A Healthy Dose of Charity: The Carle and Oswald Property Tax Exemption Appeals

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The Illinois appellate courts continue grappling with a new statute intended to bring clarity to nonprofit hospitals’ qualification for property tax exemption.  May such qualification be established through a certain amount of charitable activities, shown in financial terms?  These two cases demonstrate that charitable property use – not just charitable ownership and activities – is a nonnegotiable requirement under the Illinois Constitution for all nonprofit property owners. 

Carle Foundation v. Cunningham Township

Oral argument was heard recently, on appeal from an Illinois Court of Appeals’ ruling that new Section 86 of the Illinois Property Tax Code is unconstitutional on its face. The new statute provides for exemption if a hospital can show that “the value of services or activities listed [elsewhere] for the hospital equals or exceeds the relevant hospital entity’s estimated property tax liability.”  Section 86 thus represents the Illinois Legislature’s attempt to inject clear guidance into the test for charitable property tax exemption, particularly so that a quantitative (i.e., monetary) threshold may be applied. 

The problem?  Section 86 omits any reference to the fundamental state constitutional requirement of “exclusively charitable use.”  In other words, a property owner must show that charitable activities actually take place on its property, not just that charitable activities occur generally.  For example, under Section 86’s quantitative focus, a hospital could conceivably qualify for exemption based on its ample provision of free vitamins and free blood pressure tests at a local community center, neither of which necessarily involve charitable activities at the hospital facility itself.  Based on this omission, the appellate court ruled the statute unconstitutional.  For additional background information, please see our blog article dated January 27, 2016.

On appeal to the Illinois Supreme Court, both the hospital and the Illinois Department of Revenue argue that the statute may be upheld as constitutional, on the basis that the exclusively charitable property use requirement is implicit.  Such requirement thus need not be expressly set forth in Section 86.  Their shared position is strikingly similar to a recent court decision issued by a different Illinois Court of Appeals judicial district.   

Oswald v. Hamer

This appellate court decision was issued on December 22, 2016. The judges in this ruling sought to save Section 86’s legitimacy by finding that its mandatory language – “[exemption] shall be issued” – does not leave out the constitutional “charitable use” property requirement.  Such generous statutory interpretation falls in line with generally applicable constitutional legal principles, such as that a ruling of facial constitutional invalidation is extreme and that such conclusion should be reached only if the statute cannot be constitutionally applied under any set of circumstances.  The appellate court thus interpreted Section 86 as a second exemption requirement, on top of the core constitutional property-related element. 

Lessons for Nonprofit Property Owners

Whether the Illinois Supreme Court accepts the Oswald court’s reasoning as persuasive or strikes down Section 86 (thereby overruling Oswald), one conclusion is inescapable:  all nonprofit property owners must always specifically demonstrate their charitable property usage.  For hospitals, Section 86’s additional quantitative standard may prove helpful, if it is upheld.  For other charitable property owners, they must continue to focus on the hallmark standards of exemption qualification such as ample provision of charitable benefits, fee waivers and reductions (if fees are charged), relief of government burdens, and only de minimus non-charitable property usage.  It is not enough for a property owner to be a Section 501(c)(3) and to engage in charitable activities somewhere; the owner must demonstrably carry out charitable activities on the subject property as its primary use.