In the iconic Blues Brothers movie, Sister Mary recruits Jake and Elwood to help raise money for delinquent property taxes on the Catholic orphanage in which they grew up. The music is legendary, and the Sweet Home Chicago-area scenes are memorable – Maxwell Street, Lower Wacker, the Daley Center, and the destruction of the Dixie Square Mall. But wait: did they really need to pay those property taxes, or could they have avoided the Illinois Troopers and Jail House Rock all together?
The best legal strategy surely would have made for a dull movie. Cruising around in a ’74 Dodge with cop tires and cop suspension beats paperwork after all! But there is a better answer under Illinois law for the rest of us, with no road shenanigans necessary.
Illinois Property Tax Exemption Basics
Church. If the orphanage were run within the church, as implied in the movie, then the property’s tax exemption qualification would likely have been a slam-dunk. Religious organizations that operate their facilities for worship and related benevolent purposes, such as an orphanage, are unquestionably entitled to property tax exemption. Note that just being “religious” is not enough. The organization must be a “church” or other house of worship. Rev. James’ Triple Rock Baptist Church thus would qualify.
Education. Alternatively, if the orphanage were operated as part of a school, it would have been another easy win. All schools that relieve government burdens, such as grammar schools or high schools, qualify for Illinois property tax exemption. Trade schools and other organizations that do not directly offset government burdens, however, will not qualify for exemption. We doubt a “Jake and Ellwood Music School” would qualify (or be particularly religious). A child-care center will not qualify for “educational” property tax exemption, although it may qualify under the “charitable” legal standard below.
Charity. Orphans comprise a charitable class, and the applicable statute provides tax exemption for property owned and used for charitable purposes. Other qualifying purposes include housing for the needy, medical care aid to the poor, and a whole host of other compassionate care. If any fees are charged, additional legal requirements apply such as proof that charitable benefits are “widely made available” and “without undue obstacle.” Fee-charging social agencies thus should provide ample evidence of fee waivers and reductions, donor contributions, and volunteer engagement. While the State expects an IRS Section 501(c)(3) letter, it is not legally sufficient alone for Illinois property tax exemption.
Seeking Forgiveness
The above tax guidance is certainly helpful for property tax exemption going forward, but what about past bills, like those that the orphanage needed to pay to avoid foreclosure by the County? Again, the answer lies within available legal remedies and not unlawful mayhem.
The Illinois Property Tax Code allows a property owner that establishes exemption for the current year to also gain exemption for the three previous tax years. Sister Mary could have applied to the Cook County Assessor for recognition of tax-exempt status in the years before Jake got out of Joliet. She would have to prove qualifying ownership and usage during the years in question. Granted, that’s not very dramatic, but it would probably have been easier all around.
If the previous taxes have already been paid, the property owner can obtain refunds through the “certificate of error” process. In a nutshell, the Assessor’s office recognizes the exemption, and then it directs the County Treasurer’s office to update the tax records and to issue any tax refunds owed (minus any interest or penalties paid). This process can take significant time – months and even years – so the virtue of patience (and perhaps additional cash flow funding) will definitely be needed. No musical talent necessary. And maybe everyone could use that time to Stand by [Their] Man.
For taxes paid earlier than the three prior years’ look-back period, additional tax relief is available through the judicial system. More specifically, a lawsuit may be filed in the local county courthouse. Again, exempt ownership and usage for the relevant years will need to be shown, and the time-period involved for getting such relief may be lengthy. Don’t expect any courtroom drama or cars crashing into Chicago’s Daley Center – just file your paperwork, Shake a Tail Feather, and tell it to the judge. He or she will then instruct the County Treasurer to pay the tax refunds, if you can prove your case.
Best Practices
So how can you watch your finances as well as Minnie the Moocher? Here are a few pointers for all nonprofit property owners in Illinois.
First, maintain the organization’s real estate tax-exempt ownership and usage, whether charitable, educational, or religious. Use all the space for qualified tax-exempt programs, parking, storage, expansion, etc. If you allow others to regularly use the subject property, then make sure they are likewise tax-exempt organizations engaging in qualified exempt activities within the meaning of Illinois law. As stated above, being a Section 501(c)(3) is not, by itself, enough for Illinois property tax exemption. Any occupancy agreements should be structured as non-commercial arrangements with space sharing contributions made to help cover occupancy costs (not “rent”) and with an occupancy agreement (not a “lease”). In addition, if your charitable organization (or a guest occupant) charges fees, generous fee waivers and reductions should be provided as a hallmark of charity.
Second, comply with the applicable annual county exemption affidavit filing requirements for all exempt property owners. The only exception is for churches, which do not owe such filings. Exempt affidavit filers must report any change in exempt ownership or usage, along with any commercial leases.
Third, note that if a property does not qualify for property tax exemption, one alternative may be to seek a tax reduction through a real estate tax valuation complaint. That is a distinctly different process from exemption, but it can be quite advantageous financially. For example, an owner may be able to get a tax reduction based on vacancy or lower surrounding property values.
Last, keep in mind that a property may be partially exempt based on different usages within the facility. For example, an exempt property owner may wish to rent out part of the parking lot. There may be good revenue, but also an accompanying tax bill based on the commercial activity. This final point underscores a key requirement for any tax-exempt property: no “view to profit” allowed. So if Jake and Elwood were to put on a Rhythm and Blues Review at an exempt property, it better be for a worthwhile charitable fundraiser – not to line their own pockets.
Although Matt Murphy (and Blue Lou) didn’t listen to Aretha Franklin, her advice to Think! about the consequences of your actions was spot on, especially when it comes to property tax exemption qualification. Also, Everybody Needs Somebody to Love – probably a good tax advisor. It might not hurt to sing a little blues too!
