The Illinois Appellate Court has ruled that a Chicago-area hospice must pay property taxes despite its non-profit status, finding that the organization’s property was not exclusively engaged in charity use. This is the first such case involving a hospice, but similar litigation against providers in other health care settings indicate a trend that non-profit hospices should watch.
Midwest Palliative Hospice and Care Center, which now operates as JourneyCare, brought the lawsuit against Constance Beard, as director of the Illinois Department of Revenue, after the agency denied an exemption for 2013 property tax on its Marshak Family Hospice Pavilion inpatient facility. The facility is located on the same campus as the organization’s inpatient palliative care center, which had received a property tax exemption in 2008.
“Non-profit health care organizations that are not hospitals should be aware that simply having a federal exemption and the various policies for charitable operations is no guarantee at all that they’ll be exempt,” Kendall Schnurpal, Of counsel with Indianapolis law firm Krieg DeVault, L.L.P., told Hospice News.
Midwest’s attorney’s argued that its 501(c)(3) status warranted an exemption. The organization admits patients regardless of their ability to pay, provides free grief counseling and support services, and trains medical students in hospice care at no charge.
The court agreed that Midwest was indeed a charitable organization but determined that the hospice’s inpatient facility was operating as a business enterprise. The court based its finding on financial records showing that 94 percent of Midwest’s annual revenue came from patient billing rather than charitable donations, according to court documents.
Midwest brought in approximately 88 percent of its operating revenue from net patient services reimbursed by Medicare or Medicaid. In addition, the court found, the organization’s charitable care accounted for less than 1 percent of the new services revenue for the 2013 tax year.
That issue, the proportion of revenue used for charitable care, is the crux of this and similar cases. The court indicated that revenue should not be the sole focus in determining an organization’s eligibility for tax exemption. However, the way revenue is used plays a major role in concluding whether a property should be exempt.
“It’s pretty clear after this case that [non-profit providers] need a significant amount of charitable activity to justify that exemption. How much? We don’t know yet. Clearly it’s going to have to be at least equal to the amount the state would forego in property taxes,” Schnurpel said. “Even with that amount, if the organization isn’t a hospital, I don’t think that will be nearly enough.”
This case is becoming emblematic of non-profit health care tax litigation nationwide. Most of the cases to date have involved hospitals, but virtually any non-profit healthcare organization, including hospice and palliative care providers like Midwest, could potentially face a similar predicament.
“This is most definitely an issue in other states. Hospitals have been under the microscope for a while now as to whether they really are ‘charitable’ for purposes of tax exemption,” Schnurpel said. “A possible approach might be to explore a payment in lieu of taxes arrangement with the taxing authorities.”