The Charity Care Requirement for Hospital Property Tax Exemptions

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THE “CHARITY CARE” REQUIREMENT FOR HOSPITAL PROPERTY TAX EXEMPTIONS Edward J. Bernert Christopher J. Swift I. Introduction Hospitals throughout the United States are accorded the benefits of a charitable exemption from various state and local ad valorem property taxes. The issue we examine is the role of a “charity care” requirement, meaning a certain level of “free or discounted medical care” as a condition to hospitals obtaining charitable exemptions from property taxes. A case pending before the Illinois Supreme Court has attracted considerable attention because it presents a high profile opportunity for that Court to decide whether a quantified level of charity care is the sine qua non of the charity exemption in Illinois, Provena Covenant Medical Center v. Illinois Department of Revenue, 384 Ill. App. 3d 734, 894 N.E. 2d 452 (4 th Dist. August 26, 2008), cert. granted, Illinois Supreme Court, Case No. 107328. The appellate court in Provena upheld the Director of the Illinois Department of Revenue (Director) and denied an exemption in large measure because of an inadequate demonstration of a level of free care. A recent decision by the Connecticut Supreme Court--St. Joseph’s Living Center, Inc. v. Town of Windham, 240 Conn. 695 (March 24, 2009)--while denying the exemption in that case, nevertheless chose to reject arguments that were successfully advanced in Provena. The Connecticut Supreme Court followed the line of cases from other states that focus on the overall charitable nature of the health care institution in contrast to limiting the analysis to specific activities, such as free care for the poor, in gauging qualification for exemption. These two cases, and the decisions of other state supreme courts, provide useful vehicles to address the role of quantified charity care in the granting to hospitals of charitable exemptions from property taxes. This issue has been addressed in a number of decisions but remains a subject of dispute, including in Ohio, in which the issue is being litigated at the Ohio Board of Tax Appeals. The issue is one of state not federal law. State charitable property tax exemptions are not assured for owners that qualify for federal income tax exemption under Internal Revenue Code §501(c)(3). While the state and local property tax exemptions do not depend on qualification under federal law, the policies under the Internal Revenue Code likely will impact the manner in which the state exemptions are examined. A reexamination of the federal income tax exemption of hospitals is under way. Beginning with the 2008 and 2009 returns, the Federal Form 990, Return of Organization 2
Exemption from Income Tax, has expanded the disclosure requirements applicable to hospitals claiming income tax exemption, including a reporting of the hospital’s charity care policies in new Schedule H. Also, United States Senator Charles Grassley of Iowa has focused his efforts on the charitable exemption for the federal income tax available to hospitals and has vowed to change the manner in which the income tax exemption is administered. This report will not address the federal income tax law. Instead, we (1) examine the Illinois appellate court decision in Provena and the issues relevant to the availability of the charitable exemption to Provena likely to be addressed by the Illinois Supreme Court, 1 (2) compare that Illinois appellate decision with the St. Joseph’s case in Connecticut and several decisions of other state supreme courts that have addressed the charitable exemption for hospitals, and (3) examine tax statutes in Pennsylvania and Texas that address the charity care issue legislatively. II. Illinois--The Provena Case A. Introduction Provena Hospitals (Provena) is a nonprofit, full service general acute-care hospital located in Champaign County, Illinois. The owner of the hospital qualified under IRC §501(c)(3) for a charitable exemption and qualified for exemption from the Illinois sales and use taxes as a charity. Provena sought property tax exemption from the Champaign County Board of Review, which denied the exemption. Provena appealed the decision and the Administrative Law Judge (ALJ) assigned to the appeal recommended exemption on the basis that Provena was a charitable institution and its property was used primarily for charitable purposes. The Director disagreed with the recommendation of the ALJ. The appellate court in Provena described the actions of the Director in the following terms: The Director disagreed with the ALJ's recommendation and denied an exemption for charitable uses. The primary reason for his decision was that in 2002, the tax year in question, [Provena] devoted only 0.7% of its total revenue to charity care. Of 110,000 admissions in 2002, [Provena] gave free care to only 196 patients and discounted care to only 106 patients; and [Provena] hired collection agencies to recover the remaining balances from 64 of the patients to whom it had given discounts. Provena challenged the decision of the Director in an administrative review to the circuit court, and advanced the following argument: …under the [Illinois] supreme court's decisions, charities were not defined by percentages and that, in any event, 1 We will not address the religious use exemption issue also raised in the Provena appeal. 3
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Page 5 and 6: (1) the institution bestows benefit
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Page 9 and 10: use of real property, Provena canno
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Page 13 and 14: the nature of the institutions and
Page 15 and 16: defensible than the Illinois approa
Page 17 and 18: B. Texas The Texas Tax Code, §11.1

The Charity Care Requirement for Hospital Property Tax Exemptions

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