Illinois Appellate Court Ruling on Charitable Tax Exemption Has Broad Implications for School Districts

The evolution and expansion of the health care industry continue to test the limits of Illinois’ charitable real estate tax exemption laws, with significant implications for school district revenues. In addition to hospitals, new types of facilities such as retirement communities are trying to fit into a legal category designed for more traditional charities. If they are successful, upward pressure will be placed on the tax rates applied to all other property types. Last month, the Illinois Appellate Court addressed whether an inpatient hospice care center should receive an exemption. The Court’s ruling that the hospice center was not entitled to an exemption may be surprising to some, especially because the adjacent palliative care center run by the same organization is tax-exempt.

In Midwest Palliative Hospice and Care Center v. Beard, the Appellate Court reviewed the Illinois Department of Revenue’s decision to deny a charitable exemption to a portion of a large, end-of-life care facility in Glenview. A 501(c)(3) organization constructed a palliative care center on a 4.1-acre parcel in 2008 and received a charitable exemption through a stipulation with the Department. In 2011, the same organization constructed an inpatient hospice care facility on the same property and sought an exemption for the new facility. However, this time the Department determined that the organization’s primary purpose was not charitable, but instead its primary purpose was to provide hospice and palliative care to patients that could pay for it themselves or who have insurance or access to government sources to pay for it.

The test for a charitable exemption as set forth by the Illinois Supreme Court 50 years ago in Methodist Old Peoples Home v. Korzen. A charity must prove by clear and convincing evidence that it:

1. Has no capital, capital stock or shareholders;
2. Earns no profits or dividends, but rather derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter;
3. Dispenses charity to all who need it and apply for it;
4. Does not provide gain or profit in a private sense to any person connected with it; and
5. Does not place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses.

In applying these standards to the facts in the case, the Court agreed with the Department that Midwest Palliative and Hospice Care Center earned nearly all its revenue from fees charged to patients. As such, its primary purpose was not to provide charity but to provide services to paying customers.

The reason why the adjacent palliative care center can enjoy an exemption while its neighboring hospice center cannot is less clear. According to the Court, the palliative care center’s exemption does not influence whether the hospice care center should be exempt because the palliative care center received its exemption through a stipulation with the Department that did not create a precedent for the hospice care center and because the two institutions are, in fact, separate entities.

Given the size and scope of these kinds of facilities, whether they are tax-exempt has a significant impact on both the tax base of local school districts and the tax burden of residents and businesses. This most recent decision is consistent with other recent decisions that establish a high bar for charitable exemptions and seems to demonstrate the pendulum swinging toward taxation of health care facilities unless a persuasive case for their charitable attributes can be made.