On March 18, 2010, the Supreme Court of the State of Illinois decided a property tax case that could have nationwide implications for charitable healthcare organizations. A copy of the decision is available at https://www.state.il.us/court/Opinions/SupremeCourt/2010/March/107328.pdf. The Court ruled that forty-three parcels of real estate owned by Provena Hospitals were not exempt from Illinois ad valorem property tax under either the charitable or religious use exemptions of the Illinois code. This plurality decision of the Illinois Supreme Court is disturbing because the Court seems to have gone out of its way to define charitable use, in the context of the taxation of property owned by a non-profit IRC § 501(c)(3) hospital, so narrowly that many hospitals operating in today’s healthcare environment may not be able to maintain their exemption if the reasoning in this case is adopted by other jurisdictions, including West Virginia.
The taxpayer in this case was Provena Hospitals, a IRC § 501(c)(3) charitable corporation formed when several groups affiliated with the Roman Catholic Church merged their healthcare operations. Provena Hospitals had a policy of accepting all patients regardless of ability to pay and of denying no patient care based on financial condition. At the evidentiary hearing, the attorney for the state was able to show that for the tax year at issue, Provena had only provided 0.3% of its patients free or discounted care and that the value of charitable care provided cost the hospital only 0.7% of the hospital’s annual revenue. The decision of the Illinois Supreme Court was based, at least in part, on the failure of Provena Hospitals to actually provide significant amounts of charitable care.
Interestingly, the decision in this case was a plurality opinion joined in by only three of the Illinois Supreme Court’s seven judges. Two other judges concurred in the result but dissented from the plurality’s reasoning on the charitable use issue. Two judges did not participate. This case could provide support to other states who are seeking to limit the meaning of the term “charitable organization” as applied to hospitals.
Illinois law requires that in order to be eligible for a charitable exemption from property tax, a two-part test must be satisfied. First, the property must be owned by an institution of public charity or by a similar entity. Second, the property must be “actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit.” This test for exemption is actually very similar to the West Virginia rule. In West Virginia, in order for property to be considered exempt from ad valorem taxation under the charitable use exemption, it must be owned by a corporation that is exempt from federal income taxes under IRC §§ 501(c)(3) or 501(c)(4). In addition, such property must be “used exclusively for charitable purposes and not rented or leased out for profit.” W. Va. Code § 11-3-9.
The opinion of Illinois Supreme Court first addressed the issue of whether Provena Hospitals was a public charity. In Methodist Old Peoples Home v. Corazon (39 Ill. 2d 149, 1968), the Court had identified the following distinctive characteristics of a charitable institution: (1) the corporation has no stock, capital stock or shareholders; (2) it earns no profits or dividends but derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in its 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 place any obstacles in the way of those who need and would avail themselves of the charitable benefits that it dispenses.
The three judge plurality of the Court had no problem determining that Provena Hospitals was an IRC § 501(c)(3) corporation which satisfied both the first and the fourth prongs of their charitable institution test. The Court, however, held that Provena Hospitals did not meet the other three prongs of the test because: (a) the primary source of funding for the hospital was not derived from charitable contributions but from fees charged for healthcare services; (b) the hospital had failed to show by clear and convincing evidence that it provided services to all who needed and applied for it; and (c) the hospital failed to show that it did not place obstacles in the way of those who needed and would have availed themselves of the charitable benefits the hospital dispenses.
The Court went on to reason that even if Provena Hospitals had been able to demonstrate that it was a charitable institution as defined by Illinois law, it failed to meet its burden of showing that it used its property for charitable purposes. The Court made it clear that the amount of charitable care actually provided was insufficient to justify the exemption. Finally, the plurality established an additional test that requires taxpayers to show that they are directly lessening the burdens of the governmental units who impose the property tax, in order to receive an exemption.
The two judges who concurred with the outcome of the plurality, agreed that Provena Hospitals had failed to establish its entitlement to an ad valorem tax exemption, but disagreed with the analysis of the plurality which established new standards for determining when property was being used for charitable purposes. Specifically, the dissent disagreed with the plurality’s establishment of a quantitative test for determining how much charity is sufficient in order to qualify property for a tax exemption, and with the establishment of a test requiring taxpayers to show that they had actually lessened the burdens of the governmental units from which they were seeking exemption in order to establish an exemption.
Counsel for Provena Hospitals and for the American Hospital Association have both spoken out against the ruling of the Illinois Supreme Court. Both have suggested that the Court’s decision is out of step with a broader view of exemption shared by the federal government and the majority of other states about what it means to be a charitable organization.
It is possible that the decision in Provena Hospitals could impel some county assessors to challenge this status quo. For this reason, we urge tax exempt hospitals operating in West Virginia to be on the alert for any attempt by county assessors to limit the charitable exemption for property directly used in furtherance of providing not-for-profit healthcare services to West Virginia citizens. We have already seen the West Virginia courts limit the charitable exemption in the case of assisted living communities. Given this ruling, it certainly seems possible that a similar challenge may be made to other healthcare providers. If you have any questions about this case or its potential impact on charitable organizations operating in West Virginia, please feel free to contact Jim Thomas, Taunja Willis-Miller or John Mairs at Jackson Kelly PLLC.