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July 23, 2007

Trial Court Reverses Department of Revenue’s Decision to Deny Hospital’s Tax Exempt Status

Last Friday, July 20, Circuit Court Judge Patrick J. Londrigan of Sangamon County reversed the Illinois Department of Revenue’s denial of property tax exemption for Provena Covenant Medical Center in Champaign County.  The judge announced his decision right after hearing oral arguments from the hospital’s attorney, Patrick Coffey of Lord Bissell and Brook, and Assistant Attorney General John Simpson, who represented the Department.  The Department has 30 days to file an appeal.

The hospital had reapplied for property tax exemption beginning in 2002 because of a change in ownership. The Champaign County Board of Review recommended denial of the exemption, and in 2004, the Department affirmed the local Board’s recommendation. The hospital requested a hearing before a Department Administrative Law Judge (ALJ), and in October 2005, the ALJ issued her recommendation in favor of the hospital. The Director rejected the ALJ’s recommendation nearly one year later. The hospital then filed its complaint against the Department in the circuit court of Sangamon County in October, 2006.

The parties were in court on Friday on Provena’s motion to reverse the Department’s decision. Some months before, briefs had been filed by both parties. The Illinois Hospital Association, the American Hospital Association, and the Catholic Healthcare Association, all filed amicus briefs in support of the hospital. The judge acknowledged the amicus briefs in court before oral argument.

Provena’s main arguments in court included:

• The Hospital had called 16 witnesses over the course of the two week long hearing before the ALJ, none of whose testimony was contradicted by the Department (the Department did not call any witnesses before the ALJ);
• There was no evidence of a single instance where the hospital turned away a poor patient because of an inability to pay;
• The Department had stipulated to several facts that were subsequently ignored by the Director in his own decision, for instance, that the hospital provided "unlimited charity care" to all who applied for it;
• The Director’s decision to focus solely on the amount of charity care, "less than 1% of revenues," and no other benefit, was improper and inconsistent with court decisions on the standard for determining the nature of a charity;
• The few appellate court cases that considered the percentage of free care to the poor involved medical clinics and not hospitals with their more significant outreach activities.

The Department emphasized the size of the hospital and that it functioned primarily as a "large fee-for-service institution" and not as a charity. According to the Department, property tax exemptions are based on the charitable use of the property, not on whether the organization has a charitable purpose. It noted that the hospital’s billings exceeded its costs by $2 million, which was not "consistent" with charity and that one half of the hospital’s expenses went to salaries and benefits for employees. It further argued that there was no evidence that the for-profit physician groups, who used the hospital property, were required to, or provided, any charity care.

While acknowledging that hospitals had certainly changed since the 1907 Illinois Supreme Court case which granted a property tax exemption to a hospital run by the Sisters of the Third Order of Saint Francis, Judge Londrigan subsequently announced he was granting the hospital’s motion to reverse the Department and restore its tax exemption on both charitable and religious grounds.

For further questions/comments about this decision, please contact Kathleen Pankau, Staff Counsel, at 630-276-5598 or kpankau@ihastaff.org.