Monday, March 22, 2010

Illinois Hospital Loses Tax-Exempt Status for Not Being Charitable Enough


In a decision that could having a chilling effect on nonprofit hospitals, the Illinois Supreme Court on Thursday ruled that a Catholic hospital wasn't charitable enough, so it took away the hospital's tax-exempt status.

The ruling upheld a state tax review board's 2003 decision to end Provena Covenant Medical Center's tax-exempt status after the state learned that the center's charity care equaled less than 1 percent of revenue. Now, the hospital is liable for a multimillion-dollar property tax bill.

The Illinois decision comes as lawmakers in that state and in the nation's capital, as well as the Internal Revenue Service, are watching hospitals more closely with regard to their charitable giving. The IRS is scrutinizing hospitals' year-end tax filings, while lawmakers are talking about legislation to mandate a certain minimum level of charity care to justify tax-exempt status.

The Illinois ruling could bolster those efforts. "My biggest concern is that this will really drive more challenges to property tax exemption status for hospitals and other charities nationally at a time when they really can't afford it," said Elizabeth Mills, senior counsel to the Chicago office of Proskauer Rose.

Mills questioned the court's finding that the hospital wasn't charitable enough, noting that Illinois law sets no particular level of charity care linked to tax-exempt status.

In its decision, the high court concluded that Provena had failed to show "that it dispensed charity to all who needed it and applied for it." State lawyers had argued that only 302 patients at Provena received free or discounted care out of more than 100,000 admissions in 2002. Those patients cost the hospital a mere $831,724, or about 0.7 percent of its $113 million in revenue.

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