[author:  Ares Dalianis and Scott Metcalf ]

Since 2010, when the Illinois Supreme Court upheld the revocation of a property tax exemption for a hospital on the grounds that an insufficient amount of charitable medical care was being provided, we have been monitoring and reporting developments in this area of the law that has significant revenue implications for school districts. Our last FR Alert on this evolving area reported that in August 2011 the Illinois Department of Revenue denied charitable tax exemptions to Prentice Women’s Hospital, Edward Hospital in Naperville, and Decatur Memorial Hospital. Then, in September Governor Quinn imposed a moratorium on decisions by the Department of Revenue in order to allow stakeholders to develop standards for evaluating whether particular hospitals qualify as charitable organizations. After six months of negotiations, the stakeholders were unable to reach consensus, and earlier this month the Governor instructed the Department of Revenue to resume issuing exemption decisions.

The Illinois Supreme Court's decision in Provena Covenant Medical Center v. Dept. of Revenue held that denial of a charitable property tax exemption was appropriate in that case because the evidence indicated that only a de minimis amount of charitable care was being provided. What remains unclear is what amount of charitable care a hospital must provide in order to receive an exemption and how that charitable care should be measured. According to published reports, the Department of Revenue could soon begin issuing decisions on the 24 hospital property tax exemption cases currently pending before it. And, on the legislative front, published reports indicate State Senate Majority Leader James Clayborne, Jr. has agreed to sponsor legislation proposed by the Illinois Hospital Association.

Depending on the size of the hospital, this issue can have a significant impact on school district property tax collections. Denial of an exemption places a hospital on the property tax rolls and results in the hospital paying property taxes. In the initial year of assessment, the hospital property equalized assessed value is treated as ‘new property’ under the Property Tax Extension Limitation Law. However, if it is eventually decided that the property should have been exempt, either through a Department of Revenue decision, a court’s review of the decision, or by legislative fiat, taxing districts that collected property taxes from the hospital will be required to refund those collections going back to the date at which the property was first entitled to the exemption. Given the time required to adjudicate exemption appeals though the Department and the courts, the reach back period could be several years.

We will continue to monitor the judicial and legislative developments in this area and inform you of notable events.