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​Hospital Property Tax Exemption Law Held Unconstitutional by Illinois Appellate Court

Tax-Exempt Organizations Law Update Corbin J. Morris, Janice E. Rodgers

You may have thought that charitable property tax exemption standards already were getting tougher in Illinois, but this case is not going to help. On Wednesday, January 6, the Illinois Fourth District Court of Appeals ruled that part of a 2012 law that defined hospitals’ eligibility for charitable property tax exemption is unconstitutional. The case is Carle Foundation v. Cunningham Township, et al.

The law was enacted by the Illinois Legislature in 2012 in response to the Illinois Supreme Court’s 2010 ruling in the Provena case, in which the court denied a charitable property tax exemption to Provena Covenant Hospital in Urbana, Illinois (now part of Presence Health), because the hospital failed to provide sufficient charity care. The Supreme Court did not set a specific standard for the amount of charity care required. The new statute attempted to settle the resulting uncertainty by granting a property tax exemption to a hospital if, in essence, the amount the hospital spent on specified community benefits equaled at least the value of the tax exemption. The city of Urbana, along with other local taxing districts affected by the new law, challenged it in court in a case involving The Carle Foundation.

The Illinois Constitution establishes the outer limits of the charitable property exemption by providing that the legislature may exempt from taxation only “property used exclusively” for charitable purposes, among other exemptions. The Illinois legislature can narrow the definition of charity for tax purposes (for example, by providing that only not-for-profit corporations are entitled to the exemption), but it cannot expand the definition beyond the constitutional requirements established by the courts.

The Illinois Appellate Court found that the new statute was unconstitutional on its face because it impermissibly expanded eligibility for the property tax exemption. Contrary to the Illinois Constitution, which premises exemption on the property’s use, the court said the new statute granted exemption based only on the value of the community benefits conferred by the hospital. According to the court, “the legislature thereby added a new exemption to those authorized by [the Constitution]” by “merely requir[ing] the hospital entity to, in a manner of speaking, pay for its property tax exemption with certain services of equivalent value.” In the court’s view, the new statute did not require any charitable use of the property at all: a hospital could obtain exemption simply by paying subsidies to community clinics or unaffiliated hospitals.

Quarles & Brady Comment

It sometimes comes as a surprise to Illinois charities that 501(c)(3) federal tax status alone is not sufficient to qualify an organization for property (or sales) tax exemption in Illinois. In fact, the Illinois standard for exemption is much tougher and less clear than the federal standards, and recently Illinois taxing districts have been increasingly strict in granting exemptions—even for charities that are simply seeking renewal of existing exemptions. The exact requirements of the “exclusively” charitable use requirement in the Illinois Constitution have never been entirely clear, but this case indicates that the legislature may have even less leeway in setting parameters that fall within those standards than many had thought previously. We all may have to wait for the Supreme Court to weigh in again.

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This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact Corbin J. Morris at (312) 715-5066/, Janice E. Rodgers at (312) 715-5034/, or your Quarles & Brady attorney.