Illinois Supreme Court refuses to hear appeal of denial of real estate tax exemption for senior living facility

The Illinois Supreme Court refused to hear an appeal from the Illinois Appellate Court decision in Meridian Village Association v. Department of Revenue. The Illinois Appellate Court issued its decision in March 2011 and found that Meridian Village Association did not qualify for a real estate tax exemption on the grounds of either charitable use or religious use of the subject property.

Structure of Meridian Village Association

Meridian Village Association (“Meridian Village”) is an Illinois not-for-profit corporation which owns and operates a residential community for the elderly in Illinois. The sole corporate member of Meridian Village was initially Lutheran Child and Family Services of Illinois, and subsequently became Lutheran Senior Services. The senior living facility consists of 34 patio homes, 64 apartments and 2 display apartments, along with various activity and community rooms, outdoor facilities and parking areas. Residents at Meridian Village paid monthly fees and also paid entrance fees at the commencement of their residency agreements.

Applicable Statutes

With respect to real estate tax exemption for charitable use, Illinois law provides in relevant part that “all property of the following is exempt when actually and exclusively used for charitable or beneficent purposes and not otherwise used with a view to profit: (a) institutions of public charity; (b) beneficent and charitable organizations incorporated in any state of the United States…; (c) old peoples’ homes, facilities for persons with developmental disability and not-for-profit organizations providing services or facilities related to goals of educational, social and physical development, if, upon making application for the exemption, the applicant provides affirmative evidence that the home or facility or organization is an exempt organization under paragraph 3 of Section 501(c) of the Internal Revenue Code ... and either (i) the bylaws of the home or facility or not-for-profit organization provide for a waiver or reduction, based upon an individual’s ability to pay…”  35 ILCS 200/15-65. (emphasis added)

In addition, the religious exemption is found at 35 ILCS 200/15-40, which states:

“Property used exclusively for religious purposes, or used exclusively for school and religious purposes, or for orphanages and not leased or otherwise used with a view to profit, is exempt …” (emphasis added)

Charitable Use Analysis

Although Meridian Village’s bylaws provide that Meridian Village will waive or reduce any entrance fee, assignment of assets or fee for services based upon the individual’s ability to pay and that Meridian Village would maintain a fund for such financial hardships, the Department of Revenue found that there was no fund maintained for financial hardship cases. In addition, Meridian Village did not advise potential residents of its financial assistance policy unless the potential residents inquired.

Meridian Village did provide a total of $30,000 in financial assistance to three residents. After that $30,000 was utilized, other needy applicants were wait-listed with 19 potential residents applying for charitable care being placed on a wait list during the year 2000.

Tests for Charitable Use

Citing Methodist Old Peoples’ Home, 39 Ill.2d at 156-57, the Illinois Appellate Court considered the following factors in determining what constitutes charitable use of property:

1. Whether the benefits derived from the property are for an indefinite number of persons;

2. Whether the property benefits the public in such a way as to persuade them to an educational or religious conviction, for their general welfare;

3. Whether the property benefits the public in such a way that it reduces the burdens of government;

4. Whether the organization has no capital, capital stock, or shareholders and earns no profits or dividends;

5. Whether the organization's funds are derived mainly from public and private charity;

6. Whether such funds are held in trust for the objects and purposes expressed in the organization’s charter;

7. Whether the organization dispenses charity to all that need and apply for it;

8. Whether the organization provides gain or profit in a private sense to any person connected with it;

9. Whether the organization places obstacles of any character in the way of those who need and would avail themselves of the charitable benefits dispensed; and

10. Whether the exclusive use of its property is for charitable purposes.

In reviewing the above factors, the Illinois Appellate Court found that Meridian Village did not meet the criterion regarding benefit to an indefinite number of persons or reducing the burdens on government. It noted that the monetary disbursement of $30,000 was far less than the property tax it would pay of $160,000. It also extended financial assistance to only three individuals in the year 2000.

Meridian Village failed to meet the criterion regarding source of funds because its funds were not derived mainly from private and public charities. Instead, 100% of its funds were derived from payment of rent and security deposits. In addition, it conducted no fundraising activities in the year 2000.

Because only three individuals were provided with charity assistance, and 19 were denied housing and put on a waiting list even though units were vacant, Meridian Village did not meet the criteria that it dispensed charity to all who needed and applied for it.

Meridian Village also did not meet the criterion of not placing obstacles in the way of those seeking benefits. It did not make its financial assistance program known to prospective residents unless the residents asked. In addition, residents needed to pay a security deposit even if they received financial assistance.

Furthermore, Meridian Village did not meet the criterion that the primary use of the property be for charitable purposes, because only three of its residents received financial assistance.

Based on the foregoing analysis, the Illinois Appellate Court denied the charitable use exemption.

Religious Use Analysis

Meridian Village argued that its sole corporate member, both at the outset and subsequently, was connected to various Lutheran churches. It also argued that it was a recognized service organization of the Lutheran Church of Missouri Synod. It argued that pastors came to the facility and provided prayer and other worship services.

The Illinois Appellate Court found that a religious purpose means the use of the property by a religious society or body of persons as a stated place for public worship, Sunday School and religious instruction. The evidence showed that Meridian Village was not used as a stated place for public worship, Sunday School or religious instruction. To the contrary, the primary exclusive use was for housing for the elderly.  Accordingly, the religious exemption was denied.

Lessons from Meridian

The decision in Meridian is consistent with prior cases involving senior living facilities. The topic of real estate tax exemption for charities is currently the subject of significant conversation at all levels of state government. Governor Quinn recently declared a moratorium on decisions related to hospital real estate tax exemption after the Illinois Department of Revenue declared the real estate of three hospitals to be taxable. Illinois legislators are discussing whether to draft legislation which will set a standard for charity care for hospitals in order to maintain exemption from real estate taxation. The Meridian decision may bring greater attention to the real estate tax exemption of facilities across the entire continuum of senior care, including skilled nursing facilitates, assisted living facilities and sheltered care facilities. In order to prepare for any review of real estate tax exemption, charitable organizations which provide senior living services should consider taking the following actions:

A. Review and publicize charity care policies. Providers should review their charity care policies to determine whether they are, in fact, implementing them. They should advertise the charity care policy so the availability of such a policy is made known to those who could benefit from the policy. There needs to be a direct correlation between what a charity care policy says and how it is actually implemented.

B. Quantify Charitable Services Provided. Providers should inventory the charitable services that are provided to both residents of the charitable organizations and to the community at large. While in the recent case of Provena Covenant Medical Center v. Department of Revenue, a plurality of the court refused to give credit to Provena Hospital for activities conducted off-site, the plurality opinion is not a binding precedent. Since the matter is still unresolved in Illinois, charitable organizations should create community benefit analyses both to support an argument for tax exemption if challenged, and to educate the members of the community as to the benefit provided. Those members are the same people that serve on the boards of school districts and other taxing bodies, and the awareness of the benefit provided by charitable organizations may influence decisions by those taxing bodies as to whether to challenge the tax exempt status of the charitable organization.

C. Enhance Fundraising Activities. By increasing donations, providers will have a broader base of support, higher revenues and increase their ability to argue that they have a significant source of funding from public and private charity.

D. Review Ways in Which Tax Burden is Relieved. Providers of senior living communities should review all the ways in which they assist in reducing tax burdens for the communities they serve. This might include being involved in Meals On Wheels programs, providing free health screenings for senior citizens, or other similar programs.

E. Quantify Religious Activities.  Many faith-based senior living communities employ chaplains and have extensive worship activities. Religious activities conducted by pastoral employees and volunteers should be inventoried to provide evidence of the religious nature of the organization. If a charitable organization has a chapel, it may be appropriate to invite members from the public to worship as well. To the extent a provider has tax exempt bonds, care must be taken in consultation with bond counsel to assure compliance with covenants of tax exempt bonds relative to bond financed properties being used for religious purposes. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert Authored by: Andrew P. Tecson, Esq. and Kimberly T. Boike, Esq.