Nonprofit Hospital Tax Exemption Suffers Yet Another Blow In Illinois
By Neville M. Bilimoria, Esq., Duane Morris LLP, Chicago, IL

Review by Julie Moore¸ Roger Willliams University School of Law, Class of 2010

An Illinois Appellate Court recently handed down a decision that could have implications for non-profit hospitals seeking to maintain their tax-exempt status. On August 26, 2008, the Court, in Provena Covenant Medical Center v. Illinois Department of Revenue, 894 N.E.2d 452 (Ill. Cir., 4th Dist., 2008) held that the Illinois Department of Revenue (IDR) correctly denied Provena Covenant Medical Center (Provena) a property tax exemption because Provena does not qualify as a charitable organization.

The Court first concluded that the applicable standard of review on appeal was to review the IDR’s decision for clear error. This determination was critical because it gave the IDR’s decision a high level of deference and thus made it difficult for Provena to prevail.

The Court then referenced Section 15-65(a) of the Illinois tax code and Section 6, Article IX of the Illinois Constitution. Both provisions specify that properties of public charities are tax exempt only when they are exclusively used for charitable purposes. In interpreting the constitutional provision, the Court held that the state legislature has the power to limit exemptions beyond those set forth in the aforementioned section of the state Constitution. Thus, the legislature’s additional requirement for property tax exemption, that the property be owned by an institution of public charity, was valid. Accordingly, the Court determined that in order for a non-profit hospital to qualify for a property tax exemption in Illinois, it must be exclusively used for charitable purposes and must also be owned by a charitable organization.

The traditional test for determining whether an institution is charitable under Illinois law was delineated by the Illinois Supreme Court in Methodist Old People’s Home v. Korzen, 233 N.E.2d 537 (Ill. 1968), and includes the following six factors: 1) “the institution bestows benefits on an indefinite number of persons for their general welfare, or the benefits in some way reduce the burdens on government; 2) the institution has no capital, capital stock or shareholders and does not profit from the enterprise; 3) the funds are derived mainly from private and public charity and are held in trust for the purposes expressed in the charter; 4) the charity is dispensed to all who need it and apply for it; 5) the institution puts no obstacles in the way of those seeking the charitable benefits; and 6) the primary use of the property is for charitable purposes.”

Using the Methodist test, the Court analyzed Provena and held that it was a not charitable institution. As to the first factor, the Court concluded that Provena’s provision of medical services was not sufficient, in and of itself, to relieve the state’s burden. The Court skipped the second factor and moved on to assess whether Provena’s funds were derived primarily from private and public charities. It concluded that because only 3.4% of Provena’s revenue flowed from public and private charities, Provena did not have the “charitable identity” necessary to establish it as a charitable institution. The Court next determined that Provena didn’t satisfy the fourth or fifth factors of the Methodist test because it did not provide sufficient evidence of the amount of charity it dispensed. Finally, the Court evaluated the sixth factor, and concluded that Provena did not primarily use its property for charitable purposes because it devoted only 0.7% of its revenue to charity care.

Provena’s petition for leave to appeal was recently accepted by the Illinois Supreme Court. Non-profit hospitals nationwide will likely anxiously await a decision in that case because it may have far-reaching effects.

For more information on non-profit hospital tax exemptions, see Volume 21, Number 4, April 2009 of The Health Lawyer. [Members Only PDF].

Julie Moore is a 2L at Roger Williams University School of Law where she is an Articles Editor of the Law Review. She holds a Master’s of Science in Physician Assistant studies and practiced as a physician assistant specializing in hematology-oncology prior to attending law school.