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IL Supreme Court Maintains Non-Profit Hospital Tax Exemption

A high court recently vacated an appellate court’s decision that non-profit hospitals should not be exempt from paying property taxes unless all services provided are charitable.

Some Illinois hospitals will continue to earn non-profit hospital tax exemption status after a recent state Supreme Court ruling

Source: Thinkstock

By Jacqueline Belliveau

- The Illinois Supreme Court recently legally voided an appellate court’s decision that non-profit hospital tax exemption was unconstitutional.

In Illinois, non-profit hospitals qualify for property tax exemption if the value of all charitable services provided during the year equals or exceeds the hospital’s estimated property tax liability. Lawmakers crafted the regulation requiring a specific level of charity care in 2012 to provide clarity about property tax exemption status.

However, the Carle Foundation, a non-profit parent company of an integrated network of healthcare services in Illinois, was not granted tax exemption status from 2004 to 2011 despite receiving the status prior to 2004.

The foundation petitioned the courts to get involved, arguing that the 2012 tax exemption law should be retroactively applied since the hospitals incurred charity care costs greater than the property tax amounts.

For example, the foundation reported that 31,000 individuals received medically necessary care at its hospitals in 2014, totaling over $38 million in costs. The charity care costs were about three times the property tax amount that year.

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An unnamed accountable care organization (ACO) faced similar challenges with claiming tax exemption status last year. The IRS denied the commercial ACO charitable tax-exempt status because the organization did not directly deliver medical care or healthcare services to the general public. Rather, the ACO primarily executed contracts and negotiated deals with commercial payers.

The IRS concluded that promoting improved healthcare is a charitable purpose, but not every activity that promotes healthcare should be tax exempt.

In the Illinois case, the appellate court declared the 2012 regulation unconstitutional because the Illinois constitution allows for property tax exemptions if the property in question only provides charitable services. The judge stated that the state constitution and the regulation clarifying levels of charity care are not compatible.

But the Illinois Supreme Court’s most recent ruling argued that the appellate court did not have jurisdiction to take on the court case.

“[W]e conclude that the circuit court’s entry of a Rule 304(a) finding in this case was improper and that the appellate court therefore lacked jurisdiction to review the circuit court’s order granting plaintiff’s motion for summary judgment on count II of the fourth amended complaint,” Justice Thomas wrote. “Accordingly, we vacate the appellate court’s decision in its entirety and remand this cause to the circuit court for further proceedings consistent with this decision.”

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While the supreme court did not comment on whether non-profit hospitals should remain exempt from paying property taxes, the ruling will send the Carle Foundation case back to the circuit court for another decision.

Illinois non-profit hospitals will also continue to earn tax exemption status based on the 2012 regulation.

The Carle Foundation voiced their appreciation for the Supreme Court’s decision because its hospitals, like many other non-profit hospitals in the state, rely on the property tax exemption status to provide charity care.

“Carle initiated this legal action to preserve its ability to meet the healthcare needs of the community on behalf of our patients in the region and those served by all not-for-profit hospitals in the state,” the foundation stated on its website. “It is critical that the standards for property tax exemptions and charity care are defined for all Illinois hospitals. There has been a great deal of confusion both for hospitals providing charity care and for municipalities attempting to collect property taxes from not-for-profit hospitals.”

The American Hospital Association (AHA) echoed similar charity care concerns in a recent friend-of-the-court brief. Allowing the appellate court’s decision to stand would negatively impact their members from meeting critical healthcare needs in their communities, the organization argued.

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“Should these hospitals suddenly be unable to claim the property tax exemptions upon which they have relied for years, the resulting financial drain will jeopardize access to care in Illinois,” the AHA wrote. “All Illinois citizens – but especially those who benefit from government-sponsored health programs like Medicare and Medicaid and those among the uninsured – rely on not-for-profit hospitals to offer quality care to all.”

By requiring non-profit hospitals to pay property taxes, hospital leaders would not be able to provide high-quality, affordable care to its most vulnerable populations.

The AHA also expressed concerns that the appellate court’s declaration would also impact non-profit hospitals in other states.

“And absent this Court’s intervention, the effects of the appellate court’s ill-considered decision could negatively influence decisions by taxing authorities in other parts of the country as well,” the brief stated.

The question whether non-profit hospitals should receive tax exemptions will now be debated at the trial court level.

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