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ABA Health eSource
April 2010 Volume 6 Number 8

Illinois Supreme Court Upholds Revocation of Hospital's State Property Tax Exemption

By Stephen E. Weyl and Katie A. Ahern, Hinckley, Allen & Snyder LLP, Boston, MA,
David H. Johnson, Bannerman & Johnson, P.A., Albuquerque, NM

AuthorAuthorAuthorIn a case monitored by many tax-exempt hospitals nationwide, the Supreme Court of Illinois issued a decision on March 18, 2010 (“Decision”) 1 that upheld the Illinois Department of Revenue’s (“Department”) 2006 denial 2 of a property tax exemption for the 2002 tax year for Provena Hospitals (“Provena”) 3 with respect to its Provena Covenant Medical Center (“PCMC”) campus in Urbana, Illinois. Provena is a not-for-profit Illinois corporation that holds §501(c)(3) status 4 under the Internal Revenue Code of 1986, as amended (“Code”). Provena owns and operates six hospitals, including PCMC. PCMC is a full-service hospital serving a 13-county area in east central Illinois.

The Decision was rendered by five of the Supreme Court’s seven judges in a main and a concurring opinion. The three judge plurality took a fairly broad position with respect to what an entity must do to be entitled to a charitable real estate property tax exemption under Illinois law. The two other judges concurred in the Court’s result, but limited their concurrence to Provena’s failure to prove its entitlement to relief for the 2002 tax year, refusing to join in the main opinion’s use of a quantitative analysis of the amount of charitable care provided, which the plurality characterized as “modest”. 5

Because real estate property tax exemptions are state-specific, the Decision is necessarily limited to Illinois. Nevertheless, the factors considered by the Court have a potentially broader application than Illinois, especially at a time when the United States Congress the Internal Revenue Service and various other states are scrutinizing the differences in charity care provided by for-profit and not-for-profit hospitals, refining the concept of community benefit and reviewing other issues relating to charitable corporations.

The Illinois Property Tax Code provides real estate property tax exemptions for land (1) owned by public charitable institutions that is (2) actually and exclusively used for charitable purposes and not otherwise used for profit. The Court relied on its long-standing decision in Methodist Old Peoples Home v. Korzen 6 (“ Korzen”) in identifying the following five characteristics of a charitable institution: (1) it has no capital, capital stock, or shareholders, (2) it earns no profits or dividends but rather derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter; (3) it dispenses charity to all who need it and apply for it; (4) it does not provide gain or profit in a private sense to any person connected with it; and (5) it does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses. 7

The Court also relied on, and cited, Korzen’s definition of charity: “a gift to be applied * * * for the benefit of an indefinite number of persons, persuading them to an educational or religious conviction, for their general welfare, or in some way reducing the burdens of government.” 8

The Court measured these tests against the established standard of review and a presumption in favor of taxation. 9 Finding that the case presented a mixed question of law and fact, it applied the “clearly erroneous” 10 standard, which it characterized as “significantly deferential” 11 , allowing reversal of the Department’s decision “only when the reviewing court is left with the definite and firm conviction that a mistake has been committed.” 12 The Court concluded that the Department’s decision was not clearly erroneous. 13

Charitable Institution. In assessing the five factors stated in Korzen that control whether an entity is a charitable institution, the Court determined that Provena met the first (no capital, capital stock or shareholders) and fourth (no private inurement) factors. In ruling that Provena failed to meet its burden of proof on the other three factors, the Court drew the following conclusions.

Funds Derived From Charity. Provena failed to meet the second test. The Court noted that 3.4% of Provena’s income was derived from so-called “Other Revenue,” and Provena was unable to show what portion of that amount was attributable to charitable contributions. The only documented charitable contributions for 2002 were $6,938 in donations made to PCMC that, in the words of the Court, “were so small . . . they barely warrant mention.” 14

Provision of Charity without Obstacles. Similarly, the Court found that Provena failed to meet the third and fifth tests, requiring that “it dispensed charity to all who needed it and applied for it and did not appear to place any obstacles in the way of those who needed and would have availed themselves of the charitable benefits [Provena] dispenses”. 15 The factual record before the Court contained no information regarding Provena’s charitable expenditures in 2002, and affirmed the Department’s finding that that lack of evidence made it “not possible to conclude that the true owner of the property is a charitable organization”. 16

Use of Property. The Court also analyzed the second requirement of the property tax exemption, that the land at issue be “ actually and exclusively used for charitable or beneficent purposes” 17 and not used with a view to profit. The exemption requires charitable use as a primary purpose and is not satisfied by secondary or incidental charitable use or a mere aspiration to provide charity.

In evaluating charitable use, the Court looked to whether the use alleviated burdens which otherwise would be borne by the governmental entity losing revenue as a result of the exemption. The Court found the amount of free and discounted care offered to uninsured patients by PCMC to be de minimus, both in terms of the number of patients served and the dollar value of those services: “With very limited exception, the property was devoted to the care and treatment of patients in exchange for compensation through private insurance, Medicare and Medicaid 18 , or direct payment from the patient or the patient’s family.” 19

Although PCMC did not condition its services on patients’ ability to pay, it also did not advertise charitable care. In addition, balances left unpaid were automatically forwarded to collection agencies and were waived only if a patient could prove that no other source of payment was available and that he or she was otherwise eligible for participation in the charitable program. The Court drew a parallel between Provena’s approach to charitable care and a for-profit institution’s write-off of bad debt, while also observing the substantial disconnect between the amount of charitable care provided by Provena and the number of low-income and underinsured residents of the counties that it served. 20

The plurality also viewed Provena’s claims of charity as “often illusory”. 21 The discounts given to uninsured patients (50% and 25% in certain cases) frequently resulted in the patient being billed at an amount in excess of PCMC’s actual costs of care, which were less than 50% of its established charges on which uninsured patients were billed. Under Illinois law, charging patients a fee means the treatment “would not qualify as a gift. If it were not a gift, it could not be charitable.” 22

In denying Provena’s claim for a religious exemption, the Court observed that “the primary purpose for which the PCMC property was used was providing medical care to patients for a fee . . . . [M]edical care, while potentially miraculous, is not intrinsically, necessarily, or even normally religious in nature.” 23

The two concurring judges agreed that the record made it clear Provena had not proven its right to a charitable or religious real estate property tax exemption for 2002. They took issue, however, with the plurality’s view that Provena’s use of the property was not charitable because “the charity care provided was de minimus24 , asserting that that type of decision was best left to the legislature, rather than the judiciary. 25 The plurality’s “quantum of care requirement and monetary requirement 26 [are] without any guidelines. This can only cause confusion, speculation and uncertainty for everyone: institutions, taxing bodies, and the courts.” 27 The concurring opinion ended by noting that, based on the lack of a majority rationale, the discussion of charitable use “is not binding under the doctrine of stare decisis.28

In its most limited sense, the Decision holds only that Provena failed to carry its burden of proof for the 2002 tax year. However, and despite any differences between the plurality and the concurring judges about charitable use, the Decision clearly affirmed the long-standing principles of Illinois law which govern whether an institution constitutes a charity. Those principles make it clear that the burden of proving such status is substantial, and greater than in many other jurisdictions. The case also suggests that ongoing concerns at the Congressional level about the differences between not-for-profit and for-profit healthcare providers may gather support from the quantitative analysis performed by the plurality. In addition, state and local taxing authorities around the country may find inspiration in the decision and seek to replenish their depleted coffers through attacking the property tax-exempt status of local non-profit hospitals. While the only firm conclusion that can be drawn is that it is too early to accurately assess the meaning of the Decision, non-profit hospitals and their counsel are well-advised to re-examine their charity care and collections policies and practices in light of the Decision generally and its quantitative approach to charitable use in particular.

* * *

Please see the related teleconference Provena Hospital Decision: Is this the Beginning of the End of Real Property Tax Exemptions? on April 14, 2010.


1 Provena Covenant Medical Center et al. v. The Department of Revenue et al., Supreme Court of the State of Illinois (March 18, 2010). All references in this article are to the Court’s slip opinion.
2 The Department’s decision was discussed in the October 2006 eSource article “Illinois Department of Revenue Upholds Revocation of Hospital’s State Tax Exemption.”
3 Provena is exempt from the State’s sales and use tax, is an approved recipient of charitable donations in accordance with the Illinois State Attorney General’s determinations, and is a religious organization exempt from the State’s annual financial reporting requirements.
4 As the Court noted, this status does not “dispositive of whether real property is exempt from property tax under Illinois law.” Decision at 14.
5 Decision at 8. The plurality stated: “The hospital waived $1,758,940 in charges, representing an actual cost to it of only $831,724. This was equivalent to only 0.723% of PCMC’s revenues for that year and was $268,276 less than the $1.1 million in tax benefits which Provena stood to receive if its claim for a property tax exemption were granted.” Id.
6 39 Ill. 2d 149 (1968).
7 Decision at 16, citing Korzen at 157.
8 Id., citing Korzen at 156-157.
9 Decision at 14.
10 Citing Swank v. Department of Revenue, 336 Ill. App. 3d 851, 861 (2003) and Metropolitan Water Reclamation District of Greater Chicago, 313 Ill. App. 469, 475 (2000)
11 Quoting LeaderTreks, Inc. v. Department of Revenue, 385 Ill. App. 3d, 442, 446 (2008).
12 Decision at 13-14, citing Excelon Corp. v. Department of Revenue, 234 Ill. 2d 266, 273 (2009).
13 The Department’s decision was appealed to the Sangamon County circuit court which ruled that Provena was entitled to both charitable and religious exemptions under Illinois law. The circuit court’s decision was overturned by the Illinois Appellate Court which determined that the Department’s decision was not clearly erroneous. The Supreme Court noted that Provena had to meet its burden of proving its entitlement to an exemption by clear and convincing evidence. See Decision at 14.
14 Id.
15 Id.
16 Id., quoting Department decision.
17 Id., reciting from 35 ILCS 200/15-65 (West 2002).
18 Provena made the novel argument that its shortfall from its published charges with respect to Medicare and Medicaid patients constituted charity care. The Court noted that Provena did not have to participate in these programs, but chose to do so, receiving a steady income stream and federal tax benefits from such participation.
19 Decision at 21-22.
20 The Court noted that 13.4% of Champaign County residents (approximately 25,000)had incomes below the federal poverty guidelines and that an additional 20,000 did not have health insurance. In 2002, only 302 of PCMC’s 100,000 admissions were classified by PCMC as charity care cases.
21 Decision at 23.
22 Decision at 24.
23 Decision at 32.
24 Decision at 33.
25 The concurring judges relied primarily on a Michigan Supreme Court case ( Wexford Medical Group v. City of Cadillac, 474 Mich. 192, 713 N.W.2d 734 [2006]) and a Vermont Supreme Court case ( Medical Center Hospital of Vermont, Inc. v. City of Burlington, 152 Vt. 611, 566 A.2d 1352 [1989]). As noted above, real estate property tax exemption issues are state specific, although discussions of judicial versus legislative roles need not be.
26 Although the concurring judges refereed to a monetary requirement, the plurality opinion did not set a specific amount or quantum of care requirement, but it did indicate that charitable care amounting to less than the property taxes in question would be insufficient. See Decision at 8.
27 Decision at 36.
28 Decision at 37.

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