Friday, September 21, 2018

A (mostly unhelpful) Illinois Supreme Court Decision on Hospital Property Tax Exemption

Yesterday (Sept. 20, 2018), the Illinois Supreme Court released its long-awaited opinion in Oswald v. Hamer, a case about the constitutionality of a statute the Illinois Legislature passed in 2012 in the wake of the Provena Covenant hospital tax exemption case decided in 2010.  Unfortunately, the decision did not actually resolve the question of what a hospital must do in order to receive a property tax exemption, and in fact simply complicated that question.

Several prior blog posts detail the issues and final resolution of the Provena case, so I won’t go into detail on the background (see, e.g., here  and here).  Briefly, a plurality (not majority) of the Illinois Supreme Court held in Provena that the hospital in question failed the constitutional requirements of charitable property tax exemption because “both the number of uninsured patients receiving free or discounted care and the dollar value of the care they received” were de minimis.  While the plurality in Provena did consider what kinds of things might qualify as “charitable use” (free or discounted care for the poor being the primary one), the plurality did not lay out any specific standard for “how much” charity care (or other activities) would be necessary for a hospital to meet the charitable use requirements.  It simply said, more or less, that whatever that threshold might be, Provena did not meet it.   And the two justices that concurred in the result but dissented from the plurality’s analysis of charitable use more or less took the position that simply operating a nonprofit hospital “open to all” would qualify for charitable use without regard to any specific amount of charity care or other activity.

After Provena, the Illinois Department of Revenue withheld tax exemption from a handful of hospitals pending further contemplation of the opinion, resulting in a great howl of anguish from the nonprofit hospital industry about the uncertainty created in the wake of the case.  The Illinois legislature, largely guided by advice from the Illinois Hospital Association, responded by passing a statute providing a quantitative test for exemption: if the total value of certain services and activities (let’s call them “community benefit activities”) at least equals the property taxes that would be due on the hospital’s property, the hospital “shall be issued” a charitable exemption for its property.

The issue in Oswald was whether this statute was constitutional in light of prior Illinois Supreme Court interpretations of the constitutional requirements for charitable property tax exemption.  In particular, the court has interpreted the Illinois constitution as requiring that property be used “exclusively” for charitable purposes in order to be exempt (though “exclusively” actually means “primarily” in this context).  The plaintiff Oswald contended that the new Illinois statute violated the constitutional requirement of “exclusive charitable use” because it conferred tax exemption based upon a dollar standard that did not necessarily meet the “exclusive use” requirement.  For example, under the statute, a nonprofit hospital could in theory qualify for exemption by writing a check in an amount at least equal to the hospital’s putative property tax to a community health clinic that served the poor, even if the hospital itself served no poor patients at all, and offered zero free or discounted care.  In short, Oswald argued that since the statute permitted a charitable exemption without showing that the underlying property was in fact “exclusively” used for charitable purposes, the statute was unconstitutional.

The Illinois Supreme Court, however, held that the statute was constitutional, although the legerdemain required to reach this conclusion was substantial.  In effect, the court concluded that if there was any way to interpret the statute as being consistent with the constitutional “exclusive use” requirement, the court would do so.  Accordingly, the court stated that the statute was not really intended by the legislature to replace the exclusive use test; rather, the court essentially interpreted the statute as requiring an additional test for exemption for property owned by nonprofit hospitals: the property would have to meet both the exclusive use test, and the entity owning the property also would have to meet the monetary test of the statute.  “Therefore, a hospital applicant seeking a section 15-86 charitable property tax exemption must document the services or activities meeting the statutory criteria.  Additionally, the hospital must show that the subject property meets the constitutional test of exclusive charitable use.” [opinion page 13, emphasis added].  The word “shall” in the statute (“shall be issued a charitable exemption”) was not mandatory, according to the Court; rather, it was “permissive” – that is, despite the “shall” language, the Department of Revenue did not have to issue an exemption if the statute’s requirements were met but exclusive charitable use was lacking. I guess that in an area of law where “exclusively” means “primarily,” interpreting “shall” to mean “you can if you want to” isn’t all that surprising.

So where does the court’s opinion leave Illinois nonprofit hospitals?  My interpretation is that it leaves them mostly back where they were after the Provena decision.  The court in Oswald did not shed any light on how a nonprofit hospital would meet the “exclusive use” test, beyond referring to current precedents, including Provena and earlier exemption cases.  About the only thing that is clear is that in light of Oswald, hospitals cannot simply rely on the statute to get exemption. Meeting the statutory requirements, according to the court, is only half the battle (maybe in fact, only a tiny part of the battle since the statutory standard is relatively easy to meet, as one might expect from a statute drafted by the industry itself); the other half is showing that the property in question is “exclusively” (remember, really “primarily”) used for charitable purposes.  Does the exclusive use test require some minimum amount of charity care?  Some evidence that hospital operations are primarily designed to serve the poor?  Or is simply operating a community hospital “open to all” itself a charitable endeavor regardless the amount of charity care actually provided (as the two partially-dissenting justices in Provena suggested)?  Oswald did not answer this question, and since Provena was a plurality opinion, the really important issue – what qualifies property as being “exclusively” used for charity in the hospital context – remains as cloudy today in Illinois as it was after the Provena decision in 2010.  And that, in turn, means that more litigation is inevitable – in fact, a case involving Carle Foundation Hospital is proceeding in Champaign County Circuit Court that may be the vehicle that eventually will force the Illinois Supreme Court to actually answer the substantive question regarding what a nonprofit hospital must show to establish “exclusive charitable use.”  That case is scheduled for trial in January 2019; perhaps in a couple of years, after various appeals, we will finally have a definitive answer.

JDC

https://lawprofessors.typepad.com/nonprofit/2018/09/-a-mostly-unhelpful-illinois-supreme-court-decision-on-hospital-property-tax-exemption.html

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