June 6, 2012
A Water Park as an Exempt Religious Organization?
I always tell my students in my basic income tax class that I usually forge exam problems from stuff I read in the press, because I can't possibly make up stuff as good as what I read.
And so it is today. Hot on the heels of my post yesterday regarding the definition of a religious organization comes a story in the Milwaukee newspaper that the local Jewish Community Center (JCC) is seeking tax exemption for a family water park. According to the story,
In a legal brief, the JCC noted that what appears to be purely recreational activity "has religious and community-building purposes." At the park, members observe Shabbat, attend kosher barbecues and Jewish holiday events, and play Israeli games. All of the signs in the facility are in English and Hebrew.
<Sigh> OK - so maybe not exactly a claim that the water park is a religious organization, but close. On the other hand, JCC does appear to have raised one interesting issue: why should a YMCA be tax-exempt under Wisconsin law, but not a family water park? Why, indeed . . .
June 5, 2012
Additional Thoughts on Defining a Religious Organization
Last Wednesday Lloyd Mayer posted a provocative question: what is a religious organization? Lloyd's main point in this post, at least as I interpreted it, is that the phrase "religious organization" as used in tax exemption law would not necessarily have to be interpreted the same way in other contexts, such as "conscience" exemptions from certain regulatory laws, such as the contraception mandate (or the employment non-discrimination laws at issue in the Hosanna-Tabor case).
In thinking about Lloyd's post during the past week, when the Illinois Legislature was busy responding to the Provena Covenant tax exemption case (see my post from yesterday), I recalled that the Illinois Supreme Court in the Provena case dealt with this very issue. Provena had argued in that case that if it was not exempt as a "charity" under Illinois law, it should nevertheless be exempt as a "religious organization." In analyzing this question, the Illinois court noted that "religious identity" was not sufficient to meet the property tax exemption test (which is admittedly a high bar: property must be used "exclusively" for an exempt purpose - in this case, religious purposes - although "exclusively" really means "primarily" in this context). Instead, consistent with the "exclusive use" requirement, Provena would have had to show that the property in question was used primarily to advance its religious mission. But the court noted that this was fairly clearly not Provena's primary purpose; rather, it's primary purpose was providing health care services for a fee. Here's the relevant language:
In this case, the record clearly established that the primary purpose for which the PCMC property was used was providing medical care to patients for a fee. Although the provisions of such medical services may have provided an opportunity for various individuals affiliated with the hospital to express and to share their Catholic principles and beliefs, medical care, while potentially miraculous, is not intrinsically, necessarily or even normally religious in nature. We note, moreover, that no claim has been made that the operation of a fee-based medical center is in any way essential to the practice or observance of the Catholic faith.
In reaching this conclusion, the court used a sort of "reductio ad absurdum" argument that we use all the time in law school - noting that if religious affiliation were the only test, then a church could open a restaurant and claim tax exemption because of the underlying affiliation.
Initially, I thought that this notion of "primary purpose" would serve us well in most circumstances in identifying a "religious organization" - not just for tax exemption, but for other exemptions from public policy mandates. For example, if the Catholic church did, in fact, open a chain of restaurants (not so far-fetched; churches have opened Starbucks franchises; see Elizabeth Bernstein, Holy Frappucino, Wall Street Journal, Aug. 31, 2001 at W1), I don't think many of us would expect those restaurants to be tax-exempt, free of the employment discrimination laws, or exempted from the contraception mandate. Similarly, it seems to me that the Illinois Supreme Court got it exactly right when it said that providing health services for a fee is not primarily aimed at advancing religion, any more than selling food for a fee would be so (usually - I could think of examples, such as a specialized kosher restaurant, that might alter my conclusion).
While this "primary purpose" test is, I think, fairly easy to apply to nonprofit hospitals (as most of you know, I view nonprofit hospitals as health care businesses rather than charities anyway), and many other services provided by religiously-affiliated organizations, the one area that is a difficult call for me is religious educational institutions. For example, one source on the internet indicates that 80% of the students at Notre Dame University self-identify as Catholic. My ad-hoc observations from interactions with other Catholic parents is that at the grade school and perhaps even high-school level, selecting a Catholic school is very heavily influenced by the fact that the students receive a religious education as well as a secular one. And yet this "ethos" is not entirely captured by a "primary purpose" test that focuses solely on outputs - one could easily conclude that the majority of education going on at Notre Dame, Georgetown, and Catholic grade schools and high schools across the country is secular education, not religious education (in fact, that's essentially what the 9th Circuit observed in the Sklar v. Commissioner litigation in the Section 170 context).
That leaves me with something of a quandry - but my preliminary thought is that perhaps that quandry is resolvable by including in the "primary purpose" mix the question of why consumers choose a particular service provider. For example, it seems to me that very few (if any) hospital patients consciously select a Catholic hospital because it is Catholic. I suspect that religious identity is simply not a consideration for the vast majority of people seeking health care services. They want the "best" hospital, or the more convenient hospital, but they don't really care whether it's Catholic, Jewish, Protestant or secular. I suspect that is also true of many other services provided by religiously-affiliated groups - for example, do homeless people really care if the soup kitchen is run by the Catholic Church? Of course not. What about adoption services? Again, likely not - if you want to adopt, religious affiliation is likely not high on your list of "things to look for in an adoption agency" (at least, as long as that affiliation does not forbid the organization from providing the requested services; gay couples obviously would steer clear of Catholic adoption agencies, since such agencies will not serve gay couples).
But when it comes to education, I'm convinced the opposite is true - I suspect that for a majority of people, religious identity is a very strong selection factor, particularly for primary and secondary education - and maybe even for Notre Dame.
I'm not sure where this ends up getting me, but I do believe the question of "what is a religious organization" ought to include some analysis of why individuals choose a particular service provider. If the majority of people select a particular service provider because of the provider's religious affiliation, that ought to tell us something, I think. Something to ponder, in any event.
June 4, 2012
Illinois Enacts Hospital Property Tax Exemption Standards
Late last week, the Illinois Legislature enacted a new law setting specific standards for nonprofit hospitals seeking property tax (and sales tax) exemptions. The new law, SB2194 (the tax exemption provisions begin on page 48 of the PDF file linked above), essentially requires nonprofit hospitals to provide unreimbursed services to the poor or government entities in an amount at least equal to the property tax that would have been assessed on the hospital's property in order to retain exempt status. For-profit hospitals would get a property-tax credit for the value of such services.
The new law is a response to the Illinois Supreme Court's decision in the Provena Covenant hospital exemption case, which we have previously blogged about a number of times (key posts are here and here). In that case, a plurality of the court held that Provena Covenant hospital in Urbana, Il failed to provide sufficient charity care to qualify for property tax exemption, although the court declined to set a specific standard for how much charity care would be enough. The resulting uncertainty created a mess, and this legislation was designed to end the uncertainty.
While I'm not going to attempt a detailed dissection of the legislation in this blog post, I do want to comment on a few items. The first is that while the bill does retreat a bit from the classic community benefit formulation of tax exemption for nonprofit hospitals in that it focuses on the unreimbursed costs of services to the poor or underserved populations as the only things that "count" for tax exemption purposes, the breadth of the definition of those services is very wide indeed. In addition to classic charity care (not charging charity patients at all or heavily discounting their services), Medicaid shortfalls count, as do Medicare shortfalls for so-called "dual eligible" patients (e.g., Medicare-eligible patients that also meet eligibility requirements for Medicaid). Also counting in the calculation are
the portion of unreimbursed costs of the relevant hospital entity attributable to providing, paying for, or subsidizing goods, activities, or services that relieve the burden of government related to health care for low-income individuals. Such activities or services shall include, but are not limited to, providing emergency, trauma, burn, neonatal, psychiatric, rehabilitation, or other special services; providing medical education; and conducting medical research or training of health care professionals.
While the hospital in question will have to make an allocation for the above costs attributable to low-income inividuals, you can see that the "community benefit" theme still runs strongly in this legislation. So strongly, in fact, that I seriously doubt the legislation will effect any change to nonprofit hospital behavior. In fact, a hospital that "missed" its numerical target could simply cut a check to an appropriate entity (e.g., a clinic for the poor) and maintain exemption that way. And the fact the legislation was supported heavily by the hospital industry causes me to think that my "serious doubt" will prove to be reality.
I also wonder if the result of having a specific mathematical target (the property tax that would otherwise have been due) will lead over time to fewer services for the poor than more. While I certainly don't see any hospital CEO getting up in front of her Board and requesting changes in policies to reduce services for the poor (that would certainly get a headline in the Chicago Tribune, if not the New York Times!), one wonders if over time more subtle changes in policy (or lack of new policies) will result in a "remarkable accident" where hospitals all end up just meeting the statutory requirements in order to retain exemption. As I told one reporter, call me in five years and let's see what has happened.
In addition, there is some question whether the legislation is in fact constitutional. The Illinois Supreme Court had previously held in the Eden Retirement Center case that what constitutes a "charity" for property tax exemption purposes is in the first instance a constitutional matter, and therefore the legislature may not contradict the courts interpretations of charity for property tax exemption purposes. How this plays out with SB2194 is an interesting question. On the one hand, the bill does stick to defining broad concepts laid out by the Illinois Supreme Court in Provena - the concept of charity care as a broad gift to the community and the overall concept of relief of government burden as a sine qua non of property tax exemption. On the other hand, the bill curiously "overrules" some specifics of the Provena case - for example, the plurality in Provena quite clearly stated that Medicaid shortfalls do not count for tax exemption purposes, while this bill quite clearly says they do.
Finally, there is the question whether this legislation will become a model for other states. (If I were in a snarky mood, I might ask why anyone in their right mind would copy something passed by the Illinois Legislature, but as the saying goes, even a stopped clock tells the right time twice a day). The truth is that I doubt it. The issue of nonprofit hospital tax exemption has been settled in many states either by statute (e.g., New York, Pennsylvania, Texas); or prior litigation (e.g., Vermont, in the Medical Center Hospital v. Burlington case). While there are a few states where the issue may still be open, I didn't see any rush by state departments of revenue or local county assessment boards to copy the Provena analysis, and I similarly doubt there will be much interest in the Illinois solution to the Provena case.