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Oswald v. Hamer

Court of Appeals of Illinois, First District, Fourth Division

December 22, 2016

CONSTANCE OSWALD, Plaintiff-Appellant,
BRIAN HAMER, in His Official Capacity as Director of Revenue, and THE ILLINOIS DEPARTMENT OF REVENUE, Defendants-Appellees, Illinois Hospital Association, Intervening Defendant-Appellee.

         Appeal from the Circuit Court Cook County. No. 12 CH 42723 Honorable Robert Lopez Cepero, Judge Presiding.

          JUSTICE McBRIDE delivered the judgment of the court, with opinion. Justices Howse and Rochford concurred in the judgment and opinion.


          McBRIDE, JUSTICE

         ¶ 1 On appeal, plaintiff Constance Oswald, as a Cook County real property taxpayer, argues that section 15-86 of the Property Tax Code (Code) (35 ILCS 200/15-86 (West 2012)) is unconstitutional on its face because section 15-86(c) purports to grant a property tax exemption to a hospital applicant without regard to whether the property is used exclusively for charitable purposes, as required under article IX, section 6, of the Illinois Constitution (Ill. Const. 1970, art. IX, § 6).

         ¶ 2 In November 2012, plaintiff filed an action for declaratory judgment in the trial court, challenging the constitutionality of section 15-86. Section 15-86 details the process to seek a property tax exemption for certain Illinois hospitals and their affiliates. Plaintiff asserted that section 15-86 violates article IX, section 6, of the Illinois Constitution and, therefore, was unconstitutional on its face. Following cross-motions for summary judgment, the trial court granted summary judgment in favor of defendants, Brian Hamer, as Director of Revenue, and the Illinois Department of Revenue (collectively "the Department"), and intervening defendant, the Illinois Hospital Association, finding that section 15-86 was not facially unconstitutional.

         ¶ 3 There is no factual dispute in this case. The only issue before this court, whether section 15-86 is facially constitutional, is purely a question of law. We review a statute's constitutionality de novo. People ex rel. Birkett v. Konetski, 233 Ill.2d 185, 200 (2009).

         ¶ 4 "Under Illinois law, taxation is the rule. Tax exemption is the exception." Provena Covenant Medical Center v. Department of Revenue, 236 Ill.2d 368, 388 (2010) (plurality opinion). Article IX of the Illinois Constitution "generally subjects all real property to taxation." Eden Retirement Center, Inc. v. Department of Revenue, 213 Ill.2d 273, 285 (2004). "[T]he state's inherent power to tax is vested in the General Assembly. The legislature's power to tax is plenary; it is restricted only by the federal and state constitutions." Id. "The Illinois Constitution does not grant power to the legislature, but rather restricts the legislature's power to act." Id. at 284.

         ¶ 5 Article IX, section 6, of the constitution provides, in relevant part:

"The General Assembly by law may exempt from taxation only the property of the State, units of local government and school districts and property used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes." Ill. Const. 1970, art. IX, § 6.

         ¶ 6 "Section 6 is not self-executing. It merely authorizes the General Assembly to enact legislation exempting certain property from taxation." Provena, 236 Ill.2d at 389. "By designating the classes of property which may be exempted from taxation, section 6 of article IX has placed a restriction on the legislature's authority to exempt." Chicago Bar Ass'n v. Department of Revenue, 163 Ill.2d 290, 297 (1994). "Accordingly, a property tax exemption created by statute cannot be broader than the provisions of the constitution, and no property except that mentioned in the exemption provisions of the constitution can be exempted by any laws passed by the legislature." Id. "While the General Assembly has no authority to grant exemptions beyond those authorized by section 6, it 'may place restrictions, limitations, and conditions on [property tax] exemptions as may be proper by general law.' " Provena, 236 Ill.2d at 390 (quoting North Shore Post No. 21 of the American Legion v. Korzen, 38 Ill.2d 231, 233, (1967)).

         ¶ 7 "One class of property that the legislature may exempt from taxation is property used for charitable purposes. Charitable use is a constitutional requirement. An applicant for a charitable-use property tax exemption must 'comply unequivocally with the constitutional requirement of exclusive charitable use.' " (Emphasis in original.) Eden, 213 Ill.2d at 286-87 (quoting Small v. Pangle, 60 Ill.2d 510, 516 (1975)). Illinois courts have held that a "property satisfies the exclusive-use requirement for tax exemption purposes if it is primarily used for the exempted purpose." (Emphasis in original.) Chicago Bar Ass'n, 163 Ill.2d at 300. Illinois courts have also concluded that "a 'hospital not owned by the State or any other municipal corporation, but which is open to all persons, regardless of race, creed or financial ability, ' qualifies as a charitable institution under Illinois law provided certain conditions are satisfied." Provena, 236 Ill.2d at 391 (quoting People ex rel. Cannon v. Southern Illinois Hospital Corp., 404 Ill. 66, 69-70 (1949)). "There is, however, no blanket exemption under the law for hospitals or health-care providers. Whether a particular institution qualifies as a charitable institution and is exempt from property tax is a question which must be determined on a case-by-case basis." Id.

         ¶ 8 The Illinois Supreme Court first found not-for-profit hospitals to qualify for charitable property tax exemptions in the 1907 decision of Sisters of the Third Order of St. Francis v. Board of Review, 231 Ill. 317 (1907). In that case, the supreme court held that the hospital was an institution of public charity under a statutory predecessor to section 15-65, which granted property tax exemption to " '[a]ll property of institutions of public charity, when actually and exclusively used for such charitable purposes, not leased or otherwise used with a view to profit.' " Id. at 319 (quoting Ill. Rev. Stat. 1905, ch. 120, ¶ 2). The court discussed the purpose and work of the hospital as an institution of public charity.

"In this hospital charity is extended to all the members of the community and is not confined to any particular class of individuals. It is an institution of public charity, and where an institution devoted to beneficence of that character is, under the law, exempt from taxation, it does not lose its immunity by reason of the fact that those patients received by it who are able to pay are required to do so, or by reason of the fact that it receives contributions from outside sources, so long as all the money received by it is devoted to the general purposes of the charity, and no portion of the money received by it is permitted to inure to the benefit of any private individual engaged in managing the charity." Id. at 320-21.

         ¶ 9 The court rejected an argument about the disparity between the number of charity patients in comparison with the number of patients who paid for service.

"This objection seems to us without merit, so long as charity was dispensed to all those who needed it and who applied therefor, and so long as no private gain or profit came to any person connected with the institution, and so long as it does not appear that any obstacle, of any character, was by the corporation placed in the way of those who might need charity of the kind dispensed by this institution, calculated to prevent such persons making application to or obtaining admission to the hospital. The institution could not extend its benefactions to those who did not need them, or to those who did not seek admission." Id. at 322.

         ¶ 10 Nearly a century later in Provena, the supreme court considered whether a hospital was entitled to the charitable property tax exemption under section 15-65 of the Code (35 ILCS 200/15-65 (West 2002)). Section 15-65 granted property tax exemption for institutions of public charity for the subject property "when actually and exclusively used for charitable or beneficent purposes." 35 ILCS 200/15-65(a) (West 2002). With two justices recusing, the majority of the court concluded that the hospital failed to establish by clear and convincing evidence that it satisfied the requirements for the statutory charitable institution exemption. Provena, 236 Ill.2d at 393. Specifically, the hospital failed to establish 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 needed and would have availed themselves of the charitable benefits it dispenses." Id.

         ¶ 11 The supreme court explained the rationale behind providing exemptions for charitable institutions.

"Conditioning charitable status on whether an activity helps relieve the burdens on government is appropriate. 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 wishes to avail itself of funds which would otherwise flow into a public treasury, it is only fitting that the institution provide some compensatory benefit in exchange. While Illinois 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 sine qua non of charitable status that those seeking a charitable exemption be able to demonstrate that their activities will help alleviate some financial burden incurred by the affected taxing bodies in performing their governmental functions." Id. at 395.

         ¶ 12 However, the justices disagreed on the question of charitable use. Id. at 412 (Burke, J., concurring in part and dissenting in part, joined by Freeman, J.). The plurality of the court found the hospital's charitable care was de minimis, as the evidence presented failed to show that the hospital used the property at issue "actually and exclusively for charitable purposes." Id. at 397 (plurality opinion). The plurality observed that while the hospital did not turn anyone away for treatment, it did not advertise its charity services and billed patients as a matter of course. Unpaid bills were referred to collection agencies. Discounts or waivers in costs were only made after it was established that the patient lacked private insurance, did not have Medicare or Medicaid, lacked the ability to pay, and had qualified for the hospital's charity program. Id. at 398. The court had observed that in 2002, the hospital had "waived $1, 758, 940 in charges, representing an actual cost to it of only $831, 724. This was equivalent to only 0.723% of PCMC's revenues for that year and was $268, 276 less than the $1.1 million in tax benefits which [the hospital] stood to receive if its claim for a property tax exemption were granted." Id. at 381. "[B]oth the number of uninsured patients receiving free or discounted care and the dollar value of the care they received were [de minimis]. With very limited exception, the property was devoted to the care and treatment of patients in exchange for compensation through private insurance, Medicare and Medicaid, or direct payment from the patient or the patient's family." Id. at 397.

         ¶ 13 Justice Burke dissented on the issue of charitable use, joined by Justice Freeman. In her dissent, Justice Burke wrote, "By imposing a quantum of care requirement and monetary threshold, the plurality is injecting itself into matters best left to the legislature." Id. at 412 (Burke, J., concurring in part and ...

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