions.  (Slip opinion at 20).

This view confirms a trend noted by Evelyn Brody at Chicago Kent of states moving toward this rationale as a basis for property tax exemption.  See, e.g., Evelyn Brody, The States’ Growing Use of a Quid-Pro-Quo Rationale for the Charity Property Tax Exemption, 56 Exempt Organization Tax Review 269 (2007).

Second, the plurality concluded that neither Medicaid nor Medicare “shortfalls” (e.g., the amount by which reimbursement falls short of costs – or, as some hospitals argue, customary charges) should count as charity, because these are essentially “pay for service” transactions and Provena voluntarily chose to take part in these programs.  The court observed that both provide stable sources of revenue and other benefits (such as eligibility for federal tax exemption), and therefore the decision to treat Medicare/Medicaid patients was not a “gift” but self-interested behavior.  I should note that the plurality actually got one thing completely wrong in this part of the opinion.  The plurality asserted that the Catholic Health Association’s (CHA) community benefit guidelines also take the position that Medicare and Medicaid shortfalls do not “count” as community benefit.  That is not correct.  The CHA guidelines do not count Medicare shortfalls, but do count Medicaid shortfalls.

Now let’s turn to the dissenters (on this issue).  Unlike the plurality, the dissent wholeheartedly embraced the “community benefit” test of tax exemption, quoting extensively from Medical Center Hospital of Vermont v. City of Burlington, 566 A.2d 1352 (Vt. 1989) and Wexford Medical Group v. City of Cadillac 713 N.W.2d 734 (Mich. 2006), both classic “community benefit” cases.  The dissenters rejected the notion that any minimum level of charity care was required, quoting directly from the Medical Center of Vermont and Wexford cases:

Similarly, in Medical Center Hospital of Vermont, Inc. v. City of Burlington, 152 Vt. 611, 566 A.2d 1352 (1989), the Vermont Supreme Court, in rejecting the taxing authority’s argument that the amount of free care dispensed must exceed revenues, concluded there was nothing in any Vermont case that required an institution to dispense any free care to qualify as charitable for purposes of the charitable property tax exemption. (Slip opinion at 35)

“[I]t does not follow that an institution must present evidence of a particular level of charitable care because there is no such threshold level contained in the statute. And we refuse to create one.” Wexford, 474 Mich. at 220, 713 S.W.2d at 748. (Slip opinion at 34).  

So, where are we on the issue of tax exemption for nonprofit hospitals?  Well, in Illinois we are essentially where we were before this opinion: because only a plurality of the court (rather than a majority) held that some substantial charity care was a requirement of exemption, technically that is not a definitive holding.  We don’t know how the other two justices would have voted, and until we have a case with a 4-person majority opinion, the best we can say is that not having a substantial charity care program is extremely dangerous, but having one is not clearly required.  Nevertheless, I suspect that any Illinois hospital that already hasn’t adopted clear charity care policies, including advertising them, and who hasn’t “throttled back” on debt collection cases will be doing so immediately.  It just wouldn’t be wise to tempt fate on this point, since it is clear that at least 3 justices believe that substantial charity care is a requirement of exemption under Illinois law.

Second, I suspect that one result of the Provena decision (or non-decision, as the case may be) will be to resurrect interest in a legislative solution to the nonprofit hospital exemption debate, which is where I think the solution should come from – see my article Hospital Property Tax Exemption in Illinois: Exploring the Policy Gaps, 37 Loyola L. Rev. 493 (2006).  Deciding questions such as whether charity care is a requirement of exemption, and if so, how much and how to count it, is simply not a task well-suited to the case-by-case judicial process.  These are intensely technical questions that should have clear answers, and on this point I agree with the dissenters: the legislature needs to answer them.  In Illinois, and in other states where this issue is boiling, the best approach would be to have the legislature step in.

Finally, I would note once again that I don’t agree with either approach – that is, I do not agree with either the “charity care is essential” approach of the plurality, nor the broad community benefit formulation of the dissenters.  In my view, the relevant question should be “what does a nonprofit hospital do that for-profit hospitals do not?” – or in other words, what services do nonprofits provide that are not otherwise provided by the private market.  These services might include free care for the poor, but might also include services (like a burn center) that for-profits shun because they are money losers.  Unfortunately, it seems that this test is not on anyone’s radar screen.


March 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Provena Loses

I don't yet have a copy of the opinion, but the Chicago Tribune just posted this story, which states that Provena lost, and more importantly, that it lost on the substantive issue: the court apparently ruled that Provena failed to provide sufficient charity care to be tax-exempt.

Again, stay tuned.  I'll post my own summary and views on the opinion after I get a chance to review it, either later today or early tomorrow.


March 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Provena Decision Expected Today

Reports are that the Illinois Supreme Court's decision in the Provena Covenant Hospital tax exemption case will be released later this morning.  Stay tuned - I'll post a summary of the decision as soon as I get my hands on it and have a chance to read it.


March 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 17, 2010

Senators Question Salaries of Boys & Girls Club Execs

The Washington Post reports that four senators (Sens. Charles E. Grassley (Iowa), Tom Coburn (Okla.), Jon Kyl (Ariz.) and John Cornyn (Tex.)) have sent a letter to the Boys and Girls Clubs of America asking about the organizations' expenses for salaries and travel.  The organization, which reported a $13 million loss on its 2008 Form 990, paid chief executive officer, Roxanne Spillett, nearly $1 million in current and deferred compensation.  According to The Nonprofit Quarterly, the Senators may hold up a bill that would give the organization $425 million in federal funding unless they get more information about the expenses.


March 17, 2010 | Permalink | Comments (0) | TrackBack (0)

Should USOC Be Tax-Exempt?

An interesting article in the Christian Science Monitor questions whether the US Olympic Committee should enjoy tax-exempt status under 501(c)(3).  What struck me about this commentary is how similar the points made here are to those made by reformers for college athletics: that the programs are no longer "amateur" athletics at all, but rather big time entertainment fueled in large part by TV revenues.  I also was particularly interested in the authors' comment that USOC gets little in the way of individual donations, since I have long championed a test for tax exemption that would require an organization to show that it was "substantially" funded by donations (Mark Hall, now at Wake Forest, and I proposed one-third of annual revenues from donations) in order to be tax-exempt.


March 17, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 16, 2010

Europe-- Countries Amending Laws to Comply with European Court of Justice Decision on Cross-Border Donations

European counries have been amending their tax laws in order to comply with the ECJ decisions in cross-border giving cases. For an analysis of the decision, see Changes in the laws of various countries are being tracked by the European Foundation Centre.


March 16, 2010 in International | Permalink | Comments (1) | TrackBack (0)

Israel--Knesset Considering Bill to Amend Law to Restrict NPOs with Foriegn Funding

Members of the Knesset introduced legislation to reclassify associations (Amutot) as non-public institutions for tax law purposes.  The amendment will jeopardize access by such entities to other foreign funding if it goes into effect.  The amendment is under attack by Israeli NPOs, and ICCSL is currently analyzing the legislation on behalf of Israeli NPOs.  The proposed amendment can be found at Israel_draft_legislation_16_2_on_foreign_political_entity_funding.pdf.  The current Law on Amutot is also available in the ICCSL Documentation Center.




March 16, 2010 in International | Permalink | Comments (0) | TrackBack (0)

This is why I Question Tax-exemption for Churches

This story in the Fort Worth Star-Telegram is yet another example of why I'm beginning to like the idea of repealing all tax exemptions for churches, perhaps coupled with a deduction for money actually spent on poor relief or other community services (see yesterday's post here).

It appears that televangelist Kenneth Copeland, head of Eagle Mountain International Church, can continue to fly his ministry’s multimillion-dollar aircraft tax-free.  The Tarrant Appraisal District had denied a tax exemption for Copeland's jet when the Church refused to disclose the salaries of Copeland, his wife, the ministry’s board of directors and other employees per a form provided by the state comptroller’s office and used by the district to help establish whether officials of a religious organization are legitimate. The taxes on the jet would have been about $75,000, and the Church sued accusing the district of religious discrimination and of violating the U.S. and Texas constitutions.  The District then settled the suit (e.g., the District caved and ran for the hills).
I'm sorry, but my idea of a tax-exempt religious organization doesn't include a fleet of aircraft, including a jet, to fly the pastor around the country.  And the refusal by any church to disclose information should be a per-se reason to yank exemption.  The fact that churches are not subject to the federal Form 990 reporting requirements is another stick in my craw.  If churches want tax exemptions, they should disclose information just like every other exempt organization, and if they don't want to, they can preach on their own nickel, not the taxpayer's.

March 16, 2010 | Permalink | Comments (1) | TrackBack (0)

The AHA is at it AGAIN

The American Hospital Association doesn't like the new Schedule H to form 990, because it . . . well, because it does pretty much exactly what the IRS intended.  According the AHA, the Schedule H is fatally flawed because it bases its reporting on EIN's rather than on a system-wide basis.  As a result, individual hospitals with individual EIN's report . . . wait for it . . . INDIVIDUALLY!  Which according to the AHA means that certain system-wide expenses are "missed" by the 990.  In addition, the AHA complains, as usual, that bad debts (e.g., when a hospital bills a poor patient, hounds them with debt collection proceedings and then discovers that, praise be, they really ARE poor!) and Medicare shortfalls (e.g., the difference between what a hospital claims it costs for care vs. government reimbursement - never mind that Medicare reimbursement rates are designed to make care more efficient and squeeze out waste) aren't included in community benefit, nor are "community-building" expenses such as physical improvements in the neighborhood, economic development and workforce development.  Which begs the question why hospitals aren't spending their economic development money on, say, care for the poor.

All this was hashed out ad nauseum when the IRS was putting the new Schedule H together.  In effect, the AHA is trying to re-litigate decisions the IRS made after reading a zillion statements from AHA members about how these exact things would adversely affect their community benefit expenses.  It's no surprise that the AHA wants to include everything a hospital spends in community benefit reporting.  "Hey, we keep the toilets clean, so let us report that as a community benefit expense."  Sure.

There is really only one problem with Schedule H, which is that hospitals file it at all - this could easily be remedied by recognizing that the modern hospital is just a big business that doesn't deserve tax exemption and revoking tax-exempt status completely.   But something tells me the AHA isn't going to be making THAT argument any time soon.


March 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, March 15, 2010

IRS Experiencing Glitches with TE/GE Financial Reporting System

This article at NextGov recounts the bugs and glitches the IRS is experiencing with TREES, the IRS's Tax Exempt and Government Entities Reporting and Electronic Examination System that was first used in April 2008.  Apparently, the IRS still doesn't have the software working correctly, despite a number of attempts and upgrades, and no money is available during the current fiscal year for further work.  The system cost $18.7 million so far, but more dollars will be needed to get all its functions and features working.

That would pay for a whole lot of copies of Excel . . . 


March 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Kansas to Repeal Tax Exemption for Churches?

Kansas House Bill 2549 would require churches and religious non-profit organizations such as Catholic Charities to pay the state’s 5.3 percent sales tax.  As you might guess, this has caused churches, particularly the Catholic Church, to go into hyperventiliation (see story here) with the Bishops of Kansas' four Catholic Dioceses warning that the provision will "seriously undermine the ability of religious groups to serve Kansas' most vulnerable citizens in these very difficult times."

So I have just a couple of observations.  First, this is a repeal of exemption for the sales tax, not for the state property tax.  We're not talking Armageddon, here.  Second, many states have no sales tax exemptions at all for charitable organizations; for example, California does not base its sales tax exemptions on the nature or character of the organization at all, but exempts only certain kinds of transactions. In other words, there is no blanket exemption for religious organizations.  I wonder if the Catholic Bishops of Kansas have talked to their brethren in California - or perhaps the California Catholic Church doesn't engage in poor relief because they don't have a sales tax exemption in that state? (I'm being facetious here, folks).  By the way, Georgia is considering repealing the sales tax exemption for nonprofit hospitals.  I guess they will whine about the impact on the poor, too.  Heaven forbid that they should cut administrators' salaries.

Second, I have serious doubts that religious organizations should be exempt from taxation at the entity level.  Churches are largely nothing more than clubs for believers, and the vast majority of the revenues taken in at the Sunday collections go to pay for expenses for upkeep of the church building and grounds, salaries for the church staff (and in many cases, the pastor) and so forth.  Yes, many churches do engage in poor relief.  So here's a thought (with a hat tip to Rich Schmalbeck of Duke, who is working on an article about this idea): repeal the tax exemption for churches in all its forms (income, property, sales) and give the churches a deduction for money spent on the poor.

I'm sure the Kansas bishops would be very pleased with this outcome, which will permit them to engage in their poor relief programs free of taxation.  Right?  Yeah, right.


March 15, 2010 | Permalink | Comments (9) | TrackBack (0)