The elusive standard of charitable care

By Bethany Jaeger

The Illinois Supreme Court has to decide which standard to use when considering a highly anticipated case about what not-for-profit hospitals have to do to qualify for local property tax exemptions. While the case specifically deals with Provena Covenant Medical Center in Champaign County, the court decision has potential to affect about 160 nonprofit hospitals throughout Illinois.

We previewed the six-year-old case in the September edition of Illinois Issues magazine. Provena filed for a property tax exemption in 2002 based on its status as a charitable organization, but the Illinois Department of Revenue denied the charitable exemption two years later. The hospital later applied for an exemption based on its status as a religious institution. (See a timeline of the case here.)

Both sides presented oral arguments before the Illinois Supreme Court this morning with drastically different beliefs about what should count when considering charitable exemptions and what evidence the court should consider in deference when determining whether Provena qualifies for that property tax exemption.

On one hand, Provena’s lawyer, Patrick Coffey with Locke, Lord, Bissell & Liddell in Chicago, argued that the justices should undertake a brand new review of whether the denial of the hospital’s charitable exemption violates the state Constitution. The state charter gives the General Assembly authority to exempt “property of the state, units of local government and school districts and property used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes.”

On the other hand, the Illinois Department of Revenue, represented by Assistant Attorney General Evan Siegel, argued that the justices should give deference to the lower administrative orders issued by department director Brian Hamer and affirmed by the 4th District Court of Appeals. The thinking is that the Department of Revenue has expertise in property tax matters and was the authoritative body reviewing evidence provided by 15 witnesses and two experts during administrative hearings, so the court should give a high level of respect to the administrative findings when reviewing the case.

Which standard the court chooses affects how it would consider a 2004 recommendation of an administrative law judge. After the administrative hearings, the administrative law judge found that the hospital met the standard for charitable exemption. Hamer, however, disagreed. He had the final administrative opinion to reject the tax exemption. He deemed some of the evidence irrelevant and decided that Provena didn’t qualify for a tax exemption because it dedicated only 0.7 percent of its revenue that year to providing so-called charity care to 302 patients out of 110,000 patients admitted. “I find that the property does not qualify for the charitable institution tax exemption because the evidence is clear that this property is not used exclusively for charitable purposes,” he wrote.

The two sides further disagree about whether a certain percentage of charitable care should be a deciding factor in its tax-exempt status. Coffey argued that the standard for whether not-for-profit hospitals qualify for property tax exemptions should not be whether the hospitals designate a certain percentage of their income to providing free care to needy patients.

“That has never been the requirement, and it shouldn’t be the requirement,” he said to five of seven justices. Justices Thomas Kilbride of Rock Island and Rita Garman of Danville recused themselves and did not participate in the oral arguments.

Instead, Coffey said the determination should be on a case-by-case basis and should count the hospital’s total contribution to the community. “It’s not out of bounds to consider how much free care was given, but they have also gone beyond.” For instance, Provena operates Crisis Nursery, a 24/7 child abuse prevention and support service and provided more than $13.5 million on such “community benefits” in 2002, according to the hospital’s Supreme Court filing.

Siegel, however, argued that the dominant factor when deciding charitable exemptions is the primary use of the property. He refers to a six-point test established by a 1968 Illinois Supreme Court case Methodist Old Peoples Home v. Bernard Korzen. (Read the six criteria for nonprofit institutions in our September issue.)

“It doesn’t matter whether an organization itself … is a charitable organization,” Siegel said. “What matters on that analysis is whether it is using the property for a charitable purpose.” He added that tax exemptions are granted on an annual basis. “Just because you have it for one year doesn’t mean you have it for every year.”

Justice Robert Thomas asked whether the state expected the court to set a minimum requirement of a certain percentage of charitable care. Siegel said no, that the court already determined in 1907 that a hospital must provide a “substantial amount” of free care. “All the court need do in this case on this critical factor is decide that 0.7 percent revenues in a year that only 302 people out of 110,000 admissions obtained free and discounted care is not substantial.”

In addition to the charitable exemption, the two sides differed about whether the religious exemption should be part of the court’s consideration because of a discrepancy in the record.

Chief Justice Thomas Fitzgerald questioned several times how Hamer could have ruled that Provena did not qualify for a charitable exemption based on its religious affiliation when the administrative law judge never addressed that question. “I’m still puzzled at how the director based his finding upon a statement that wasn’t there.”

“Well, it was mistaken, absolutely,” Siegel responded. “But I believe that he read the [administrative law judge’s] opinion as not giving much weight to the religious exemption.”

Coffey argued that the administrative law judge did not address the religious exemption because she already found that an exemption was warranted as a charitable organization, and Hamer rejected the religious exemption without explanation.

In addition to differing over other details, the two sides predominantly argued that their opponents were trying to change the standard of determining whether hospitals qualify for property tax exemptions.

“Provena [provided] free and reduced care to just 302 patients,” Siegel said. “That’s not a large proportion. The primary use of the property is treatment of patients with insurance. By arguing that 0.7 percent is sufficient, Provena is trying to alter the constitutional standard. And it is for this court, not the legislature, to determine what constitutes a constitutional charitable use.”

Coffey countered that the state is the one trying to base a decision on a standard that has never been used by the court, referring to the use of a certain percentage needed to qualify for a tax exemption. He said a proposal to set a minimum percentage of charitable care should go through the legislative process, not the court system.

It is up to the court to decide which standard to use. Although Justices Kilbride and Garman recused themselves and are not required to disclose their reasons, a majority opinion still requires four justices, according to Joseph Tybor, Illinois Supreme Court spokesman.