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Riverside Medical Center v. Department of Revenue of the State of Illinois

July 30, 2003


Appeal from the Circuit Court for the 21th Judicial Circuit, Kankakee County, Illinois No. 01--MR-950 Honorable Fred S. Carr, Jr., Judge, Presiding

The opinion of the court was delivered by: Presiding Justice McDADE


In this appeal, the defendants, the Illinois Department of Revenue and the Kankakee County Board of Review, seek review of the decision of the Kankakee County circuit court granting the plaintiff, Riverside Medical Center, a charitable exemption from property taxes under section 15--65 of the Property Tax Code (35 ILCS 200/15-65 (West 2000) for clinics it owns in Bourbonnais, Maneto and Momence. The defendants argue that the subject properties do not meet the requirements for an exemption. For the following reasons, we reverse the order of the circuit court of Kankakee County and confirm the decision of the Illinois Department of Revenue.


The plaintiff, Riverside Medical Center, is a not-for-profit corporation that owns a hospital and eight clinics in and around Kankakee. Three clinics are located in Bourbonnais, Momence and Maneto. Riverside applied to the Illinois Department of Revenue (the Department) for property tax exemptions for these clinics for 1998 on the basis that the properties were used for charitable purposes. The Department granted the exemptions, except for portions that were rented out to private physicians. Following the Department's determination, the Kankakee County Board of Review requested a formal hearing.

The matter proceeded to an administrative hearing before administrative law judge Alan Marcus. The parties stipulated that the only parts of the clinics that were potentially eligible for an exemption were those portions that had not been rented to private doctors. David Schroeder, the chief financial officer and treasurer of Riverside Health System, was the only witness.

Schroeder testified to the corporate and financial structure of the Riverside system. Riverside Health Systems is a not-for-profit corporation that is exempt from federal income tax pursuant to section 501(c)(3) of the Internal Revenue Code of 1954 (the Code) (26 U.S.C. §501(c)(3) (2000)). The corporation is also designated as a public charity under Section 509(a)(1) of the Code (26 U.S.C. §509(a)(1) (2000)).

The corporation's articles of incorporation dedicate it to the improvement of the health of the communities it serves through the provision of charitable health care. The charter devotes Riverside's operations and revenue to that purpose. The system covers its operating costs through patient fees, grants, and donations. The three clinics obtained almost 100% of their revenue from patient fees, with rent also a minor contributing income source. Donations amounted to 0.05% of Riverside's 1998 revenue. Riverside budgets 3% of its total budget for charity care; however, there was no evidence presented to indicate that Riverside limits charity care to only 3% of its budget. Riverside is a party to agreements with Medicare, Medicaid and other large health insurers to provide health care at discounted prices to members of those plans. In 1998, Riverside provided $191,670,616 worth of patient services. After discounts due to Riverside's agreements with the insurers, it received only $92,558,756, or approximately 50% of the value of the medical services rendered. The three clinics at issue ran a combined deficit of $850,000 in 1998. The Riverside system as a whole, however, had a net revenue of approximately $10 million in 1998.

Schroeder testified that the clinics fulfill their charitable purpose by giving charity care to patients who are unable to pay. The clinics do this in two ways. First, a physician working at the clinic may choose to give informal care to a patient with whose financial situation he or she is familiar. In those cases, the physician will treat the patient, but will not bill for the services. Rather, the care will be given free from the outset.

Second, the clinic gives out "charity care" to those individuals that it later determines are unable to pay. The clinic gives care to all patients who come to the clinic and does not demand proof of ability to pay before treatment is administered. Later, the clinic bills the patient. Upon nonpayment, another bill is sent out 30 days later. The clinic repeats this process several times. If, after several invoices are sent to the patient, the bill remains unpaid, the clinic turns the account over to its collections department. The department contacts the patient by phone to determine why the bill has not been paid. If the patient, at that time, indicates that he or she is unable to pay, the collections agent gives the patient an opportunity to submit a charity care application. If the patient indicates on the application an inability to pay, the bill is written off as uncollectible and further efforts at collection are discontinued. The clinics do not advertise the availability of charity care.

Following the hearing, Judge Marcus issued a recommendation that the subject properties not be given a tax exemption. The judge noted that 97% of the clinics' revenues came from patient billing, and that Riverside could not produce documentation to prove the amount of charity care actually given in 1998. The judge believed that this, in conjunction with the fact that the clinics billed all patients and did not advertise the availability of charity care, led to the conclusion that the clinics were not primarily used for charitable purposes. The judge characterized the 3% budget for charity care as de minimus and found that the clinics were primarily used for providing medical care to patients who were able to pay. The Director of the Department of Revenue, acting in accordance with the judge's recommendation, issued an order denying an exemption on November 6, 2001.

Riverside filed a complaint for administrative review on December 7, 2001. The court, after hearing argument in the matter, found that the ruling of the Department was clearly erroneous. The court found the clinic deficit of $850,000 was not de minimus and issued tax exemptions for the properties. The Kankakee Board of Review (the Board) and the Illinois Department of Revenue now appeal that decision.


Riverside claims an exemption from Illinois property taxes under section 15-65 of the Property Tax Code (35 ILCS 200/15--65 (West 2000). The provision states that all institutions of public charity are exempt from property tax when "actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit." 35 ILCS 200/15--65 (West 2000). While the parties do not dispute that the clinics are institutions of public charity, they do dispute whether the clinics are used exclusively for charitable purposes. The Board and the Department argue that the amount of charity care actually given by the clinics is insufficient, when compared to care given by the clinics that is paid for by patients. The ...

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