Illinois Property Tax Exemption Remains…For Now

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Property tax exemption and tax-exempt hospitals have been a highly controversial area for many years. Most recently, The Carle Foundation (“Carle”) v. Cunningham Township was brought to the Illinois Supreme Court challenging the law that allows Illinois’ not-for-profit hospitals to maintain property tax exemption. The Illinois Supreme Court decision, settled on March 23, 2017, concluded that not-for-profit hospitals in Illinois can maintain property tax exemption.

Background

Under Public Act 97-688, effective on June 14, 2012, the State of Illinois passed Section 15-86 of the Property Tax Code, exempting not-for-profit hospitals in the state from paying property taxes so long as the value of their charitable services was equal to or greater than their property tax liabilities. The local government authorities; however, have been challenging this law, arguing that many tax-exempt hospitals should be subject to property taxes; similar to other for-profit businesses.

The Case

Carle, which operates Carle Foundation Hospital in Urbana, IL, obtained a judgment that the charitable property tax exemption contained in the new Section 15-86 applied to its property tax exemption claims for years before the statute was effective in 2012. When summary judgment was entered in favor of Carle, the Circuit Court rejected a claim by local taxing bodies on the constitutionality of Section 15-86. On January 5, 2016, the Fourth District Appellate Court reversed the Circuit Court’s decision and held that Section 15-86 was unconstitutional. The case was appealed to the Illinois Supreme Court.

On March 23, 2017, the Illinois Supreme Court vacated the Fourth District Appellate Court’s decision concluding that the Appellate Court did not have proper jurisdiction to take the appeal.   However, when the Supreme Court vacated the Appellate Court decision, it did not address the question of the constitutionality of Section 15-86. Although this decision maintains property tax exemption for Carle for the time being, the Supreme Court remanded the case to a lower court for reconsideration.

Other Property Tax Exemption Challenges

The Carle case comes on the heels of other recent property tax challenges to hospitals and other tax-exempt organizations in the United States.  Outlined below are some of these property tax exemption challenges with respect to tax-exempt organizations.

In 2015 the Tax Court of New Jersey ruled, in the case of AHS Morristown, d/b/a Morristown Memorial Hospital v. Town of Morristown, that Morristown Medical Center (formerly Morristown Memorial Hospital) was liable for unpaid property taxes for tax years 2006 through 2015.

Provena Covenant Medical Center (“Provena”), an IRC §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 free care provided by Provena is inadequate and inconsistent with its claimed charitable purpose.

In August of 2011, the Illinois Department of Revenue denied property tax exemption to three hospitals based on their charity care levels. The State of Illinois utilizes five criteria which hospitals must meet in order to qualify as charities. In a widely known case, the court used that criteria to uphold a state decision that stripped Provena Covenant Medical Center 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.

Again, in early 2012, the Supreme Court of Pennsylvania affirmed the denial of real estate tax exemption in the case of Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals.

Most recently, on October 14, 2016, Princeton University (“University”) reached a settlement agreement related to a lawsuit brought against it by Princeton, New Jersey residents. As a result, Fields v. Trustees of Princeton University will not go to trial. In the lawsuit, the plaintiffs challenged the property tax exemption granted to Princeton University claiming that the University should be paying property taxes for its campus.

Conclusion

The payment of property taxes can impact a tax-exempt hospital’s ability to further its mission and tax-exempt purposes and provide benefit to the community. These cases, which are followed closely by various types of tax-exempt organizations, could potentially have regional, if not national, ramifications as it opens the door for other municipalities to challenge the tax-exempt status of hospitals, universities, and other types of traditionally tax-exempt organizations.

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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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