A new chapter has been added to the long saga of property tax exemptions for hospitals in Illinois.  Last week, an Illinois Appellate Court struck down as unconstitutional Section 15-86 of the Property Tax Code, which created a procedure for granting exemptions to hospitals if the total value of the hospital’s charitable services exceeded the hospital’s estimated property tax liability.  Given the legal issues involved and the significance of this issue to both hospitals and taxing agencies, this decision is unlikely to be the final chapter.  The decision in Carle Foundation v. Cunningham Township is the latest development regarding an issue we have been reporting on for many years.  Over a dozen years ago Champaign County tax officials began questioning the charitable tax exemption for two major hospitals in Urbana, Provena Covenant Medical Center and Carle Foundation Hospital.  For tax year 2004, exemptions for both hospitals were revoked.  This created shock waves throughout the hospital industry as reported on the front page of The Wall Street Journal.  Both matters ended up in court.  In 2010, the Illinois Supreme Court issued a decision on the Provena matter finding that the hospital did not qualify for a charitable property tax exemption (read the FR Alert here).  After two years of uncertainty during which several hospitals were denied charitable property tax exemptions, the Illinois General Assembly and Governor Quinn enacted P.A. 97-688, which included a new Section 15-86 of the Property Tax Code (read the FR Alert here).  Section 15-86 created a specialized charitable property tax exemption for hospitals under which a property tax exemption would be granted so long as the total value of seven types of hospitals provided services and activities exceeded the estimated tax liability of the hospital.

The 46-page decision in Carle Foundation addresses many issues before discussing the constitutionality of Section 15-86.  Initially, the Court considers the appropriateness of an interlocutory appeal in this particular matter.  The Court then provides an overview of the administrative process by which the Illinois Department of Revenue grants or denies exemptions.  The reason for this discussion is the procedural posture of this case.  Carle Foundationinvolves a request for an exemption brought in circuit court rather than through the administrative process at the Department of Revenue.  The Court concludes that this is appropriate under Section 23-25(e) of the Property Tax Code because The Carle Foundation was seeking a retroactive exemption for tax years 2004-2011, which was an exemption it enjoyed before 2004 and again after 2011.  The purpose of the Court’s lengthy discussion of secondary issues is to try and resolve the case on issues other than the constitutionality of Section 15-86.  Ultimately, the Court concludes that it has no other choice but to examine the constitutional issue.

The conclusion that Section 15-86 is unconstitutional is premised on language in the Constitution of the State of Illinois requiring that the “exclusive” use of property be for charitable purposes in order for a property tax exemption to be granted.  Article IX, Section 6 of the Constitution states that the General Assembly may provide an exemption from taxation only for “property used exclusively for . . . charitable purposes.”  According to the Court, Section 15-86 contains no such limitation on eligibility for the hospital exemption.  According to the Court, a hospital not used exclusively for charitable purposes would still be entitled to an exemption under the language of Section 15-86 if the value of its charitable services exceeds the estimated amount of its property taxes.  Because the Illinois General Assembly did not require hospitals receiving the exemption to be used exclusively for charitable purposes, the Court concluded that Section 15-86 is unconstitutional.

In reaching this conclusion, the Court addressed several issues that raise the possibility of review by the Illinois Supreme Court.  First, the Court discussed how “exclusive” use has been interpreted over the years by other courts to mean “primary.”  This implicitly raises the issue of how much of a property needs to be used for charitable purposes in order to qualify for an exemption.  Second, the Court addresses two legal standards for determining the constitutionality of legislation.  One standard involves the requirement that where two possible interpretations of a statute are possible, a court must choose the interpretation resulting in the statute being found constitutional.  The Court could not, however, find any interpretation of Section 15-86 that would result in it being constitutional because there is no requirement of exclusive charitable use of hospital properties that receive the exemption.  More importantly, the Court is highly critical of the other legal standard known as the “No-Set-of-Circumstances” test.  Under this test, a statute is facially unconstitutional only if no set of circumstances exists under which it would be valid.  After modifying the analysis and application of this legal standard, the Court concludes that there is no set of circumstances under which Section 15-86 is constitutional.

Going forward it is likely the Illinois Supreme Court will be asked to address the issue.  If the Supreme Court refuses to take up the case, the current decision will stand and hospitals seeking exemptions will have to measure up to the standards in effect before Section 15-86 was adopted as set forth in the Provena decision.  There is also the possibility of new legislative action.  In the meantime, some hospitals may be required to begin paying property taxes as well as prior year property taxes.  We have heard through informal channels that the Illinois Department of Revenue will be holding off on issuing any new exemption determinations under Section 15-86 while this issue is being resolved in the courts.