In Oswald v. Hamer, ¹ the Illinois Supreme Court (Court) upheld the constitutionality of an Illinois law stating that a hospital applying for a charitable use property tax exemption "shall be issued" the exemption if the value of certain qualifying services or activities in a given year equals or exceeds the hospital's estimated property tax liability for the same year. In so holding, the Court construed "shall" as used in the statute (35 ILCS 200/15-86(c)) as permissive rather than mandatory, and concluded that a hospital seeking a charitable use property tax exemption under 35 ILCS 200/15-86 (Section 15-86) must both document the services and activities it provides that meet statutory requirements and must show that the property meets the constitutional test of exclusive charitable use under Article IX, Section 6 of the Illinois Constitution (Constitution).

Background and legislative history

Article IX, Section 6 of the Constitution limits the charitable exemption from property tax to property that is "used exclusively for … charitable purposes." Additionally, Illinois law (35 ILCS 200/15-65 (Section 15-65)) limits the exemption to property that is used for charitable purposes and owned by a charitable organization. Lastly, Section 15-86(c) states that a hospital applicant "shall be issued" a charitable property tax exemption if the value of certain hospital qualifying services or activities in a given year equals or exceeds the hospital's estimated property tax liability for the same year. A Cook County taxpayer challenged Section 15-86 as facially unconstitutional, arguing that it orders the state to issue a property tax exemption without considering the Constitution's exclusive charitable use requirement.

The legislature enacted the hospital exemption at issue, Section 15-86, in response to the Court's earlier ruling in Provena Covenant Medical Center v. Ill Dept. of Rev., 236 Ill. 2d 368 (2010), in which the Court unanimously (with two justices recused) concluded that a medical center failed to satisfy the charitable use property tax exemption requirements, but disagreed on how the failure occurred. The plurality opinion determined that both the number of uninsured patients receiving free or discounted care and the dollar value of the care they received were de minimis (i.e., the hospital did not satisfy the charitable use requirement). The two partially dissenting justices argued that the medical center did not qualify for the charitable exemption based on the property's actual ownership (i.e., the hospital did not meet the ownership requirement because it did not qualify as a charitable organization) and that the plain language of Section 15-65 does not permit the Court to impose a quantum of care or monetary threshold.

In adding Section 15-86, the legislature specifically stated its intent to establish: (1) a new category of ownership for not-for-profit hospitals and hospital affiliates, rather than requiring them to qualify as "institutions of public charity,"² and (2) quantifiable standards (applied on a case-by-case basis) for issuing charitable exemptions from property tax.³

Analysis

Noting that Section 15-86(a) and (c) do not explicitly reference the Constitutional requirement for exclusive charitable use, the Court presumed based on principles of statutory construction that the legislature intended to comply with the Constitutional limitation requiring exclusive charitable use. Further, the Court found that the legislature explicitly stated its intent to establish a new category of ownership for not-for-profit hospitals and hospital affiliates rather than requiring them to qualify as "institutions of public charity,"⁴ and found that this references Section 15-65, which includes an explicit reference to the exclusive charitable use Constitutional limitation.

Although Section 15-86 omits a specific reference to the Constitution's exclusive charitable use requirement, the Court noted, the legislature was aware of the requirement and intended to enact a Constitutional charitable property tax exemption for eligible hospitals. Therefore, the Court construed "shall" in Section 15-86(c) as permissive rather than mandatory, thereby "avoid[ing] the possible constitutional infirmity."

Lastly, the high burden of succeeding on a facial challenge to the statute requires that no set of circumstances exist under which the statute would be valid. The Court declined to address the argument by some of the amici to disregard the "no set of circumstances" test in determining facial constitutionality of legislation, because the taxpayer never raised this issue.

Implications

The ruling in this case provides further clarity for hospitals and hospital affiliates regarding the requirements they must meet to qualify for the charitable use exemption from property tax under the Constitution and applicable statutes. In the wake of the Court upholding the constitutionality of Section 15-86, a hospital seeking a charitable use property tax exemption under the statute must both document the services and activities it provides that meet statutory requirements and show that the property meets the constitutional test of exclusive charitable use.

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ENDNOTES

¹ Oswald v. Hamer, No. 122203 (Ill. S. Ct. September 20, 2018).

² The Court noted that before Section 15-65 was enacted, private hospitals could apply as charitable organizations for the property tax exemption.

³ Section 15-86(a)(5).

⁴ Id.