By: Brittany Flaherty Theis

In Franciscan Communities, Inc. v. Hamer, the Illinois Appellate Court affirmed the Illinois Department of Revenue’s (“IDOR”) decision to deny Franciscan Communities’ (“FC”) applications for property tax exemptions based on claimed religious and charitable uses (except for the chapel). Part One discussed the denial of the religious-use exemption. The appellate court also affirmed the IDOR’s denial of a charitable tax exemption.

Relying on Illinois precedent, the appellate court analyzed six factors for determining whether property is exclusively used for charitable purposes. The court specifically noted that the factors are guidelines and not strict requirements. Courts are to consider the facts of each case. The factors include whether: “(1) the charitable institution bestows benefits upon an indefinite number of persons, reducing the burdens of government; (2) the charitable institution has no capital, capital stock or shareholders, and earns no profits or dividends; (3) the institution’s funds are derived mainly from private and public charity and are held in trust for the purposes expressed in the charter; (4) charity is dispensed to all who need it and apply for it; (5) the institution puts no obstacles in the way of those seeking the charitable benefits; and (6) the primary use of the property is for charitable purposes.”

In Franciscan, FC failed to satisfy the factors listed above. First, the court considered the substantial entrance fees, monthly maintenance fees, and screening activities to determine its purpose and function was not primarily charitable, “but rather was designed ‘to cater to those persons who could pay for the services rendered.'” Second, although FC had no capital stock or shareholders, it was purchased and operated with a view to profit. Additionally, the retirement community paid substantial management fees to FC and there was no evidence its highest-compensated employees were paid salaries commensurate with other nonprofits. “A charitable institution is one which does not provide gain or profit in a private sense to any person connected with it.” For those reasons, the administrative law judge concluded, and the courts agreed, that “FC provided gain or profit in a private sense to persons connected with it” and FC failed to meet the second factor. FC also failed to satisfy the third guideline because it received almost no donations or gifts in the relevant year and its income from residents’ fees was nearly 100%. For the fourth factor, FC argued its “contractual allowances” were charitable. The court disagreed because assistance under these programs was conditioned on the retirement community’s own financial circumstances and the number of persons receiving such assistance was minimal. FC failed to satisfy the fifth factor because it placed obstacles in the way of those who needed and would have availed themselves of charity. The court made this determination based on the lack of advertising regarding a “Gift of Care” program, the conditional nature of the program, and the significant entrance fees. The last factor also weighed in favor of taxation because “the term ‘exclusively used’ means the primary purpose for which the property is used and not any secondary or incidental purpose.” The court had already determined the retirement community was operated with a view to profit and the community’s “primary purpose was to house and serve upscale seniors.” All six factors weighed in favor of taxation. For that reason, the appellate court affirmed the circuit court, which upheld the IDOR’s denial of FC’s request for a property tax exemption (except for the chapel).

As with the religious-use exemption, courts will look beyond the ownership of property in determining whether property qualifies for charitable tax exemption. A party applying for such exemptions will need to prove more than a charitable inspiration. Instead, the fact intensive review will look to the day-to-day operation and use of the subject property.

For more information about property tax exemptions and how they might impact your taxing body, please contact Whitt Law Attorney Joshua Whitt.

Franciscan Communities, Inc. v. Hamer, 2012 IL App (2d) 110431 (Aug. 28, 2012).

Internal References:
Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149 (1968).

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