After the Provena court overturned the property-tax exemption for hospitals, the legislature passed a fix. Now the Illinois Appellate Court has overturned that statute.

The 1970 Illinois Constitution allows the General Assembly to exempt properties that are "used exclusively for…charitable purposes" from property taxes. Ill. Const. 1970, art. IX, § 6. How those exemptions work for not-for-profit hospitals has been contentious for a while. Cash-strapped counties want to collect property taxes; not-for-profit hospitals want to claim an exemption.

In Carle Foundation v. Cunningham Township, 2016 IL App (4th) 140795, the Illinois Appellate Court, Fourth District, raises this issue again, holding that a 2012 statute designed to clarify the definition of "charitable purposes" is unconstitutional and the hospital is thus liable for property taxes. On March 14, the Illinois Supreme Court stayed enforcement of the fourth district ruling "pending disposition of the petition for leave to appeal" to the high court. As of press time, the court has not yet decided whether to hear the case.

'[E]xclusive' use for a 'charitable purpose'

In 2010, the Illinois Supreme Court issued its ruling in Provena Covenant Medical Center v. Department of Revenue, 236 Ill.2d 368 (2010), finding that Provena did not satisfy the statutory definition of a "public charity" and so was not eligible for a property tax exemption.

In response, the General Assembly drafted legislation in 2012 to preempt Provena. The statute, which can be found at 35 ILCS 200/15-86, attempts to lower the bar for hospitals, allowing them a property tax exemption if the value of their charitable services provided meets or exceeds their estimated property tax liability. 35 ILCS 200/15-86(c). The 2012 statute defines those services as ones that "address the health care needs of low-income or underserved individuals or relieve the burden of government with regard to health care services." 35 ILCS 200/15-86(e).

After addressing several preliminary issues, the Carle court analyzes the constitutionality of the statute in light of article IX, section 6 of the Illinois Constitution of 1970, which in pertinent part allows tax exemptions only for property "used exclusively for…charitable purposes." The court first opines that the General Assembly is free to create a property tax exemption scheme that is more restrictive than allowed under the constitution - i.e., less generous to taxpayers - but it cannot provide exemptions that are more generous than the constitution allows.

The Carle court applies this principle to how the statute defines charitable purposes. The court first notes that for 106 years, the Illinois Supreme Court has "interpreted 'exclusive' use as 'primary' use." Carle, ¶ 123. However, this interpretation does not mean that non-charity work can be a major use. Instead, it must be "merely incidental." Id. ¶ 126.

The fourth district found that § 15-86 lackes "any mention of exclusive use for an exempt purpose," which "omits the constitutional standard." Id. ¶¶ 139-40. The court also found that the statute's offset scheme does not require exclusive use.

Beyond that, the Carle court found that the statute does not require any use of the property for charitable purposes because a hospital could obtain the exemption "simply by paying subsidies to community clinics." Id. ¶ 142. It held that "a property owner cannot buy a charitable exemption." Id. Ultimately, the court struck down § 15-86.

A waiting game

According to an anonymous source at the Illinois Department of Revenue, IDOR has received approximately 225 applications for exemption from hospitals. It will not act on those until the Carle appeal is decided. Another 75 eligible hospitals have yet to apply.

With no action being taken on the applications, counties and municipalities are hard pressed to project tax revenue. Along with hospitals, they are waiting to see whether, and if so how, the supreme court weighs in.