Perhaps you’ve read about localities around the country imposing property taxes on nonprofit organizations, or revoking their sales tax exemptions, or squeezing additional PILOTS (Payments in Lieu of Taxation) from the wealthiest among them.  Perhaps you’ve even congratulated yourself on the fact that no such stories have appeared about Illinois.  Unfortunately, no news is not good news.

Rather, local coverage of the issue has been muted because Illinois can withdraw exemptions without legislative action.  Property tax exemption for charities, schools, and churches is guaranteed by the state’s constitution.  While that might seem to make exemptions here exceptionally secure, it also means that determinations of their extent are made by the courts. And while few politicians are eager to be seen beating up on nonprofits, judges –- even elected ones –- are less constrained. 

When the Illinois Supreme Court ruled this spring that Provena Covenant Hospital didn’t merit a property tax exemption because it failed to provide adequate charity care, public discussion focused on the effect on health care.  But nothing in the decision necessarily restricts its impact to hospitals.  Indeed, Provena takes its reasoning from an earlier case about nursing homes.  Each case grapples with the meaning of the word “charity” in the state constitutional provision, and each holds that the word isn’t synonymous with “nonprofit.” 

Elaine Waterhouse Wilson, a partner at the Quarles & Brady law firm, sees the decision as a threat to nonprofit  “organizations that are supported primarily by fees,” even below-market fees.  Though Provena accepted Medicaid payments which did not reimburse it fully for the care provided, the court held that insufficient to constitute ‘charity.’  “It was very clear [under the ruling] that you had to be giving things away,” said Ms. Wilson.
 
Nonprofits may organize and persuade the Illinois legislature to clarify the amount of “charity” necessary to retain tax exemption.  But Professor Phillip Hablutzel of IIT Chicago-Kent College of Law, co-author of the Illinois Not-for-Profit Corporation Act, doubts it.  “In the twenty years I’ve been involved, there hasn’t been a coherent front among charities in facing the legislature. It’s hard to get these people to make common cause–the museum people don’t see what they have in common with the churches.” 

Nor, apparently, do many human services agencies or arts groups see what they have in common with the hospitals. Despite the national trend and Donors Forum’s attention to the issue, including hosting a post-Provena program featuring Ms. Wilson and a representative of the Attorney General’s office, nonprofits in Illinois appear skeptical that the decision may have an impact on their operations. 

William Rattner, Executive Director of Lawyers for the Creative Arts expressed confidence that his organization is secure in its exemption, “They’ll keep going after the hospitals because it’s easy and that’s where the money is.”  Laurel O’Sullivan, vice president of public policy at Donors Forum, isn’t so sure.  “I’m afraid that many nonprofits are unaware of how a decision like Provena could become Illinois’ canary in the coal mine, an indication of the state’s intentions of following the national trend of seeking additional revenue from nonprofits.”

Already the Provena decision may have an effect on a pair of cases involving luxury retirement developments operated by the nonprofit Franciscan Communities Inc.  A group of local taxing bodies in Lake County defeated the group’s application to exempt its high-end senior care facility from property taxes, a decision now under review in the circuit court.

Franciscan Communities also filed suit in Cook County asking that the assessor be required to allow it to retain exemption on the Clare, Gold Coast property it purchased from Loyola University of Chicago and redeveloped as a luxury senior-care condominium community.  Though the original suit was dismissed, observers expect Franciscan to re-file it.  They also expect Franciscan to lose.

“Provena is a definitive victory for local governing bodies,” said municipal lawyer Vanessa V. Clohessy, partner at Hodges, Loizzi, Eisenhammer, Rodick & Kohn, who represented the school district in the Lake County case.  Clohessy and her associateSteven M. Richart said Provena made it much likelier they’d prevail on appeal in Lake County, but that these cases were so fact-specific it was hard to predict the ruling’s impact on other nonprofits. 

If and when a Provena-style loss of exemption hits another nonprofit, the impact on its operation will be substantial.  “In the current economy,” said Professor Hablutzel, “it would be hard to do fundraising for another one-third of your budget so the taxes could be paid.”

~ Blogger Kelly Kleiman is a consultant to nonprofits as well as a lawyer and a freelance journalist.  Her work has appeared in many media outlets, including the New York Times, Wall Street Journal, Huffington Post, Christian Science Monitor, and Chicago Public Radio.