What does it take to successfully obtain charitable property tax exemption for a nonprofit’s real estate? As the Illinois Supreme Court ruled recently in: plenty – and more than just doing good in terms of overall programming. While its holding focused on hospital exemption, the Court decision is more broadly instructive in reaffirming the long-established and still-applicable key elements of exemption qualification.
In its September 20, 2018 Oswald v. Hamer decision, the Court upheld a 2012 charitable property tax exemption statute requiring that hospitals “shall be issued” an exemption so long as the value of their annual charitable services equals or exceeds their estimated yearly property tax liability. To do so, the Court held that the statute implicitly includes the state constitutional requirement that the subject property also be “used exclusively” for charitable purposes, as such term has been judicially interpreted.
Narrowly construed, this ruling provides another chapter in the story of nonprofit hospitals seeking property tax relief, mostly notably with the 2010 landmark Provena landmark hospital ruling, the enactment of resulting legislation, and ensuing litigation about exemption qualification.[1] More broadly, however, it serves as a powerful reminder of the Illinois constitutional framework in which “taxation is the rule,” and “[t]ax exemption is the exception,” as the Provena court observed.
For all nonprofit owners seeking Illinois property tax exemption, the Oswald decision thus carries three important implications: (1) they must demonstrate charitable use of their property, not just charitable ownership; (2) exemption remains a steep hill to climb, in terms of proving qualification; and (3) exempt qualification must not be tainted by impermissible factors such as fees reflecting an impermissible “view to profit.”
The Constitutional Backdrop
The Oswald case involved a “facial” challenge to the post-Provena exemption legislation. That is, regardless of any specific nonprofit applicant, would it be unconstitutional to grant property tax exemption regardless of how an applicant uses its real estate – so long as they do enough charity to at least match the dollar value of the otherwise warranted property taxes?
The Court answered this question by starting with the Illinois Constitution, noting first that it does not grant any power to the legislature but rather restricts such power. In addition, the Illinois legislature’s “power to tax is plenary,” restricted only by the federal and state constitutions. The property tax framework thus starts with taxation, subject only to limited carve-out exceptions. Article IX, Section 6 of the Illinois Constitution expressly provides a carve-out for property “used exclusively” for certain purposes including school, religious, and charitable purposes. This constitutional provision thus authorizes the Illinois legislature to enact legislation allowing for exemption. As the Oswald Court ruled, such legislative authority falls within such constitutional constraints; the legislature may not go beyond these parameters.
The All-Important Exclusively Charitable Use Requirement – “Shall” Plus
Consequently, it is not enough to do charity generally (or education or religion). As the Oswald court pointed out, and notwithstanding the 2012 statute’s omission of more than the financial “value” element, a property tax exemption applicant must affirmatively show that the subject property is “exclusively used” for charitable purposes. What does that mean?
As the Court instructed, its venerable Methodist Old Peoples Home 1968 decision defines the word “charity” as “a gift to be applied . . . for the benefit of an indefinite number of persons, persuading them to an educational or religious conviction, for their general welfare – or in some way reducing the burdens of government.” Further relying on Methodist Old Peoples Home, the Court defined the term “exclusively used” as “the primary purpose for which property is used and not any secondary or incidental purpose.” The Court recognized that these terms may be challenging in application, but they nevertheless apply to all charitable property tax exemption applications – including those filed by hospitals seeking to rely on the new statute.
To reach this conclusion, the Court stretched its judicial interpretation to find that the new statute’s use of the word “shall” – as in “shall be issued a charitable exemption” – is not mandatory, but rather implicitly allows room for the additional exclusively charitable use constitutional requirement. To do so, the Court relied on constitutional principles such as the presumption that the legislature intends to enact laws within constitutional parameters. Correspondingly, while the specific statute at issue admittedly omitted the exclusively charitable use requirement, the Court may read such requirement into the legislation as a matter of judicial prerogative: “[W]here applying language literally in a clause of an otherwise coherent statute would frustrate the spirit of the statute and the intent of the legislature, language may be disregarded, modified, or supplied to give effect to the legislative design.” In effect, the Oswald Court gave a proverbial leg up to the Illinois legislature, fixing this statutory deficiency and thereby saving the statute’s constitutionality.
Following Oswald – Climbing the Steep Hill of Property Tax Exemption
Whether a nonprofit is a hospital or other type of tax-exempt organization, it thus remains critical for property tax exemption applicants to satisfy the exclusively qualified use requirement. What that does mean in application?
First, remember that qualification of exemption is no easy task as a legal matter. The burden of establishing property tax exemption is admittedly high for applicants. As a threshold matter, and as a matter of state constitutional law, all exemptions must be strictly construed against the taxpayer. In applying the law to specific facts, the government is to resolve all debatable questions in favor of taxation. Exemption applicants thus must “clearly and conclusively” prove qualification for this very valuable economic privilege.
Second, the subject property must be “exclusively” used for a tax-exempt purpose. This is a fact-specific inquiry. According to Illinois case law interpreting the exemption statute, the term “exclusively” means “primary use,” and therefore may include consideration of time that property is used for exempt purposes, the percentage of property used for exempt purposes, the percentage of total visitors who use property for exempt purposes, and whether nonexempt uses directly and substantially support exempt uses. Some “incidental” non-exempt use may be allowed, but only very little!
Third, the exemption qualification must fit well within one of the specific categories, such as religious, educational, or charitable. Each word is a term of art. Churches and other houses of worship generally qualify for “religious” exemption based on their worship and related religious activities. The term “educational” narrowly connotes a school program with regular faculty, curriculum, student body and classrooms, which offsets government burdens to educate its citizenry. Self-improvement courses, adult education schools and programs that focus on a specific skill set often do not qualify as “educational” for purposes of tax exemption, nor do childcare centers (although they may qualify as “charitable,” per below).
The “charitable” exemption is the broadest category. Per Methodist Old Peoples Home, a multi-factor “facts and circumstances” test applies, with the applicant required to show the following:
(1) The benefits derived are for an indefinite number of persons;
(2) The organization has no capital, capital stock or shareholders, and earns no profits or dividends;
(3) The organization derives its funds mainly from public and private charity and holds them in trust for the objects;
(4) The organization dispenses charity to all who need and apply for it;
(5) The organization does not appear to place obstacles of any character in the way of those who need and would avail themselves of the charitable benefits it dispenses; and
(6) The organization actually and exclusively uses any subject real estate for charitable purposes.
In applying these factors on a case-by-case basis, hearing officers and courts have discretion regarding the weight to accord each factor. No one factor is determinative. It is therefore wise and prudent to demonstrate “charity” as strongly as possible, such as through ample charitable contributions, extensive use of volunteers, plenty of “free soup” or other charitable beneficence shown to many. To the extent possible, it may also be helpful to demonstrate how the organization’s activities relieve government burdens, as another hallmark of tax-exempt qualification.
No “View to Profit”
Regardless of the type of exemption qualification, a property owner must not operate with a “view to profit.” What does that mean? Generally speaking, fee-charging practices are subject to scrutiny and, unfortunately, the ultimate answer will lie within the eye of the government beholder – initially the County Board of Review, then the Illinois Department of Revenue. This issue also dovetails with the fourth and fifth charitable factors above, which require that charity be generously provided without undue obstacle to recipients.
For all of these reasons, careful planning can be vital to a successful property tax exemption application. If the organization charges fees, then its messaging (policy documents, brochures, online information) should be clear: no one will be denied services for financial inability to pay fees. Any fees charged, such as for facility usage[2] or program participation, should be non-commercial in nature, such as based on below-market rates, with no late fees or no collection activities. Fee waivers and fee reductions should be generously provided, through easily accessible applications and otherwise. They should be documented well too, to further demonstrate the absence of the prohibited “view to profit.”
Planning, documenting, focusing on exempt property usage, and otherwise following the statutory constraints – they all add up hopefully to exemption qualification for nonprofit property owners. The Illinois Supreme Court’s Oswald serves as a powerful reminder that there are no “shall” entitlements in property tax exemption parlance, only applications well demonstrating that exemption “may” be recognized based on all the relevant factors.
[1] For background information about the resulting litigation, see Fatal Flaw Defeats Illinois Property Exemption Statute in Nonprofit Hospital Case (Jan. 27, 2016) and A Healthy Dose of Charity: The Carle and Oswald Property Tax Exemption Appeals (Jan. 24, 2017).
[2] For further guidance about appropriate facility usage arrangements, see /blog/sharing-others-benefits-written-facility-....
