Wednesday, January 6, 2016

Illinois Appellate Court Declares Hospital Tax Exemption Law Unconstitutional

As many of you may recall, in March 2010 the Illinois Supreme Court upheld a ruling by the Illinois Department of Revenue denying a charitable property tax exemption to what was then Provena Covenant Hospital in Urbana, IL (now Presence hospital).   For prior blog posts about that decision, see here and here.   After the court decision, the Illinois Legislature in 2012 enacted a new statute to define eligibility for charitable property tax exemption (for a blog post about that statute, see here).  In essence, this new statute permitted hospitals to get a tax exemption if the amount they spent on specified community benefits (such as charity care for the uninsured, although the list of qualifying expenditures was very broad) at least equaled the value of the tax exemption.

The city of Urbana, where another large nonprofit hospital (Carle Hospital) is located, however, was not happy with the statutory fix, which would have resulted in their losing over $1 million a year in tax revenue from Carle's exempt status.  Urbana and other local taxing districts affected by the new law challenged it in court, and today (Wednesday, January 6) the Illinois 4th District Court of Appeals held the new statute unconstitutional on its face.  You can find the opinion here.

The Illinois Supreme Court previously had smacked down the Legislature for expanding the definition of charity for property tax exemption purposes in Eden Retirement Center v. Department of Revenue.  The court's view is that the outer limits of charitable exemption are set by the Illinois Constitution; accordingly, the Legislature can narrow the definition of charity for tax purposes, but it cannot enlarge that definition beyond what the courts have established as the constitutional requirements for charitable exemption.  Or put another way, what is "charitable" for Illinois property tax purposes is ultimately a matter for the Illinois Supreme Court to decide, not the legislature.

The 4th District found that the new hospital exemption statute went beyond the constitutional limits on exemption.   Specifically, the Illinois Supreme Court previously had held that the constitution requires that exempt property be used "primarily" for charitable purposes.  But the hospital exemption statute did not require exempt property to meet the "primary use" requirement.   Indeed, the statute permitted a hospital to keep its exemption by simply paying another recognized charity an amount equal to the value of the hospital's exemption.   As the court noted, in essence this permitted a hospital to "buy" exempt status without regard to the charitable use of the hospital's own property.  And since charitable use is a constitutional requirement, this approach made the statute unconstitutional on its face.

At the time the statute was passed, I had serious questions about its constitutionality.   Although the court's analysis took a different tack than my own, it seems those concerns were justified.  This case, however, is clearly headed to the Illinois Supreme Court.  It will be very interesting to see whether the court delivers yet another smackdown to the Illinois Legislature, which is pretty much batting .000 on recent major legislation (its pension "reform" law having been declared unconstitutional in a strongly-worded opinion by the Illinois Supreme Court last year).

In the meantime, the appellate opinion isn't going to have much effect, I suspect.  It may result in a "hold" on processing a few hospital exemption applications or renewals pending the inevitable appeal (I can't imagine that this case won't be heard by the Illinois Supreme Court), but it is likely that everyone - both taxing districts and hospitals - will simply operate under the current status quo until the matter is finally resolved.  If the Illinois Supreme Court upholds the appellate opinion, however, then things are going to get very, very interesting for nonprofit hospitals in Illinois, many of whom may face loss of exemption as a result.

John Colombo

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