Illinois Supreme Court upholds hospital property tax exemption


Donald L. Lippert, Jr.
T +1 312 602 8042 

Barb Ricken
T +1 312 602 8282

Kyle Kennett
T +1 312 602 8639

Clare Walter
T +1 312 602 8791

Jake Singletary
T +1 312 602 8530
On Sept. 20, 2018, in Oswald v. Hamer, the Illinois Supreme Court unanimously held that the Illinois property tax exemption for hospitals and their affiliates is constitutional.1 Previously, two districts of the Illinois Appellate Court had issued conflicting opinions concerning the constitutionality of the hospital property tax exemption statute on its face. This decision finally resolves the inconsistent treatment of the property tax exemption for Illinois hospitals and declares the statutory exemption to be facially constitutional.

Background Illinois law provides a property tax exemption for property owned by a charity that is “actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit.”2 The exemption is available where a charitable organization “uses the property exclusively for the distribution, sale, or resale of donated goods and related activities and uses all the income from those activities to support the charitable . . . activities of the owner, whether or not such activities occur on the property.”3 This property tax exemption is authorized by a provision of the Illinois Constitution allowing the legislature to exempt “property used exclusively for . . . charitable purposes.”4 The Illinois Supreme Court has held that the “exclusively used” terminology “means the primary purpose for which property is used and not any secondary or incidental purpose.”5

In 2010, the Illinois Supreme Court held that a religiously-affiliated Illinois hospital was not entitled to an exemption from property tax because it failed to establish that it was a charitable institution and that its property was used exclusively for charitable purposes.6 In response to this decision, in 2012, the Illinois property tax code was amended to create a new category of charitable exemption tailored to hospitals, generally referenced as Section 15-86.7 A property tax exemption is offered to hospitals that provide benefits to low-income individuals and other services that relieve the burden of the government in an amount that exceeds the value of its property tax exemption. The value of this hospital property tax exemption is based on the amount of property taxes that would be due if the property were not exempt.

There have been two conflicting Illinois Appellate Court decisions regarding the constitutionality of Section 15-86. In Carle Foundation v. Cunningham Township, the Illinois Fourth District Appellate Court held that the statute was unconstitutional on its face.8 Specifically, the Appellate Court held that the exemption violated constitutional language limiting the available exemption from property tax to property used exclusively for charitable purposes.9 In contrast, the Illinois First District Appellate Court held in the instant case that the property tax exemption provided by Section 15-86 was constitutional on its face.10 The Appellate Court based its conclusion that the statute is constitutional on the interpretation that the statute, read as a whole, permits a hospital to qualify for the exemption once it meets the threshold test of exclusively providing charitable services. This decision was appealed to the Illinois Supreme Court.

Hospital property tax exemption is facially constitutional In affirming the Appellate Court, the Supreme Court carefully considered the statutory language of Section 15-86 and held that the statute satisfies the constitutional “exclusive charitable use” requirement. The decision hinged on one word in Section 15-86: “shall.” Specifically, the statute provides:

A hospital applicant satisfies the conditions for an exemption under this Section with respect to the subject property, and shall be issued a charitable exemption for that property, if the value of services or activities listed in subsection (e) for the hospital year equals or exceeds the relevant hospital entity’s estimated property tax liability, as determined under subsection (g), for the year for which exemption is sought.11
At issue was whether the use of the word “shall” was unconstitutional because it mandates the issuance of a property exemption without considering the constitutional requirement that property subject to exemption must be “used exclusively for . . . charitable purposes.”12 In determining the constitutionality of Section 15-86, the Illinois Supreme Court’s main concern was to determine and give effect to the intent of the legislature.13 The plain language of Section 15-86 leaves little room for interpretation regarding statutory intent because it expressly provides that “[i]t is the intent of the General Assembly to establish a new category of ownership for charitable property tax exemption to be applied to not-for-profit hospitals and hospital affiliates in lieu of the existing ownership category of ‘institutions of public charity.’”14 The Supreme Court reasoned that, when read as a whole, the statute permits a hospital to qualify for an exemption only once it meets the constitutional test of exclusive charitable use. To avoid any possible constitutional violation, the Supreme Court determined that the word “shall” in the statute must be construed to be permissive and not mandatory.

The Supreme Court emphasized that its decision was limited to the constitutional validity of the statute on its face. As explained by the Court, “it is possible that specific future applications of section 15-86 may produce actual constitutional problems.” Any constitutional challenges considering the statute as applied will be considered by Illinois courts as they arise.

Commentary The Illinois Supreme Court’s decision in Oswald concludes the longstanding uncertainty surrounding the hospital property tax exemption and brings a sigh of relief to managers of not-for-profit hospitals that did not know whether they were eligible for such exemption. Because three-fourths of Illinois’ approximately 200 hospitals are nonprofit in nature, this decision has a broad effect.15 For these hospitals, property tax bills are a significant annual expenditure and the overturning of this statute would have likely caused financial hardships for many of the state’s not-for-profit hospitals. This statute will permit hospitals to focus more attention on medical services and public service rather than determining eligibility for an exemption from property taxes, or trying to restructure their activities to specifically fit under the exemption. Similarly, Illinois’ budgeting process may become a little more certain, to the extent that the amount of property tax revenue that may be derived from nonprofit hospitals is no longer at issue. However, the Supreme Court emphasized that its decision was limited to a facial challenge of the hospital property tax exemption statute. Thus, there is always a possibility that an “as applied” constitutional challenge could be raised in the future.

1 Illinois Supreme Court, No. 122203, Sep. 20, 2018.
2 35 ILL. COMP. STAT. 200/15-65.
3 35 ILL. COMP. STAT. 200/15-65(b).
4 See ILL. CONST. art. IX, § 6.
5 Methodist Old Peoples Home v. Korzen, 233 N.E.2d 537 (Ill. 1968). 
6 Provena Covenant Medical Ctr. v. Department of Revenue, 925 N.E.2d 1131 (Ill. 2010).
7 35 ILL. COMP. STAT. 200/15-86.
8 45 N.E.3d 1173 (Ill. App. Ct. 2016).
9 On appeal, the Illinois Supreme Court vacated Carle because the Appellate Court lacked jurisdiction and remanded the case to the trial court for further proceedings. Thus, the Supreme Court did not consider the constitutionality of the Illinois property tax exemption for hospitals in Carle. 89 N.E.3d 341 (Ill. 2017). For a discussion of this case, see GT SALT Alert: Future of Illinois Property Tax Exemption Remains Uncertain.
10 73 N.E.3d 536 (Ill. App. Ct. 2016).
11 35 ILL. COMP. STAT. 200/15-86(c) (emphasis added).
12 ILL. CONST. art. IX, § 6.
13 See Murphy-Hylton v. Lieberman Management Services, Inc., 72 N.E.3d 323 (Ill. 2016). 
14 35 ILL. COMP. STAT. 200/15-86(a)(5).
15 Schencker, Lisa, State Supreme Court Upholds Law Allowing Hospital Property-Tax Exemptions, CHICAGO TRIBUNE, Sep. 20, 2018.

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.