ARE YOU CHARITABLE ENOUGH?

Scott G. Weber By: Scott G. Weber

Does your company rely on the "charitable institution" exemption for property taxes?1 Recently, an Urbana hospital providing more than $38,000,000 in free care and community benefits was ruled "not charitable enough" by the Illinois Supreme Court and therefore lost its tax exempt status.2 The landmark decision of Provena Covenant Medical Center v. Illinois Department of Revenue has forced many non-profit hospitals which rely on the exemption to reconsider their charitable efforts and aggressive accounting practices.3 This article outlines the holding in Provena, the effects this ruling has for non-profit hospitals, and possible solutions to ensure that your business does not lose its tax-exempt standing.

In Illinois, statutes granting property tax exemptions are strictly construed in favor of taxation as the Illinois Constitution provides that all land is subject to taxation.4 Thus, a heavy burden must be met by the proponent of the exemption in order to qualify.5 One commonly used property tax exemption is for "charitable institutions."6 Unfortunately, the statutory language in the exception is confusing, so the Illinois Supreme Court enunciated a five-factor test to determine if an institution is "charitable" enough to avoid paying property taxes.7

The five factors to consider are: (1) the company has no capital, capital stock, or shareholders; (2) it earns no profits or dividends but rather derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter; (3) it dispenses charity to all who need it and apply for it; (4) it does not provide gain or profit in a private sense to any person connected with it; and (5) it does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses. A court will consider each institution on a case by case basis in light of all the factors listed above.8

In Provena, the Illinois Supreme Court found that the medical center met factors one (1) and four (4) above. However, Provena failed to meet the remaining factors. When considering factor two (2), the Department's primary basis for denial was that Provena allocated only seven-tenths of one percent (0.7%) of its net patient service revenue to charity care of those patients unable to pay. The Court concluded that this amount of charitable care was insufficient to withstand the constitutional scrutiny required to justify a property tax exemption.9

State legislators have debated setting a precise level of charity care to meet the exemption, but have not followed through on passing such legislation.10 This precedent indicates that courts in the future can arbitrarily determine how much charity care should be provided without using a defined standard, and hospitals are left without knowing whether forgiving unpaid medical bills and offering medical services for free will be considered in determining whether they meet the state exemption. Therefore, hospitals should avoid aggressive accounting practices and ensure that a higher percentage of its revenue is allocated to charity care.

The Court determined that Provena failed factors three (3) and five (5) as well, because it did not advertise that it was a charitable organization, patients were billed regularly for services, and when patients could not pay, they were automatically referred to a collection agency. Despite the fact that Provena provided care to everyone who requested it and discounted its prices when treating the indigent, Provena failed to meet its heavy burden under factors three (3) and five (5). In addition, the Court rejected Provena's argument that treating those on Medicare and Medicaid was charitable, because accepting such patients is optional and generates a steady stream of income from resources that might otherwise be underutilized.11 Therefore, hospitals seeking the exemption, should promote and publicize their charitable efforts and avoid regularly billing patients who may need charity care.

Although the decision in Provena addressed a large hospital provider, the precedent concerns all non-profit entities across Illinois and is likely to take on national importance. All institutions seeking this exemption should consider reviewing their bylaws, admissions policies, charity care policies, collections policies, and any other policy that could be used to show a lack of charitable purposes within the organization. If you need assistance in reviewing, revising, or drafting such policies or dealing with other business-related legal issues, please give me a call at 309-674-1133 or email me at sweber@qjhpc.com.

  1. 35 ILCS 200/15-65 (West 2002)
  2. Provena Covenant Medical Center v. Dept. of Revenue, 2010 WL 966858.
  3. Japsen, Bruce. "Illinois Supreme Court Rules Provena must pay tax." Chicago Tribune. 3/18/2010.
  4. Methodist Old People's Home v. Korzen, 39 Ill.2d 149 (1968).
  5. Coyne Electrical School v. Paschen, 112 Ill.2d 387 (1957).
  6. Ill. Const. 1970, art. IX, ยง6.
  7. Methodist Old People's Home v. Korzen, 39 Ill.2d 149 (1968).
  8. Provena Covenant Medical Center v. Dept. of Revenue, 2010 WL 966858.
  9. Seitz, William. "Provena Covenant Medical Center v. Dept of Revenue." Tax Trends. Vol. 53 No. 11. May 2010.
  10. Japsen, Bruce. "Illinois Supreme Court Rules Provena must pay tax." Chicago Tribune. 3/18/2010.
  11. Kiselev, Marianna. "Provena Covenant Medical Center v. Dept of Revenue." Illinois Business Law Journal. 4/26/10.