Illinois Tax-Exempt Hospitals Under Fire
Background
The Carle Foundation owns four parcels of land in Urbana, Illinois. It operates tax-exempt hospitals on two of these parcels, a day care center on a third and a power plant on a fourth which provides services to the other parcels of land. Prior to 2004, the four parcels were not subject to property tax and were considered exempt under section 15-65(a) of the Illinois Code. Beginning in 2004, the Cunningham Township assessor began assessing property taxes on The Carle Foundation on the four parcels determining them to be nonexempt and continued to assess property taxes through 2011. The Carle Foundation first filed suit on December 13, 2007 seeking property tax relief and has subsequently amended the complaint stating that “the four parcels should be exempt from real estate taxes during the assessment years 2004 to 2011 on the ground of charitable use.”
The Decision
In 2010, the Illinois Supreme Court ruled that nonprofit hospitals in the state should not qualify for property tax exemption if they behave like businesses. As a result of this ruling, three nonprofit hospitals were denied property tax exemption.
Illinois Legislature enacted Senate Bill 2194 in 2012 which set forth new standards for nonprofit hospitals seeking property tax exemptions. Under the Bill, in order for nonprofit hospitals to maintain property tax exemption, the nonprofit hospital must provide unreimbursed services to the poor or government entities in an amount equal to or greater than the amount the nonprofit organization would have been assessed for property taxes.
Senate Bill 2194 was a response to help end the uncertainty established in the Illinois Supreme Court’s decision in the Provena Covenant Medical Center (“Provena”) property tax exemption case. Provena, an Internal Revenue Code §501(c)(3) tax-exempt Catholic institution located in Champaign County, IL, owns 43 parcels of real estate. Provena allows outside, for-profit entities to use these facilities to generate personal and/or corporate profit. The Champaign County Board of Review denied Provena property tax exemption ruling that the percentage of charity care provided by Provena is inadequate and inconsistent with its claimed charitable purpose.
In addition, in August of 2011, the Illinois Department of Revenue denied property tax exemption to three hospitals based on the level of charity care provided. The State of Illinois utilizes five criteria which hospitals must meet in order to qualify as charities. The court used that criteria in the Provena case to uphold a state decision that stripped Provena of its property tax exemption for failing “to show by clear and convincing evidence” that it provided charity care to “all who needed it and applied for it” in 2002. Accordingly, utilizing the Provena decision, the Illinois Revenue Department denied requests for tax exemption from Northwestern Memorial’s Prentice Women’s Hospital in Chicago, Edward Hospital in Naperville, and Decatur Memorial Hospital.
Ruling
The Illinois 4th District appellate court ruled, in The Carle Foundation v. Cunningham Township, that 35 Ill. Comp. Stat. Ann. 200/15-86 was unconstitutional and stated that, in order for nonprofit organizations to be exempt from property taxes, the exempt property needs to be “used exclusively” for “charitable purposes”.
This ruling comes on the heels of the recent decision in New Jersey in the case of Morristown Memorial Hospital v. Town of Morristown, which Judge Vito L. Bianco revoked the hospital’s property tax exemption on the grounds that the operation and use of the property for which the hospital held tax exemption was conducted for profit. The Judge ruled that Morristown Medical Center (formerly Morristown Memorial Hospital) was liable for unpaid property taxes for the years 2006 through 2008. On November 10, 2015, Atlantic Health (the hospital’s parent corporation) and the Morristown town council reached an agreement to settle the Morristown Memorial Hospital property tax issue.
Atlantic Health agreed to pay the town of Morristown an upfront payment of $10 million and, in addition, annual installments for the next 10 years to cover $5.5 million in penalties and interest for the years 2006 through 2015. In addition, prospectively, approximately one-quarter of the property will be taxed at an assessed value of $40 million from 2015 to 2025 which will approximate another $1.05 million in annual tax payments; to be shared between the town and the Morris School District.
The Appeal
On January 28, 2016 The Carle Foundation announced that it will be appealing the decision on the grounds that it does provide charity care in amount that should allow for property tax exemption. The Carle Foundation said “This is about much more than a local property tax exemption. It is about defining the rules and making clear the laws that govern hospitals and municipalities alike. Most importantly, it is about tens of thousands of people in Illinois receiving lifesaving treatment for free via charity care programs at not-for-profit hospitals.”
Conclusion
The impact of this decision is not limited to just tax-exempt hospitals in the State of Illinois, but to tax-exempt hospitals nationwide. Tax-exempt hospitals and other types of tax-exempt organizations should be aware of the possible long-term effects of these recent rulings. The payment of property taxes or a negotiated payment in lieu of tax (PILOT) may impact a tax-exempt hospital’s ability to provide benefit to the community.
The cases, which were followed closely by various types of tax-exempt organizations, could potentially have regional, as well as national, ramifications as it has established certain guidelines for other municipalities to challenge the tax-exempt status of hospitals, universities, and other types of traditionally tax-exempt organizations.
Ask Our Experts
Please contact a member of Withum’s Healthcare Services Group at [email protected] for further questions or assistance.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
