According to Article IX, Section 6 of the Illinois Constitution, the legislature may exempt from property taxes only the “property of the State, units of local government and school districts and property used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes.”  According to Section 15-86 of the Property Tax Code, a hospital may qualify for a charitable exemption by providing services or activities worth as much or more than the hospital’s estimated property tax bill for that year.  Is Section 15-86 facially unconstitutional?  That’s the question the Illinois Supreme Court agreed to answer in the closing days of the May term, allowing a petition for leave to appeal in The Carle Foundation v. Cunningham Township.

Carle Foundation arises from four parcels in Urbana, Illinois.  An affiliate of the plaintiff operates a hospital on two of the parcels, the third contains a day care center, and the fourth contains a power plant which serves the other three parcels.  Until 2004, the four parcels were considered exempt under the charitable use exception.  But between 2004 and 2011, the township assessor assessed the four parcels at their full value.

In late 2007, ten months after its application for a charitable exemption was denied, the plaintiff filed suit, seeking a declaratory judgment that the four parcels were exempt from taxation pursuant to section 15-65 of the Property Tax Code.  Ultimately, after one trip to the Appellate Court, the plaintiff withdrew its applications for exemptions for 2004 and 2005.  Later, it filed applications for exemptions for the years 2006 and 2008, but it ultimately withdrew those applications too.  The plaintiff made no attempt to have the parcels exempted for the years 2009-2011.

The plaintiff’s Fourth Amended Complaint contains 35 separate counts.  The Appellate Court divided them into four categories: (1) the earlier exemptions were never validly discontinued; (2) the parcels were exempt under the recently enacted Section 15-86; (3) a request for declaratory judgment that Section 15-86 applied retroactively to the tax years 2004 through 2011; and (4) for alleged breach of a settlement agreement.  The trial court granted plaintiff summary judgment on its claim that the parcels were exempt pursuant to Section 15-86, entering a Rule 304(a) finding to purportedly authorize an interlocutory appeal.  Three separate groups appealed: the Department of Revenue; the township, city and township assessor; and various county officials.

The Fourth District reversed the Circuit Court.  The court began by considering its own jurisdiction.  The Circuit Court had entered a Rule 304(a) finding, but “that is not enough.”  There had to be an actual final judgment on a separate claim, or the Rule 304 language accomplished nothing.  The Court ultimately concluded that by entering summary judgment granting declaratory relief under Count II, the court below had entered a final judgment in a matter which was sufficient separable from the rest of the case.

The Court then turned to the question of whether Section 15-86 could apply to a proceeding under Section 23-25(e) of the Code.  Section 15-86 plainly related by its plain language to an administrative procedure for determining exemptions, while Section 23-25(e) was supposed to be a judicial alternative to an administrative determination.  The Court ultimately concluded that Section 15-86 did apply to the declaratory judgment action, at least indirectly, in the sense that plaintiffs could argue that they had been arbitrarily denied an exemption under Section 15-86 when one had been administratively granted to similarly situated years or parcels.  The Court then reviewed the question of whether the legislature plainly intended for Section 15-86 to apply retroactively, and concluded that it did.

All that led the Court to the central question: could Section 15-86 be squared with Article IX, Section 6?  The Court began by noting that although the constitution limited exemptions to property used “exclusively” for charitable purposes, the courts had consistently held that the word “exclusively” shouldn’t be taken too literally; as long as a non-charitable use was de minimis over the course of a year, it didn’t imperil the property’s exemption.

But even with that qualification, were “services worth more than the foregone property tax bill” sufficient to qualify as “exclusive” charitable use under the Constitution?  The traditional test for a facial constitutional challenge involves the court determining whether there is any hypothetical set of circumstances in which the statute could be validly applied – that’s why so few facial challenges ever succeed.  The Fourth District suggested at some length that the “no set of circumstances test” was vague, difficult to apply, and that it wasn’t entirely clear that even the United States Supreme Court truly adhered to it anymore, citing Washington State Grange v. Washington State Republican Party.  Nevertheless, the Court concluded that Section 15-86 was facially unconstitutional because it mandated charitable exemptions pursuant to a criterion that couldn’t be reconciled with the criterion in Article IX, Section 6.

We expect Carle Foundation to be decided this winter.

Image courtesy of Flickr by Adrian Clark (no changes).