Illinois Supreme Court Holds Provena Covenant Medical Center Is Not Exempt From Illinois Property Tax
On March 18, 2010, the Illinois Supreme Court upheld the decision of the Illinois Department of Revenue to deny Provena Hospital’s application for property tax exemption for the Provena Covenant Medical Center located in Urbana, Illinois. This decision may jeopardize the property tax exemptions for other hospitals in Illinois owned by not-for-profit corporations.
The Illinois Supreme Court applied a two-part test to determine whether property qualifies for a charitable exemption. The property must be owned by a charitable institution and the property must be actually and exclusively used for charitable or beneficial purposes, and not leased or otherwise used with a view for profit. Provena Covenant Medical Center failed both the charitable ownership and the charitable use requirements.
While the requirement to show both charitable ownership and charitable use to obtain tax exempt status is not new, the Court’s analysis of the factual support required to satisfy these requirements does break new ground, and may result in the imposition of property taxes on other hospital real estate owned by not-for-profit corporations. The Court also applied a standard of review which affords much deference to the findings of the Illinois Department of Revenue.
The Court unequivocally announces that merely satisfying the federal standard for tax-exempt status under Internal Revenue Code Section 501(c)(3) is insufficient to establish property tax exemption under Illinois law.
Provena Covenant Medical Center failed to meet the “charitable ownership” requirement because it failed to prove by clear and convincing evidence that: (i) the funds of the hospital are not profits or dividends but derived mainly from private and public charity and held in trust for the purposes expressed in its charter; (ii) the hospital dispensed charity to all who needed it and applied for it; and (iii) the hospital did not appear to place any obstacles in the way of those who needed charity care and would have availed themselves of the charitable benefit the hospital dispenses. The Court based its review upon the evidence of charity care presented to the Department of Revenue, and found that only 302 of 10,000 inpatient and 100,000 outpatient admissions, representing 0.27% of the hospital’s total number of annual patients, received charity care. Monetarily, this level of charity care corresponded to $831,724 in costs (which the Court noted was less than the value of the property tax exemption), which equaled 0.723% of the hospital’s annual revenues.
Provena Covenant Medical Center failed to meet the “charitable use” requirement because it failed to prove by clear and convincing evidence that the specific hospital property for which the exemption was sought was actually and exclusively used for charitable purposes. To reach this decision, the Illinois Supreme Court analyzed (i) whether Provena’s charitable actions lessened in any way the government’s burden to care for and advance the interests of its citizens, both in terms of the type and term of services provided, and (ii) whether the amount of Provena’s charity care dispensed on the property in question was significant and not merely de minimus.
The focus of the Illinois Supreme Court on the two factors noted above to determine charitable use breaks new ground in the analysis of the charitable use requirement. It is noteworthy that this analysis of the charitable use test was supported by only three of the seven Illinois Supreme Court justices. It remains to be seen how Illinois County Boards of Review, the Illinois Department of Revenue and Illinois courts will scrutinize these factors when evaluating tax exemption applications.
The Provena decision imposes several new requirements for a not-for-profit hospital to attain tax exemption for its property. First, it imposes the burden upon non-profit hospitals to demonstrate (i) how much of the hospital’s revenue comes from charitable contributions as opposed to fees generated from providing medical care, (ii) how the hospital is run as a true charity as opposed to being a profit-focused institution (including how its billing and collection practices are implemented), (iii) how easily accessible the hospital’s charity care program is to those in need of charity care, as opposed to simply being the “payor of last resort,” (iv) how transparent and well-publicized the hospital’s charity care policy is, and (v) how much charity care the hospital actually dispenses on the actual real estate for which the exemption is sought (either in terms of actual number of patients receiving free or discounted care or the dollar amount of the value of charity care received).
Second, it is important to note that while the Provena decision does not impose a dollar-for-dollar correlation between the value of the tax exemption sought and the value of the charitable goods or services provided by the hospital, the plurality of the Court was clearly troubled by the fact that the value of the charitable services provided (as calculated by the Court to separate “true charity” from the excess costs of the Medicare/Medicaid programs and general “bad debts” which for-profit hospitals also incur) was significantly less than the value of the tax exemption sought.
Third, the ruling highlights that the requirements for Illinois property tax exemption are more stringent than general federal or state income tax exemption requirements, and that the burden of proof to prove all required elements for Illinois property tax exemption falls entirely on the hospital seeking tax exempt status. Failure to meet the required burden of proof may result in denial or revocation of tax exempt status for the property in question.
Fourth, Provena reiterates the deferential standard of review for property tax exemption decisions. Creating a thorough and complete evidentiary record early in the tax exemption application process is thus crucial.
Fifth, if applied strictly, the need to show significant public support via charitable contributions instead of merely payments from governmental and commercial payors for healthcare services provided would be a high burden to satisfy for most modern not-for-profit hospitals. This standard also illustrates the importance of proactively establishing how well the hospital’s charity care program serves the community by being actively and substantially used, readily accessible and well-publicized in the community. Unfortunately, no bright line tests were announced as to the quantum of charity care that would be sufficient to satisfy the charitable ownership test; these tests will evolve over time at the administrative level in response to exemption applications.
With respect to the proper application of the “charitable use” test, the conflict between the Court’s plurality opinion (supported by three judges) and concurring opinion (supported by two judges) left a muddled picture, given the recusal of the other two judges would hold the majority-establishing vote. Until a clear majority of the Court adopts a position on this point in a future case, the interpretation of the charitable use test will remain unsettled.
In conclusion, after Provena, Illinois non-profit hospitals should expect expanded challenges to property tax exemption on charitable grounds. Hospitals should be prepared to demonstrate that they do function as charitable institutions with robust charity care programs that substantially benefit their communities, and to explain how their facilities are used to advance those purposes. Hospitals will need to advance the points successfully at the administrative level, given the judicial deference that will be shown to the analyses at the administrative agency level.
Alfred Henneboehle, Officer
Cristina E. Spicer, Associate