Last week the Illinois Supreme Court announced its much-anticipated decision in Carle Foundation v. Cunningham Township.[1] The court unanimously vacated the Illinois Appellate Court’s ruling that Section 15–86 of the Illinois Property Tax Code, [2] which governs charitable property tax exemptions for nonprofit hospitals, is unconstitutional, remanding the case to the circuit court for further proceedings.

The supreme court’s opinion was premised on purely jurisdictional grounds; it did not address the constitutionality of Section 15–86 on the merits. But for now, subject to another much-anticipated decision by the appellate court in Oswald v. Hamer, [3] there is renewed certainty that hospitals seeking charitable property tax exemptions can invoke Section 15–86.

The developments leading up to Carle

The Carle decision cannot be viewed in isolation. It is one piece of an evolving legal framework that dates back at least as far as 2002.

At that time, a controversy erupted over whether, to qualify for a charitable exemption, the Illinois Constitution’s charitable-use test required hospitals to provide a specific amount of so-called “charity care”—i.e., free or discounted services to low-income individuals.

The issue came to a head in 2006 when the Illinois Department of Revenue (DOR) denied Provena Covenant Medical Center a charitable exemption based on the small percentage of Provena’s charity care compared to its overall budget.

Fast forward to 2009, when the supreme court decided the appeal from the DOR’s decision in Provena Covenant Medical Center v. Department of Revenue. [4] In Provena, a majority of the court held that, based on the evidence of record, the DOR properly concluded that the property in question was not owned by a charitable institution and therefore was not entitled to a charitable exemption under the statutory test for charitable ownership [5] The court reached no majority on the proper test for deciding whether a hospital satisfies the Illinois Constitution’s charitable-use requirement, a separate analysis from the statutory test.[6]

In the wake of Provena, the Illinois General Assembly enacted Section 15–86 to address the lingering uncertainty over charitable exemptions for nonprofit hospitals. Section 15–86 was intended “to establish a new category of ownership for charitable property tax exemption” [7] in which a hospital could satisfy the conditions for exemption if “the value of services or activities” enumerated in the statute “exceed[ed] the relevant hospital entity’s estimated tax liability” for the year in question.[8]

The Carle litigation, which began in 2007, involves an exemption request for four parcels of land in Urbana, Illinois. Because the litigation was pending at the time Section 15–86 took effect, the plaintiff requested an exemption under the statute. Ultimately, the case resulted in an interlocutory appeal from the circuit court’s determination that Section 15–86 applied to the plaintiff’s exemption request.

On appeal, after addressing a number of threshold questions, including its jurisdiction to hear the appeal, the appellate court declared Section 15–86 facially unconstitutional.[9] The court reasoned that Section 15–86 impermissibly grants charitable exemptions “on the basis of an unconstitutional criterion, i.e., providing services or subsidies equal in value to the estimated property tax liability . . . without requiring that the subject property be ‘used exclusively . . . for charitable purposes,’” as required by the Illinois Constitution.[10] The court’s decision resulted in an appeal as of right to the Illinois Supreme Court.

While the Carle appeal was pending before the supreme court, the appellate court issued its decision in Oswald. There, unlike in Carle, the court held that Section 15–86 is facially constitutional, reasoning that the statute need not expressly incorporate the constitutional charitable-use standard for that standard to apply.[11]

Oswald is not over yet. The appellate court recently heard oral arguments on the plaintiff’s petition for rehearing. It remains to be seen whether the Oswald court will modify its original opinion in any way. And once its judgment becomes final, the losing party will have 35 days to file a petition seeking leave to appeal the judgment to the Illinois Supreme Court.

The Illinois Supreme Court’s decision in Carle

It was against this backdrop that the supreme court issued its decision in Carle.The court’s holding is relatively straightforward: the Illinois Appellate Court had no jurisdiction to hear an interlocutory appeal from the entry of a declaratory judgment finding that Section 15–86 applied to the plaintiff’s exemption claims.[12] The court reasoned that, as a matter of appellate procedure, there was no final disposition of an appealable claim.[13] Therefore, the supreme court vacated the appellate court’s decision in its entirety.

There are a number of nuances to the court’s jurisdictional analysis. But in the end, the result is what’s key. For hospitals seeking to plan their exemption requests, Section 15–86 is again a viable option, subject to the disposition of any petition for rehearing in Carle and the final disposition of the Oswald case.

What Carle does not do

Carle was expected by some observers to settle once and for all the legality of Section 15–86, clarify the distinction between the statutory and constitutional tests for charitable property tax exemption and articulate the exact contours of the constitutional test. And although it does provide short-term guidance on whether Section 15–86 remains in effect, it leaves a number of questions unanswered. Most significantly:

  • The decision does not address the constitutionality of Section 15–86 on the merits. It is not yet known whether any of the litigants in Carle will file a petition for rehearing. Even if they do not, this issue may arise again on remand. It also remains the subject of the Oswald litigation, which could, in time, end up before the Illinois Supreme Court.
  • The decision does not address the constitutional charitable-use test that Illinois nonprofit hospitals must satisfy to qualify for property tax exemption under the Illinois Constitution. That test has remained uncertain and opaque since the Illinois Supreme Court’s 2009 decision in Provena.

As hospitals await further clarification on these issues, circuit courts will be obliged to follow the existing opinion in Oswald, andSection 15–86 will remain the law in Illinois.

Our participation

Nixon Peabody was pleased to play an active role in the Carle litigation, submitting an amicus brief to the Illinois Supreme Court on behalf of the Illinois Health and Hospital Association that supported the Carle Foundation’s position. A copy of the brief is linked here. Over the upcoming weeks and months, the firm will continue to monitor developments in both the Carle and Oswald cases.