This week, the Illinois Supreme Court will hear oral argument in an important case for Illinois hospitals, which also has significant ramifications for property tax bases for local government entities. The Carle Foundation v. Cunningham Township decision will impact the way non-profit hospitals do business in Illinois and the tax dollars that flow from them.
The power to exempt properties from tax obligations is created by the Illinois Constitution. Article IX, Section 6 explains that, in order to qualify for exemption as a “charitable” use, the property must be “used exclusively for charitable purposes.” The charitable use exemption was then codified in the Property Tax Code. As time passed, courts loosened the exclusivity requirement to encompass properties that are primarily put to charitable uses. However, in 2010, the Illinois Supreme Court issued a decision in Provena Covenant Medical Center v. Dept. of Revenue, finding that a hospital had gone too far in seeking to take advantage of the charitable use exemption, and would be required to pay property taxes.
Hospitals then turned to Springfield for a legislative fix. In 2012, a new statutory tax exemption for hospitals was triggered “if the value of services or activities [that address the health care needs of low-income or underserved individuals or relieves the burden of government] equals or exceeds the relevant hospital entity’s estimated property tax liability for the year for which exemption is sought” (35 ILCS 200/15-86). The legislation was retroactive requiring many taxing bodies to return multiple years of property taxes, regardless of whether the money had already been spent.
This was then challenged in the 4th District Appellate Court in Carle Foundation. The appellate court held that Section 15-86 is inconsistent with the Illinois Constitution’s charitable use exemption. This court reiterated the requirement that the property itself must be used for charitable purposes. The court reasoned that “[a] property owner cannot buy a charitable exemption” by “in a manner of speaking, pay[ing] for its property tax exemptions with certain services of equivalent value.” Because that is what Section 15-86 allows, as shown by the actions of the hospitals, the court deemed the statute to be incompatible with the Illinois Constitution. The court concluded that Section 15-86 failed to adhere to the constitutional standard of “exclusive” charitable use and that “it was unenforceable from its inception.”
The Carle Foundation then appealed to the Illinois Supreme Court. On March 14, 2016, the Illinois Supreme Court stayed enforcement of the 4th District ruling, pending disposition of the petition for leave to appeal to the Illinois Supreme Court. On January 12, 2017, the Illinois Supreme Court will hear the case and a decision will occur later in 2017. It will be interesting to see if the hospital lobbyists in Springfield are able to push through another legislative fix.
We will continue to follow the Carle Foundation case and will provide updates as they become available. If you have any questions about how this applies specifically to your agency, please contact your Tressler attorney.