Protecting Revenue Through Involvement in Property Tax Exemption Proceedings

By Scott Metcalf

Property tax exemptions can affect the revenues of public bodies both when the property is privately-owned and when the property is government owned. When an exemption is granted to a privately-owned property, the tax burden shifts to other taxpayers and may result in a property tax refund. As stewards of public funds, public bodies are entitled to become involved in these proceedings. When a public body owns property, it is entitled to an exemption under certain conditions. Because failure to comply with the requirements for an exemption could subject the property to taxation, public bodies must pay careful attention to the usage and reporting requirements in the Property Tax Code.

Exemptions for Privately-Owned Property

Several different types of exemptions exist for privately-owned property. Where a property is used for charitable, religious, or educational purposes, a total exemption from property taxes may be granted. Applicants must file an application at the local Board of Review, and, if the exemption will reduce the assessed value of the property by $100,000 or more, the applicant must send notice to the municipality, school districts, and community college district. A recent Illinois Appellate Court decision held that school districts that do not intervene in the Board of Review proceedings lose their ability to challenge later court decisions granting the exemption. Housing Authority of the County of Marion v. Department of Revenue, No. 5-07-0260 (5th Dist. April 20, 2009). Therefore, when a notice of an exemption application is received, it should be carefully evaluated to determine if the amount of revenue at stake and the strength of the applicant’s claim justify intervening in the proceedings. Public bodies can continue their involvement in the proceedings when the case moves to the Illinois Department of Revenue, which makes the final administrative decision to grant or deny the application. Under Housing Authority of the County of Marion, so long as a public body was involved in the early stages of the case, it may continue its involvement if the final decision of the Illinois Department of Revenue is challenged in the courts.

Exemptions for Government-Owned Property

Whether a property is used for school district purposes or leased to another entity, careful attention should be paid to the legal requirements for a school district’s property tax exemption. State statute provides that “All property of public school districts or public community college districts not leased by those districts or otherwise used with a view to profit is exempt.” 35 ILCS 200/15-135. Last year, the Illinois Appellate Court upheld the denial of an exemption for a school district property subject to a sales-leaseback arrangement because the school district failed to provide clear and convincing evidence that it did not profit from the transaction and because the school district derived an economic advantage from the lease of the building. Springfield Sch. Dist. No. 186 v. Dep’t of Revenue, 384 Ill. App. 3d 715 (4th Dist. 2008). As a result of this decision, school districts must be careful in drafting the leases of school district property, even if those leases are with other school districts or units of government. Also, each year the school district will receive a Continued Ownership and Use Affidavit from the local assessing officials. This form must be filled out and returned. If it is not, a property may be returned to the tax rolls.

Protecting Exemptions

Finally, a recent Illinois Appellate Court decision provides the first interpretation of a statute that allows for judicial review of decisions to revoke existing property tax exemptions. In The Carle Foundation v. Dep’t of Revenue, No. 4-09-0195 (4th Dist. Oct. 29, 2009), the Court held that a party may file a complaint in circuit court seeking judicial reinstatement of a property tax exemption where (1) a property owner was previously granted an exemption; (2) local or state officials purport to revoke the exemption; and (3) the present grounds for the exemption are similar to those on which the exemption was previously granted. Although the Foundation was allowed to challenge the denial of its exemption at both the Department of Revenue and at the Circuit Court, all future litigants must choose one forum or the other for their challenges. Public bodies that are threatened with the loss of a property tax exemption on one of their properties are now clearly entitled to go directly to Circuit Court to retain their exempt status.

Given the potentially significant financial impact of these property tax exemption issues, close monitoring of exemptions can benefit both school districts and other units of local government.