A Time of Uncertainty: Not-for-Profit Property Tax Exemptions, Charity Care and the Provena Decision

March 22, 2010

Late last week the Illinois Supreme Court (the Court) issued its long-anticipated decision in the case Provena Covenant Medical Center v. Illinois Department of Revenue (Provena). The Court’s opinion, delivered by Justice Karmeier, upheld the Illinois Department of Revenue (Revenue) Director Brian Hamer’s ruling that Provena Covenant Medical Center, located in Urbana, Ill. (PCMC), did not provide enough charity care services to justify the continuation of its charitable purpose property tax exemption. The Court’s opinion noted that PCMC’s parent company, Provena Hospitals, was the true property owner of PCMC, and that Provena Hospitals itself was not a charitable institution nor did it primarily serve charitable purposes. Furthermore, the Court held that PCMC provided only minimal levels of charity care thus the property was not being primarily used for charitable purposes. The Court’s decision will be problematic for not-for-profit hospitals because it leaves a key question unanswered—just how much charity must a hospital provide to justify an exemption? The decision is expected to encourage local taxing bodies to pursue efforts to remove tax exemptions of not-for-profit hospitals and other providers.

The Provena Court’s analysis focused on an earlier decision made by the revenue director who, agreeing with the recommendation of the Champaign County Board of Review, found that PCMC did not qualify for a property tax exemption because it failed to provide a sufficient amount of charity care and used aggressive debt collection efforts against former patients who were unable to pay for their healthcare services. The director’s conclusion was based on the contention that a hospital should not be allowed to maintain a property tax exemption if it dedicates less than one percent of revenues to providing charity care. PCMC, however, argued that the amount of charity care a hospital provides is only one of many factors that courts have historically considered when analyzing whether an entity operates with a charitable purpose. PCMC further argued that the six-factor “charitable purpose” test first established by the Illinois Supreme Court in 1968 in Methodist Old People’s Home v. Korzen (Korzen) (and long since criticized as outdated), purposefully did not place a greater emphasis on charity care over the remaining factors and that rescinding a charitable hospital’s property tax exemption based solely upon one factor was inconsistent with the Court’s long-standing precedent.

Nevertheless, the Provena Court applied the Korzen test without questioning its appropriateness. Under the Provena ruling, an institution claiming to operate with a charitable purpose is still required to show that:

  1. It is used for the benefit of an indefinite number of persons . . . for their general welfare – or in some way reducing the burdens of government;
  2. It has the distinctive characteristics of a charitable institution, thus, it has no capital, capital stock or shareholders, and earns no profits or dividends;
  3. It derives its funds mainly from public and private charity;
  4. It dispenses charity to all who need and apply for it;
  5. It does not place obstacles of any character in the way of those who need and would use the charitable services; and
  6. Its property is truly primarily and predominantly used for charitable purposes.

Although the Provena decision’s affirmation of the Korzen test without clarification of the relevant factors has drawn criticism and a call for legislative action, the members of the Illinois General Assembly appear to be split on the question of whether the decision warrants legislative corrective action. According to recent news reports, State Sen. Michael Frerichs (D-Champaign) said “the hospital and the local community need more answers than they got from the Supreme Court ruling [and] that without clear guidance about how much charity care is required, one can see cash-strapped cities and other local governments turning to hospitals as they search for revenue.” Sen. Frerichs also said that “I think we need to act quickly because I think you’re going to see a lot of taxing bodies looking to pounce on hospitals in their areas. And I think, ultimately, that is not the answer for good, quality medical care in our communities.”

On the other hand, other legislators are taking a wait and see approach before concluding that legislative action is imperative. As a result, there is no clear signal that the General Assembly will intervene and alter the ruling of the Court by legislative action. Because of the uncertainty, not-for-profit hospitals must analyze their operations in light of the Provena decision. If the hospital concludes that the amount of charity it provides is anything less than sufficient, immediate action should be taken to enhance charitable services.

Although Provena centers on the property tax exemption of a large hospital provider, the Court’s decision should concern all not-for-profit entities across Illinois and is likely to take on national importance. Hospitals and other not-for-profit entities, such as skilled nursing facilities, assisted living facilities, long-term acute care hospitals and even academic institutions, will need to review bylaws, admissions policies, charity care and collections policies, and any other policy that could be used to show the entity is not truly operating as a charitable owner or for a charitable purpose.

McGuireWoods routinely assists clients with matters involving tax exemptions for not-for-profit entities and is well-positioned to offer guidance as not-for-profit entities take steps to secure their exempt status in light of this ruling. Should you require McGuireWoods assistance in this manner, please feel free to contact the authors.