Lutheran General Health Care System v. Department of Revenue

• Decision Date: 16 June 1992
• Docket Number: No. 1-90-3475,1-90-3475
• Citation: 231 Ill.App.3d 652,595 N.E.2d 1214
• Parties: , 172 Ill.Dec. 544 LUTHERAN GENERAL HEALTH CARE SYSTEM and Health Care Medical Foundation, Plaintiffs-Appellees, v. The DEPARTMENT OF REVENUE, Defendant-Appellant.
• Court: United States Appellate Court of Illinois

Page 1214

595 N.E.2d 1214

231 Ill.App.3d 652, 172 Ill.Dec. 544

LUTHERAN GENERAL HEALTH CARE SYSTEM and Health Care Medical

Foundation, Plaintiffs-Appellees, v. The DEPARTMENT OF REVENUE, Defendant-Appellant.

No. 1-90-3475.

Appellate Court of Illinois,

First District, Second Division.

June 16, 1992.

Thomas J. McCarthy, Lynne M. Raimondo, Ira J. Belcove, Chicago, for plaintiffs.

Roland Burris, Atty. Gen., by Claudia Fainfot, Asst. Atty. Gen., Chicago, for defendant.

Justice McCORMICK delivered the opinion of the court:

The Department of Revenue (the Department) appeals from an order in administrative review, finding that plaintiffs were entitled to an exemption from real estate taxes. The Department argues that the circuit court erred in reversing the finding of the administrative law judge that plaintiffs did not use the property in question for charitable purposes. The Department also argues that plaintiffs' complaint in administrative review was not filed in a timely manner.

Plaintiffs are the Lutheran General Health Care System (the System) and the Health Care Medical Foundation (the Foundation). The System is a Federal tax-exempt charitable organization and a part of a nationwide network of health and human service organizations operated by its parent corporation, the Evangelical Lutheran Church of America. At the time this case arose, the System operated Lutheran General Hospital in Park Ridge, Illinois, and Lutheran General Hospital-Lincoln Park in Chicago.

The Foundation is a multi-specialty physicians' group formed in affiliation with Lutheran General Hospital. The Foundation, like the System, is a Federal tax-exempt charitable organization.

In August 1987 the System purchased a one-story building located at 6000 West Touhy in Chicago and rented approximately 60% of the building to the Foundation at a fair market rent. The property was used by the Foundation for operation of a multi-specialty, out-patient clinic and to provide medical care and treatment to in-patients of Lutheran General Hospital and Lutheran General Hospital-Lincoln Park.

Subsequently, plaintiffs applied to the Cook County Board of Appeals for an exemption from real estate taxes for that portion of the property leased to the Foundation. Plaintiffs contended that the property was used for educational and charitable purposes and, therefore, was exempt from taxation under sections 19.1 and 19.7 of the Revenue Act. Ill.Rev.Stat.1985, ch. 120, pars. 500.1, 500.7.

The Board of Appeals approved plaintiffs' exemption application, but the Department later reversed that decision. Following the Department's reversal, plaintiffs requested and were granted a formal hearing on their exemption application.

The hearing was held May 9, 1989, before administrative law Judge George Nafziger. At the hearing, Leighten Smith, the Foundation's president, testified that in 1980, the Foundation's predecessor, Health Care Associates, was formed in response to a decrease in funding for graduate medical education programs. Smith testified that Health Care Associates was a for-profit group similar to a faculty practice plan. Smith described a faculty practice plan as an organization of physicians involved in the teaching and administrative programs of an institution or major teaching medical center. In the case of Health Care Associates, its affiliation was with the University of Illinois.

According to Smith, the faculty practice plan was utilized as a vehicle to provide funds for the cost of graduate medical education, i.e., fees generated from professional services would be used to pay the faculty and to pay other expenses incurred in conducting the educational programs and in providing ambulatory or out-patient care.

In 1984 Health Care Associates was restructured into a not-for-profit corporation and its name was changed to the Health Care Medical Foundation. Smith testified that the changes were made to enable the Foundation to obtain research grants and to allow it to retain surplus revenues at the end of a fiscal year.

The Foundation is controlled by a 15-member board of directors. Eight of the directors are the clinical division chairmen of Lutheran General Hospital. Smith testified that the presence of these eight directors is designed to further the faculty practice plan and to insure that the Foundation is in step with the programs of the System and the hospitals.

The seven remaining directors are elected by the Foundation's shareholders. A physician who has been employed by the Foundation for three years may become a shareholder by purchasing one share of the Foundation's stock for $20. The stock confers no ownership interest in the Foundation and when a physician's employment ceases the Foundation repurchases the share for $20.

The physicians employed by the Foundation are paid a salary based upon their patient care activities as well as their educational, administrative, and research activities. Approximately 52% of the physicians' time is spent in educational, research, and administrative activities and, according to Smith's testimony, a physician with no desire to teach would not be hired by the Foundation. Smith also testified that the physicians are not allowed to maintain private practices and that the salary paid to them by the Foundation is less than that which they would receive in a private practice.

Describing the property on west Touhy, Smith testified that the original intention was to develop the property as an arthritis treatment center, however, the building eventually was used to house expanded programs in geriatric medicine, rheumatology and primary care. Smith further testified that the property was used primarily to treat elderly patients. According to Smith, the property provided the patient volume necessary to maintain the System's graduate fellowship program in geriatrics and was vital to the the continuing accreditation of the fellowship.

Smith characterized the property as a major teaching site, explaining that it was used by all internal medicine residents, who are required to do a rotation in rheumatology; by family practice residents who choose to take a rotation in rheumatology; and by senior medical students, primarily from the University of Illinois, who elect to do a clerkship in rheumatology.

Smith testified that in 1987 there were a number of pharmaceutical clinical trials underway at the property and studies on the detection of abdominal aneurysms in the elderly and bone density in senior citizens were also being conducted. Smith stated that because these studies could not be conducted in a hospital on an in-patient basis, the patient base at the West Touhy site was essential to this research.

Smith stated that the Foundation's charges to its patients at the West Touhy site are competitive with the charges of other medical service delivery systems, but that the physicians employed by the Foundation have no interest in the revenues generated by the charges other than the salaries they received from the Foundation. However, a physician could make a judgment to write off or not charge an account based on a patient's financial situation. Smith further testified that no patients are turned away or refused treatment because of the inability to pay.

Kenneth Rojek, vice-president for practice management at Parkside Human Services Corporation (Parkside), also testified for plaintiffs. Parkside, a tax-exempt subsidiary of the System, provides professional management services to the Foundation. Rojek testified that the Touhy property was purchased because the Foundation did not have enough space on campus to conduct research or to continue to expand and develop programs in geriatric medicine and in arthritis and primary care services. Rojek testified that this lack of space had threatened the accreditation of the hospitals' teaching programs.

Rojek also testified that Parkside did the billing for doctors employed by the Foundation, but that a doctor could waive a fee if it was determined that a patient was unable to pay. Rojek stated that no one would be denied care based on an inability to pay and that patients with previously unpaid bills would be accepted for treatment. Rojek further stated that while attempts are made to collect unpaid fees, the Foundation has a policy of not suing to collect fees, except in very unusual circumstances.

On January 11, 1990, Nafziger issued a recommendation that the Touhy property remain on the tax rolls. In reaching his recommendation, Nafziger relied on the six guidelines for determining whether property is being used for charitable purposes that were set forth by the Illinois Supreme Court in Methodist Old Peoples' Home v. Korzen (1968), 39 Ill.2d 149, 233 N.E.2d 537.

In Korzen, the supreme court held that a use is considered charitable when (1) it is for the benefit of an indefinite number of persons, persuading them to an educational or religious conviction, for their general welfare or in some way reducing the burdens on government; (2) the charitable institution has no capital, capital stock, or shareholders, and earns no profits or dividends; (3) the institution derives its funds mainly from public and private charity and holds them in trust for the objects and purposes expressed in its charter; (4) charity is dispensed to all who need and apply for it and gain or profit is not provided in a private sense to any person connected with the charitable institution; (5) it does not appear that any obstacles are placed in the way of those who need and would avail themselves of the charitable benefits dispensed; and (6) the primary purpose for which the property is used is charitable. Korzen, 39 Ill.2d at 157, 233 N.E.2d 537.

Nafziger found that the Foundation met two of these guidelines: the requirement that charity be dispensed to all who need and apply for it and the requirement that no obstacles be placed in the way of those seeking the benefits....