Nos. 3--02--0590,   / 3--02--0602 cons.

_________________________________________________________________

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 2003

			 			)	

RIVERSIDE MEDICAL CENTER, an 	)	Appeal from the Circuit Court

Illinois not-for-profit 		)	for the 21th Judicial Circuit,

corporation,				)	Kankakee County, Illinois

						)	

	Plaintiff-Appellee,		)	

						)	No. 01--MR–950

	v.					)

						)	

			 			)	Honorable Fred S. Carr, Jr.,

THE DEPARTMENT OF REVENUE OF	)	Judge, Presiding 

THE STATE OF ILLINOIS and THE	)

KANKAKEE COUNTY BOARD OF 	)

REVIEW,					)

						)	

     Defendants-Appellants.		P)

_________________________________________________________________

	PRESIDING JUSTICE McDADE delivered the opinion of the court:

_________________________________________________________________

	In this appeal, the defendants, the Illinois Department of Revenue and the Kankakee County Board of Review, seek review of

the decision of the Kankakee County circuit court granting the

plaintiff, Riverside Medical Center, a charitable exemption from

property taxes under section 15--65 of the Property Tax Code (35

ILCS 200/15–65 (West 2000) for clinics it owns in Bourbonnais, Maneto and Momence. The defendants argue that the subject

properties do not meet the requirements for an exemption. For the

following reasons, we reverse the order of the circuit court of Kankakee County and confirm the decision of the Illinois

Department of Revenue.  

FACTS 

	The plaintiff, Riverside Medical Center, is a not-for-profit corporation that owns a hospital and eight clinics in and around

Kankakee. Three clinics are located in Bourbonnais, Momence and

Maneto. Riverside applied to the Illinois Department of Revenue

(the Department) for property tax exemptions for these clinics

for 1998 on the basis that the properties were used for

charitable purposes. The Department granted the exemptions,

except for portions that were rented out to private physicians.

Following the Department's determination, the Kankakee County

Board of Review requested a formal hearing. 

	The matter proceeded to an administrative hearing before

administrative law judge Alan Marcus. The parties stipulated that

the only parts of the clinics that were potentially eligible for

an exemption were those portions that had not been rented to

private doctors. David Schroeder, the chief financial officer and

treasurer of Riverside Health System, was the only witness.

	Schroeder testified to the corporate and financial structure

of the Riverside system. Riverside Health Systems is a not-for-

profit corporation that is exempt from federal income tax

pursuant to section 501(c)(3) of the Internal Revenue Code of

1954 (the Code) (26 U.S.C. §501(c)(3) (2000)). The corporation is

also designated as a public charity under Section 509(a)(1) of

the Code (26 U.S.C. §509(a)0(1) (2000)). 

	The corporation's articles of incorporation dedicate it to

the improvement of the health of the communities it serves

through the provision of charitable health care. The charter

devotes Riverside's operations and revenue to that purpose. The

system covers its operating costs through patient fees, grants,

and donations. The three clinics obtained almost 100% of their

revenue from patient fees, with rent also a minor contributing

income source. Donations amounted to 0.05% of Riverside's 1998

revenue. Riverside budgets 3% of its total budget for charity

care; however, there was no evidence presented to indicate that

Riverside limits charity care to only 3% of its budget. Riverside

is a party to agreements with Medicare, Medicaid and other large

health insurers to provide health care at discounted prices to

members of those plans. In 1998, Riverside provided $191,670,616

worth of patient services. After discounts due to Riverside's

agreements with the insurers, it received only $92,558,756, or

approximately 50% of the value of the medical services rendered.

The three clinics at issue ran a combined deficit of $850,000 in

1998.  The Riverside system as a whole, however, had a net

revenue of approximately $10 million in 1998.  

	Schroeder testified that the clinics fulfill their

charitable purpose by giving charity care to patients who are

unable to pay. The clinics do this in two ways. First, a

physician working at the clinic may choose to give informal care

to a patient with whose financial situation he or she is

familiar. In those cases, the physician will treat the patient, but will not bill for the services. Rather, the care will be

given free from the outset. 

	Second, the clinic gives out "charity care" to those

individuals that it later determines are unable to pay. The

clinic gives care to all patients who come to the clinic and does

not demand proof of ability to pay before treatment is

administered. Later, the clinic bills the patient. Upon

nonpayment, another bill is sent out 30 days later. The clinic

repeats this process several times. If, after several invoices

are sent to the patient, the bill remains unpaid, the clinic

turns the account over to its collections department. The

department contacts the patient by phone to determine why the

bill has not been paid. If the patient, at that time, indicates

that he or she is unable to pay, the collections agent gives the

patient an opportunity to submit a charity care application. If

the patient indicates on the application an inability to pay, the

bill is written off as uncollectible and further efforts at

collection are discontinued. The clinics do not advertise the

availability of charity care. 

	Following the hearing, Judge Marcus issued a recommendation

that the subject properties not be given a tax exemption. The

judge noted that 97% of the clinics' revenues came from patient

billing, and that Riverside could not produce documentation to

prove the amount of charity care actually given in 1998. The

judge believed that this, in conjunction with the fact that the

clinics billed all patients and did not advertise the availability of charity care, led to the conclusion that the

clinics were not primarily used for charitable purposes. The

judge characterized the 3% budget for charity care as de minimus and found that the clinics were primarily used for providing

medical care to patients who were able to pay. The Director of

the Department of Revenue, acting in accordance with the judge's

recommendation, issued an order denying an exemption on November

6, 2001.

	Riverside filed a complaint for administrative review on

December 7, 2001. The court, after hearing argument in the

matter, found that the ruling of the Department was clearly

erroneous. The court found the clinic deficit of $850,000 was not

de minimus and issued tax exemptions for the properties. The Kankakee Board of Review (the Board) and the Illinois Department

of Revenue now appeal that decision.

ANALYSIS

	Riverside claims an exemption from Illinois property taxes

under section 15-65 of the Property Tax Code (35 ILCS 200/15--65

(West 2000). The provision states that all institutions of public

charity are exempt from property tax when "actually and

exclusively used for charitable or beneficent purposes, and not

leased or otherwise used with a view to profit." 35 ILCS 200/15--

65 (West 2000). While the parties do not dispute that the clinics

are institutions of public charity, they do dispute whether the

clinics are used exclusively for charitable purposes. The Board

and the Department argue that the amount of charity care actually given by the clinics is insufficient, when compared to care given

by the clinics that is paid for by patients. The State

characterizes the clinics' practice of ceasing collection efforts

in cases where the patient is unable to pay as the writing off of

bad debts rather than the providing of charity care.

	In reviewing an administrative decision under the

Administrative Review Law (735 ILCS 5/3-101 et seq. (West 2000)),

the appellate court reviews the administrative agency's decision,

rather than that of the trial court. Peoria & Pekin Union Ry. Co. v. Department of Revenue, 301 Ill. App. 3d 736, 739-40, 704 N.E.2d 884, 887 (1998). The decision of the administrative agency

should not be overturned unless it is clearly erroneous. Lutheran Church of the Good Sheperd of Bourbonnais v. Department of

Revenue, 316 Ill. App. 3d 828, 831, 737 N.E.2d 1075, 1078 (2000). In other words, the determination should not be overturned unless

the record leaves the reviewing court with the "’definite and

firm conviction that a mistake has been committed.’" AFM Messenger Service, Inc. v. Department of Employment Security, 198 Ill. 2d 380, 395, 763 N.E.2d 272, 282 (2001), quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 92 L.Ed. 746, 766, 68 S.Ct. 525, 542 (1948).

	To determine whether the clinics are eligible for a property

tax exemption under section 15-65, we use the test established in

Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149, 233 N.E.2d 537 (1968). In order to be eligible, the alleged charity must

show that: (1) it is set up for the benefit of an indeterminate number of persons; (2) it has no capital, capital stock or

shareholders and earns no profits or dividends; (3) it derives

its funds primarily from public and private charity and holds

those funds in trust for the objectives and purposes expressed in

its charter; (4) it dispenses charity to all who need and apply

for it, does not provide gain or profit in a private sense to any

person connected with it, and does not appear to place obstacles

of any character in the way of those who need and would avail

themselves of the charitable benefits it dispenses; (5) the

property is actually and factually used exclusively for the

charitable purpose, regardless of any intent expressed in the

organization's charter or bylaws; and (6) charity use is the

primary purpose for which the property is used and not a

secondary or incidental purpose. Old Peoples Home, 39 Ill. 2d at 156-57, 233 N.E.2d at 541-42.

	With regard to the first factor, the record clearly

indicates that the clinics are set up for the benefit of an

indefinite number of individuals. The clinics do not place a

numerical limit on the number of people who can receive charity

care. Although the clinic only sets aside 3% of its budget for

charity care, there is no indication that charity care is limited

by that amount. The clinics' witness testified, and the State

does not dispute, that the clinics will offer charity care to

anyone who is unable to pay for services rendered.	

	Second, the Riverside system does not have shareholders or

capital like a traditional corporation. Profits are not distributed to owners, and all assets are used to further the

system's charitable mission. The three clinics, as constituents

of the Riverside system, share these attributes.  We note,

however, that Riverside had a net revenue of $10 million in 1998. 

While we do not believe this fact necessarily requires a finding

in favor of taxation, in general this level of revenue is not

consistent with the provision of charity.  

	We find on the third factor that, as the State points out,

Riverside and the clinics do not derive the majority of their

funds from private or public charity. Ninety-seven percent of

Riverside's revenues for 1998 came from patient billings. The

clinics also had income from rental space. Only 0.05% came from

donations. No grants or donations were made directly to the three

clinics at issue, and it is unclear whether donations made to

Riverside were in any way used for the benefit of the clinics.

This factor clearly does not favor Riverside's position. 

	Riverside also falls short on the fourth factor.  As the

State points out, the clinics do not dispense charity to all who

need it and that they place obstacles in the way of those who seek

charity. The clinics do this in several ways. First, they do not

advertise the fact that they provide charity care to those who

cannot afford to pay for medical services. The State contends

that this fact prevents many who may be in need of charity

services from receiving charity treatment, since they do not know

that such care is available. Second, the State asserts that the

clinics place obstacles in the way of those eligible for charity care by sending bills to all patients and not stating on the bill

at any time that charity care may be available. Therefore, those

who would otherwise need charity care may pay their bill anyway,

despite their eligibility for free care. 

	Riverside responds by arguing that it provides care to all

who come to the clinics without regard to their ability to pay.

The record indicates that (1) Riverside does not perform any pre-

care screening to determine whether a patient can afford to pay

his or hertheir bill; (2) the clinics give the same care to all

patients, regardless of the ability to pay; and (3) the clinics

do not turn patients away. Furthermore, the clinics do not pursue

collection efforts once it has been determined that the patient

cannot pay the medical bill.

	The cases of Highland Park Hospital v. Department of Revenue, 155 Ill. App. 3d 272, 507 N.E.2d 1331 (1987), and Alivio Medical Center v. Illinois Department of Revenue, 299 Ill. App. 3d 647, 702 N.E.2d 189 (19988), deal squarely with the issue. In

Highland Park, the hospital gave free care in a manner similar to that used by Riverside. All patients were seen by a doctor

without any preliminary screening concerning the ability to pay.

The patient was then billed after the visit. After 90 days, if

the patient was unable to pay the bill, the debt was classified

as uncollectible and written off as free care. The clinic in

Highland Park wrote off approximately 6% of its care in this way. Highland Park, 155 Ill. App. 3d at 276, 507 N.E.2d at 1334.

	Similarly, in Alivio, the clinic wrote off around 25% of its billings as charity care. Alivio, 299 Ill. App. 3d at 649, 702 N.E.2d at 191. The clinic would charge each patient the full

price of services following the visit but reduced the amount

based on the patient's ability to pay if the full amount had not

been paid after several statements were sent. Alivio, 299 Ill. App. 3d at 649, 702 N.E.2d at 191.

	In both cases, the court found that the clinics were not

giving charity care, but, rather, were writing off "bad debts."

Alivio, 299 Ill. App. 3d at 652, 702 N.E.2d at 193; Highland Park, 155 Ill. App. 3d at 280-81, 507 N.E.2d at 1336. In both cases, too, the court found relevant the fact that the clinics

did not advertise the availability of charity care. Alivio, 299 Ill. App. 3d at 652, 702 N.E.2d at 193. Highland Park, 155 Ill. App. 3d at 281, 507 N.E.2d at 1337. The decisions in Highland Park and Alivio are persuasive and we agree with and adopt the reasoning.  

	Next to be determined is whether the clinics were actually

used exclusively for charitable purposes. To determine the use of

the clinics, it is appropriate to consider the bylaws and charter

of the allegedly charitable organization. Chicago Patrolmean's Ass'n v. Department of Revenue, 171 Ill. 2d 263, 271, 664 N.E.2d 52, 57 (1996). However, even if the organization's charter

devotes it to charitable service, the court should examine

whether the organization is acting pursuant to the charter and is

actually performing charitable works. Morton Temple Ass'n , Inc. v. Department of Revenue, 158 Ill. App. 3d 794, 796, 511 N.E.2d 892, 893 (1987).   

	The Riverside charter devotes the clinics to the provision

of charitable health care in the areas that it serves. However,

the clinics must actually provide exclusively charitable care to

the community. This the clinics do not do. Although the Riverside

system provides 3% of its budget for charity care, and even

though the three clinics at issue ran an $850,000 deficit for

1998, the evidence indicates that the primary use of the clinics

is to provide care to patients who are able to pay, either

individually or through Medicare, Medicaid or private insurance.

Furthermore, the failure of Riverside to advertise the

availability of charity care assures that such care will remain a

small percentage of the total care provided by the clinics.

	Riverside argues, however, that its charity care is not

limited to the provision of free care. It points out that it also

provides discounted care to patients through Medicare, Medicaid

and private insurance. Specifically, Riverside claims to give

this care at 50-%fifty percent of actual cost. We are unpersuaded by the

argument. Although Riverside does give discounts, these discounts

are given pursuant to contract. The large insurers have

negotiated preferential rates with Riverside, but there is no

indication that Riverside agreed to the arrangement in pursuit of

its charitable mission. It may be that Riverside agreed to the

rate discounts as a way of attracting a reliable stream of

business from patients insured by the large insurers. At any

rate, we are confident that these discounts are not charitable, and do not warrant a finding in favor of Riverside.

	Sixth and finally, it must be determined whether charity is

the primary use of the subject property or rather whether it is a

secondary or incidental use. For the reasons discussed in the

previous paragraph, charity appears to be, at best, a secondary

use of the properties in question. It is difficult to determine

exactly how much charity care was given at the clinics themselves

since such information was not submitted to the record, but it

appears that it does not amount to the majority of the care given

by the clinic. Charity care given by the clinics may be as little

as the 3% budgeted for that purpose by the Riverside system

generally. 

	The evidence in the record indicates that the three clinics

in the Riverside system are not used primarily for charitable

purposes. In fact, the clinics at issue here share significant

characteristics with the institutions in Alivio and Highland Park, in that they do not advertise the availability of charity care and only extend such care when patients do not pay after

repeated billings. In Alivio and Highland, the appellate court denied the requested exemption. The same result obtains here. The

ruling of the Department of Revenue was not clearly erroneous and

it is confirmed.

CONCLUSION

	The record and applicable case law support the conclusion

that the Riverside clinics are not eligible for a charitable

exemption from state property taxes. The clinics are not used primarily for charitable purposes. Rather, charity care appears

to be a use secondary to the primary function of providing health

care to paying customers. Also, the cases of Alivio and Highland Park, which present billing schemes similar to the one used by the Riverside clinics, support the conclusion that an exemption

should not be granted. The order of the Kankakee County cCircuit

cCourt finding the denial of an exemption by the Illinois

Department of Revenue to have been clearly erroneous is reversed

and the decision of the Illinois Department of Revenue is

confirmed.  

	Confirmed.

	LYTTON and BARRY, J.J., concur.