Provena Covenant Medical Center v. Department of Revenue

Brief Fact Summary.

Provena Hospitals owns and operates the Provena Covenant Medical Center (Plaintiff) which the Illinois Department of Revenue (Defendant) determined was not entitled to a property tax exemption for charitable organizations because charitable acts were lacking.

Synopsis of Rule of Law.

A medical institution must receive sufficient revenue from its charitable care in order to qualify for a property tax exemption.

Facts.

Provena Hospitals (Plaintiff), one of four subsidiaries of Provena Health, owns and operates six hospitals, including Provena Covenant Medical Center (PCMC) (Plaintiff), a full-service hospital.  Provena Hospitals is exempt from federal income tax.  The Illinois Department of Revenue (Defendant) determined that while PCMC (Plaintiff) was exempt from retailers’ occupation tax, service occupation tax, use tax, and service use tax, it was not entitled to a property tax exemption for charitable organizations based on analysis of the actual amount of “charity” it provided to the community.  For example, the amount of aid provided by Provena Hospitals (Plaintiff) to PCMC (Plaintiff) patients under the facilities charity care program equaled only 0.723 percent of PCMC’s (Plaintiff) revenues (which was $268,276 less than the $1.1 million in property tax benefits which PCMC sought).  Provena Hospitals (Plaintiff) ascribed $25,282,000 of its $739,293,000 total revenue to “other revenue,” with no showing as to how much, if any, of it was derived from charitable contributions.  Charitable donations made to PCMC (Plaintiff) were only $6,938.  Following the denial of the property tax exemption, Provena (Plaintiff) sought review through a suit in state court.

Issue.

Must a medical institution receive sufficient revenue from its charitable care in order to qualify for a property tax exemption?

Held.

(Karmeier, J.)  No.  A medical institution must receive sufficient revenue from its charitable care in order to qualify for a property tax exemption.  The central issue in this case is whether Provena Hospitals (Plaintiff), thorugh PCMC (Plaintiff), established that it was entitled to a charitable exemption under the Property Tax Code for various parcels of real estate it owns.  The Director of Revenue (Defendant) determined that it had not and denied the exemption.  For the following reasons, the court affirms the judgment of the appellate court upholding the decision by the Department of Revenue (Defendant) to deny the exemption.
  Taxation is the rule under Illinois law.  The exception is tax exemption.  All property is subject to taxation, unless exempt by statute, in conformity with constitutional provisions.  The burden of establishing entitlement to a tax exemption rests upon the person seeking it.  The burden is very heavy.  The party claiming an exemption must prove by clear and convincing evidence that the property in question falls within both the constitutional authorization and the terms of the statute under which the exemption is claimed.
  The following are distinctive characteristics of a charitable institution: (1) it has no capital, capital stock, or shareholders; (2) it earns no profits or dividends but instead receives funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter; (3) it dispenses charity to all who need it and apply for it; (4) it does not provide gain or profit in a private sense to any person connected with it; and (5) it does not appear to place any obstacles in the way of those who need or would benefit from the charity it provides.
  For purposes of applying these criteria, “charity” is defined as a gift to be applied for the benefit of an indefinite number of people, persuading them to an educational or religious conviction, for their general welfare—or in some way reducing government burdens.  Provena Hospitals (Plaintiff) clearly satisfies the first of the factors identified by this court for determining whether an organization can be considered a charitable institution as it has no capital, capital stock, or shareholders, and it does not provide private gain or profit to any person connected with it.
  While the first and fourth factors lean in favor of characterizing Provena Hospitals (Plaintiff) as a charitable institution, the remaining factors when applied show that the characterization will not hold.  Provena Hospitals (Plaintiff) clearly fails to meet the second criterion: its funds are not derived mainly from private and public charity and held in trust for the purposes expressed in the charter.  They are overwhelmingly generated by providing medical services for a fee.  Likewise, Provena Hospitals (Plaintiff) failed to show by clear and convincing evidence that it satisfied factors three or five, namely, that it dispensed charity to all who needed it and applied for it and did not appear to place any obstacles in the way of those who need or would benefit from the charity it provides.
  Charitable ownership and use are required to be eligible for charitable exemption.  Specifically, an organization seeking an exemption must establish that the subject property is actually and exclusively used for charitable or beneficent purposes, and not leased or used otherwise with a view to profit.  When the law says that property must be used solely for charitable or beneficent purposes, it means that charitable or beneficent purposes are the primary ones for the use of a property.  Secondary or incidental charitable benefits will not be sufficient, nor will it be enough that the institution professes a charitable purpose or hopes to use its property for granting charity to others.
  The Department of Revenue (Defendant) rejected Provena Hospital’s (Plaintiff) claim for exemption by determining that the corporation failed to satisfy this charitable “use” requirement.  In explaining what constitutes “charity,” the courts have held that it may be more fully defined as a gift, to be applied consistently with existing laws, to benefit an indefinite number of persons, by bringing their hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves for life, or by building or maintaining public buildings or works, or otherwise lessening the burdens of government.  It is appropriate to condition charitable status on whether an activity helps lessen the burdens on government.  After all, each tax dollar lost to a charitable exemption is one less dollar affected governmental bodies will have to meet their obligations directly.  If a charitable institution wants to avail itself of funds that would otherwise flow into a public treasury, it only fits that the institution should provide some compensatory benefit in exchange.  While the law has never required that there be a direct, dollar-for-dollar correlation between the value of the tax exemption and the value of the goods or services provided by the charity, it is a requirement of charitable status that those seeking a charitable exemption be able to demonstrate that their activities will aid in reducing some financial burden the affected taxing bodies incur in performing their governmental functions.  Affirmed.

Discussion.

The Illinois Department of Revenue’s (Defendant) determination that PCMC (Plaintiff) was not entitled to a charitable property tax exemption centered on the financial figures provided.  The amount of funding allocated to or given to PCMC (Plaintiff) was statistically insignificant, which showed that it was operating for profit and dispensing very little charity.  That definition of charity, used by the Defendant, was affirmed by the court to view what a hospital was providing had to reduce the burden on government.  Given that such a meager amount of money was provided to charity, it was assumed from the Provena opinion that needy patients were being covered by other forms of government welfare or funds.  Basically, PCMC’s profits were not being used to reduce government spending on medical care.