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03/21/96 CHICAGO PATROLMEN'S ASSOCIATION ET AL. v.

March 21, 1996

CHICAGO PATROLMEN'S ASSOCIATION ET AL., APPELLEES,
v.
THE DEPARTMENT OF REVENUE, STATE OF ILLINOIS, APPELLANT.



Chief Justice Bilandic delivered the opinion of the court: Justice Harrison took no part in the consideration or decision of this case.

The opinion of the court was delivered by: Bilandic

CHIEF JUSTICE BILANDIC delivered the opinion of the court:

The plaintiffs, the Chicago Patrolmen's Association and the American Police Center and Museum, filed a complaint in the circuit court of Cook County for administrative review of a decision by the Department of Revenue of the State of Illinois (Department). The Department denied the plaintiffs a charitable tax exemption from property taxation for four parcels of real property. The circuit court set aside the Department's decision and granted an exemption for 100% of two of the parcels, and 98% of a third parcel. The appellate court affirmed, with one justice dissenting. 269 Ill. App. 3d 274, 645 N.E.2d 549, 206 Ill. Dec. 544. We allowed the Department's petition for leave to appeal. 145 Ill. 2d R. 315.

The main issue is whether property used primarily for charitable purposes is entitled to an exemption from taxation under section 19.7 of the Revenue Act of 1939 (Ill. Rev. Stat. 1987, ch. 120, par. 500.7) where two organizations each own "an undivided 50% interest" in the property and only one is a charitable organization.

FACTS

On May 5, 1987, the Chicago Patrolmen's Association(Association) and the American Police Center and Museum (Museum) became the beneficiaries of a land trust. The land trust's res consists of four adjacent parcels of property, located at 1705-25 South State Street in Chicago. Under the terms of the trust agreement, the Association and the Museum each have "an undivided 50% interest" in the property as the beneficial owners. The trustee, Lakeside Bank, holds legal title to the property. The Association and the Museum jointly secured and guaranteed a bank loan in the amount of $100,000 around the time the property was purchased.

The plaintiffs later applied for an exemption from property taxation for the 1987 tax year. The plaintiffs claimed that the entire property was exempt under section 19.7 (Ill. Rev. Stat. 1987, ch. 120, par. 500.7). The board of appeals of Cook County approved the exemption. The Department's Board of Appeals recommended that a partial-year exemption be granted from May 8, 1987, through December 31, 1987. The Department's director rejected the recommendations and denied the exemption.

The plaintiffs requested a formal hearing on the matter, which was conducted before an administrative law judge. The plaintiffs presented the testimony of Joseph Pecoraro, the president of the Association and the chairman of the board of the Museum. Numerous exhibits were also offered into evidence, including the organizations' articles of incorporation, financial statements, and tax records.

The Association's purpose, according to Pecoraro, is to "champion the cause" of police officers who work for the City of Chicago. Members go to Springfield and "act as a union" in order to encourage legislation that would "make the policeman's job easier." The Association collects dues from, and provides death benefits to, itsmembers. The Association is a not-for-profit corporation. The Association lacks tax-exempt status as a charity under section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. § 501(c)(3) (1988)).

The Museum contains artifacts and exhibits about police officers, their training, and how they function. The Museum is open to the general public. The Museum does not charge admission, although there is a donation box at the door. Approximately 20,000 children tour the Museum each year. Most of the Museum's activities are directed toward children, and many of the exhibits and programs are designed to alert children to the dangers of drug abuse, to instruct them on street awareness, and to promote better relationships between young people and the police. The Museum has tax-exempt status as a charity under section 501(c)(3) (26 U.S.C. § 501(c)(3) (1988)).

From 1972 to 1987, the Museum was located elsewhere. The property on South State Street was acquired in May 1987 so that the Museum could expand. The property contains three brick buildings and a parking lot. The plaintiffs spent the remainder of 1987 and early 1988 renovating the property in preparation for the Museum's opening.

The Museum reopened in May 1988. Since then, the Museum has used all the property for its charitable purposes, with the exception of (1) 160 square feet used by the Association for office space and (2) the northernmost building, which remains vacant. The parking lot has been used only for the Museum.

The Association and the Museum allow other civic groups and charitable organizations to use the property free of charge, upon request. The Museum pays the mortgage on the property. The Association and the Museum each pay for building operating expenses based on the relative portion of the property occupied. As aresult, the Museum incurs an estimated 90% of the operating and upkeep expenses. The Museum pays these expenses out of funds donated to it by contributors.

The Department found that the Museum is a charitable organization and that the portions of the property occupied by the Museum were used for charitable purposes. The Department further found that the Association is not a charitable organization, noting that it serves primarily to benefit its members. Because the Association, a noncharitable organization, owns an undivided 50% interest in the property, the Department denied the plaintiffs' request for a charitable tax exemption in toto.

The plaintiffs filed a complaint in the circuit court for administrative review of the Department's decision. The circuit court held that the Association's lack of status as a charitable organization and its ownership interest in the property were irrelevant. The circuit court found the plaintiffs' primary use of the property to be controlling of the exemption issue. Accordingly, the circuit court remanded the matter to the Department with instructions to determine if the Museum had primary use of the property and, if so, whether the property should be granted a full or partial exemption.

After remand, the Department issued an order in compliance with the circuit court's instructions. The Department found that all the property was used by the Museum for charitable purposes for 66% of the calendar year 1987, with the exceptions of the vacant building and of the 160 square feet used by the Association for office space.

The circuit court entered its final order on August 14, 1992, ruling as follows. The property's first parcel, consisting of the parking lot, was entitled to a 100% exemption because it was used exclusively by the Museum. The second parcel, consisting of a building, was entitled to a 100% exemption because it was used exclusively by the Museum. The third parcel, consisting of a building, was entitled to a 98% exemption because, with the exception of the 160 square feet (or 2%) of Association office space, it was used exclusively by the Museum. The fourth parcel, consisting of the vacant building, was not entitled to any exemption. As noted, the appellate court affirmed the circuit court's decision over the dissent of one justice.

ANALYSIS

We note initially that the plaintiffs have never challenged the Department's denial of tax-exempt status for the fourth parcel of land with the vacant building. As a result, this case concerns only whether the plaintiffs were properly granted an exemption for 100% of the first two parcels, and 98% of the third parcel (hereinafter referred to as the property at issue).

The Department contends that none of the property at issue is entitled to a charitable tax exemption because of the Association's undivided 50% ownership interest. According to the Department, to allow an exemption under the facts of this case would be "a ...


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