Romoser, W. D.

English

bepress Legal Repository

The Exemption of Charitable Institutions from Real Property Taxation in Illinois

Chicago-Kent College of Law

Chicago-Kent Law ReviewVolume 45 | Issue 2 Article 8October 1968The Exemption of Charitable Institutions fromReal Property Taxation in IllinoisW. D. RomoserFollow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreviewPart of the Law CommonsThis Notes is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion inChicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contactdginsberg@kentlaw.iit.edu.Recommended CitationW. D. Romoser, The Exemption of Charitable Institutions from Real Property Taxation in Illinois, 45 Chi.-Kent L. Rev. 207 (1968).Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol45/iss2/8THE EXEMPTION OF CHARITABLE INSTITUTIONSFROM REAL PROPERTY TAXATION IN ILLINOISSince state governments are constantly confronted with financial crises,much attention focuses on sources of tax revenue. An area certain to receiveclose scrutiny is the real property tax exemption for charitable institutions.In 1954, an Ohio study by the Cuyahoga County Auditor (that county in-cludes Cleveland) found that 17% of the entire county's real property wastax exempt, while in Cleveland the figure was 21%. The market value ofthis exempt property was estimated to be approximately two billion dollars.Charitable institutions represented more than 40% of the dollar value, whilethe remainder represented other tax exempt institutions.' With the pro-liferation of non-profit organizations seeking real property tax exemptionas charities, it would seem most appropriate that the development of whatis a charitable use and purpose should be reviewed.The Illinois Constitution grants the power to exempt from taxation tothe legislature.The property of the state, counties, and other municipal corpora-tions, both real and personal, and such other property as may beused exclusively for agricultural and horticultural societies, forschool, religious, cemetery, and other charitable purposes, may beexempted from taxation; but such exemptions shall be only bygeneral law.2 (Emphasis added.)The Constitution grants to the legislature permissive power to make specificexemptions. But the wording of the Constitution in effect restricts this per-missive authority within classes already established by the document.The legislature has by general law exempted charities from taxationand in doing so has broadened the meaning of "charity." The legislature hasexempted:All property of institutions of public charity, all property of benefi-cient and charitable organizations, whether incorporated in this orany other state of the United States, and all property of old people'shomes, when such property is actually and exclusively used forsuch charitable or beneficient purposes, and not leased or other-wise used with a view to profit; and all free public libraries.3It is readily apparent that neither the Constitution nor legislative enact-ment has provided a definition of "charity." Therefore, we must focus ourattention on the judicial handling of the matter. While many states haverejected a common law definition of charity in preference to statutory defi-. 1 Bennett, Robert T., Real Property Tax Exemption of Non-Profit Organizations, 16Clev.-Mar. L. Rev. 165 (1967).2 I1. Const. art. IX, § 3 (1870).SIll. Rev. Stat., ch. 120, § 500.7 (1967).CHICAGO-KENT LAW REVIEWnition, Illinois has not. The English Statute of Charitable Uses4 is thefoundation for Illinois law and its definition. From that point on the defini-tion has developed through case law. The definition most notably and gen-erally used by the Illinois courts is that given by Justice Gray in Jackson v.Phillips.5A charity, in a legal sense, may be more fully defined as a gift, to beapplied consistently with existing laws, for the benefit of an indefi-nite number of persons, either by bringing their hearts under theinfluence of education or religion, by relieving their bodies fromdisease, suffering or constraint, by assisting them to establish them-selves for life, or by erecting or maintaining public buildings orworks, or otherwise lessening the burdens of government. It is im-material whether the purpose is called charitable in the gift itself,if it is so described as to show that it is charitable in its nature. 6In hearing cases in which an organization's ability to qualify for exemp-tion is at issue, the courts have always followed the policy of strictly constru-ing the exemption provisions in favor of taxation and against exemption.7In handling the exemption cases the courts have predominantly followed atwo point test. The property in question must be owned by a charitableorganization and must be used for a charitable purpose.8The courts have been consistent on what they considered to be acharitable organization.We have heretofore followed earlier decisions which said that thedistinctive characteristics of a charitable organization are that ithas no capital, capital stock, or shareholders, earns no profits, andpays no dividends, but derives its funds mainly from public andprivate charity and holds them in trust for the objects and pur-poses expressed in its charter.9Most frequently, question has arisen regarding an organization makinga profit. For example, where a religious organization ran a bookstore andderived a profit from it, the charitable status of the store was brought intoquestion.' 0 The court examined the purpose of running the bookstore.If the purpose was to effect religious education by distributing religiousmaterials, and profits derived from these sales were used for the continuationor enlargement of that purpose, the exemption would be granted."' But4 43 Eliz., C. 4 (1601).5 14 Allen 556, 96 Mass. 556 (1867).6 Crerar v. Williams, 145 I11. 625, 643, 4 N.E. 467, 470 (1893); Skinner v. NorthernTrust Co., 288 Ill. 229, 232, 123 N.E. 289, 290 (1919).7 Follett's Illinois Book & Supply Store, Inc. v. Isaacs, 27 Ill. 2d 600, 190 N.E.2d 324(1963).8 Rogers Park Post No. 108, American Legion v. Brenza, 8 Ill. 2d 286, 134 N.E.2d292 (1956); Milward v. Paschen, 16 Ill. 2d 302, 157 N.E.2d 1 (1959).9 American College of Surgeons v. Korzen, 36 111. 2d 340, 348, 224 N.E.2d 7, 11 (1967).10 The Congregational Sunday School & Publishing Society v. Board of Review, 290II. 108, 125 N.E. 7 (1919).11 Id. at 113, 125 N.E. at 10.NOTES AND COMMENTSif the purpose of running the bookstore is not to effect religious educa-tion, but simply to make a profit which might be used in another part of theorganization for charitable purposes, the court would not grant the exemp-tion.12 The fine line rests in the determination of the purpose. Where profitsare the motivation, the exemption is not granted. But where charity is thepurpose and profits are incidental to it and used for fostering the primarypurpose the exemption is granted.'3Another factor in determining if ownership of the land is by a charitableorganization is the manner in which the organization receives its funds.While the courts favor gifts as a source of funds, they have been tolerant oforganizations receiving their funds from membership dues.14 Some charitableorganizations raise the necessary funds for their charitable purposes bycharging those able to pay for the services being rendered. By so doing theorganization is able to provide services to those unable to pay.15 In ThePeople v. Y.M.C.A., 16 the exemption of a YMCA hotel was challengedbecause it was making a profit from its paying customers. The court feltthe profits were inconsequential and were not the goal of the organization,but rather a means of gaining funds from those who were able to pay inorder that they could provide charity to those that were unable to pay.Likewise, in Parks v. Northwestern Univ.,1 7 the exempt status of the univer-sity was challenged because part of its funds were derived from tuition. Thecourt saw this as an entirely proper means of gaining funds in order to carryout a charitable purpose. With the exception of the areas of profits andsource of funds, the courts have had little difficulty in determining if anorganization was charitable. The court is quick to deny charitable statusto an organization which has capital, capital stock, or shareholders.' s JusticeCardozo's famous statement effectively touches this area.What controls is not the receipt of income, but its purpose. In-come added to the endowment helps to make it possible for thework to go on. It is only when income may be applied to the profitof the founders that business has a beginning and charity an end.The line of division is the same whether the gift is to education orto relief of the poor, the halt, and the blind. Charity ministers to themind as well as to the body.' 9The fact that the institution holding the property is judged to becharitable is insufficient to exempt if from real property taxation. The12 Id. at 117, 125 N.E. at 11.'3 The People v. Y.M.C.A., 365 IlI. 118, 6 N.E.2d 166 (1937).14 Supra note 9.15 The Sisters of St. Francis v. The Board of Review, 231 Ill. 317, 83 N.E. 272 (1907);People ex rel. Cannon v. Southern Ill. Hospital, 404 Ill. 66, 88 N.E.2d 20 (1949).16 Supra note 13.17 218 111. 381, 75 N.E. 991 (1905).18 American College of Surgeons v. Korzen, 36 Ill. 2d 340, 224 N.E.2d 7 (1967).19 Butterworth v. Keeler, 219 N.Y. 446, 447, 114 N.E. 803, 804 (1916).CHICAGO-KENT LAW REVIEWproperty must actually be used in carrying out the institution's charitablepurposes. 20 Even though the land is owned by the charitable institution ifit is not used for charitable purposes or is sitting idle it will not be exempt.The use of the land must be active and for charitable purpose.Thus, in The People v. Catholic Bishop,21 the Bishop appealed a judg-ment given the Lake County collector for delinquent taxes on 465 acresowned by the Bishop. The Bishop on appeal was able to show that 385 acresof the total was actually used for charitable purposes. But as to the other 80acres he only could show an intent to use it for a charitable purpose (heplanned to construct a golf course for seminarians). The court granted ex-emption for all but the 80 acres because they were actively used for acharitable purpose. Since the 80 acres was not in active use for a charitablepurpose it was taxed.The main issue surrounding the charitable use of property rests on thequestion of whether the use is primary or secondary. In The School ofDomestic Arts and Science v. Carr,22 the court was faced with this problemwhen a school which taught domestic arts, and qualified as a charitableinstitution, sought an exemption from taxation for its property, part ofwhich was used as a restaurant. The meals which the students made in thecourse of their studies were sold in the restaurant and a profit was derived.The court granted the exemption, finding the purpose of running therestaurant charitable, with the profits being incidental to it. In regards tothe primary versus secondary conflict, the court stated:If the property is devoted primarily to the religious or charitablepurposes which exempt from taxation an incidental use for anotherpurpose will not destroy the exemption, but an incidental use forreligious or charitable purposes of property whose primary use isfor another purpose will not warrant exemption.23Thus, we have seen that for property to be exempt from real estate taxa-tion it is necessary that it be owned by a charitable institution and that theactive use of the property be for a charitable purpose. Until very recentlyboth of these requirements were not very stringently tested in determiningqualification. The relationship between the charter of the organization,which stated its purpose, and the facts of the property's use were not re-quired to be fully compatible. The ability to show some charitable purposeand some charitable use was all that was required. The Illinois SupremeCourt in a recent case has shown strong signs of applying a more stringentstandard to the present test.20 Follett's Illinois Book & Supply Store, Inc. v. Isaacs, 27 Ill. 2d 600, 190 N.E.2d 324(1963).21 311 Ill. 11, 142 N.E. 520 (1924).22 322 Ill. 562, 153 N.E. 669 (1926).23 Id. at 568, 153 N.E. at 671.NOTES AND COMMENTSIn Methodist Old Peoples Home v. Korzen,24 the plaintiff, an Illinoisnot-for-profit corporation, filed a complaint seeking a declaratory judgmentthat the Georgian Home, which it owned and operated in Evanston, wasexempt from taxation. The Master in Chancery found that the Home didnot qualify for exemption, and the trial court followed his recommendation.Being a revenue matter, the case was appealed directly to the IllinoisSupreme Court.The Home was so administered that for one to become a resident hehad to file an application with the board. The board screened the applicantsto ascertain that they were in good mental, emotional and physical health.Upon acceptance of the applicant, a contract was entered into requiring theapplicant to pay a founder's fee varying from $6,250 to $25,000 and a monthlycharge from $175 to $375, the exact sum depending upon the size and loca-tion of the individual's apartment within the home. The parties then under-went a sixty day trial period, during which either party could rescind thecontract.The court took particular note of the organization's charter, which statedits purpose of providing "proper accommodation and care for the sick andhomeless aged."25 Judging from the chartered purpose of the organization itis apparent that it met the first part of the test, which is that of ownershipby a charitable organization.The court then undertook a detailed examination of the facts of theproperty's use and determined that the facts did not evidence a charitableuse. But rather than state that the test requiring a charitable organization'sownership of the property and a charitable use was not fulfilled the courtwent further. It made particular reference to the failure of the use to meetthe purpose as expressed in its charter. The relationship of the use, whichwas disclosed by the facts of operation, was correlated to the purpose, asevidenced by the charter. The court summed up its analysis of the prop-erty's use with this statement:It is undisputed that plaintiff's corporation structure and its ab-stinence from profit making in a private sense are akin to that of acharitable institution. However, the variance between its statedchartered purpose of providing "proper accommodations and carefor the sick and homeless aged;" and the health requirements con-tained in its bylaws that "applicants shall be in good mental, emo-tional and physical health, and free of any communicable disease,"militates strongly against the requirement that it hold property intrust for the objects and purposes expressed in its charter.26 (Empha-sis added.)The fact that the court devoted a minor portion of its opinion to the24 39 111. 2d 149, 233 N.E.2d 537.25 Id. at 152, 233 N.E.2d at 539.26 Id. at 157-8, 233 N.E.2d at 542.212 CHICAGO-KENT LAW REVIEWtraditional two part test and devoted the greater portion of its opinion totesting the facts of use against the chartered purpose seemingly points to amore stringent test. The new test, if indeed Methodist Old Peoples Home v.Korzen expresses one, will be the requirement of the property's ownershipby a charitable institution and a charitable use factually compatible to theinstitution's charter. This test will be much more stringent than the old.It indicates the court's recognition of the revenue drain which is takingplace through pseudo-charitable exemption from the real property tax, thedrain which is widening the gap between the state government's revenueand expenses and is heightening the state's financial crisis.W. D. RoMOSER

https://scholarship.kentlaw.iit.edu/cgi/viewcontent.cgi?article=2078&amp;context=cklawreview

The Exemption of Charitable Institutions from Real Property Taxation in Illinois

Abstract

Similar works

Full text

Available Versions

bepress Legal Repository

Chicago-Kent College of Law