Coles-Cumberland Professional Development Corp. v. Department of Revenue

NO. 4-95-0913

IN THE APPELLATE COURT

OF ILLINOIS

FOURTH DISTRICT

COLES-CUMBERLAND PROFESSIONAL ) Appeal from
DEVELOPMENT CORPORATION, Owner, and ) Circuit Court of
LINCOLNLAND HOME CARE FOUNDATION, INC., ) Coles County
Lessee, ) No. 95MR8
Plaintiffs-Appellees, )
v. )
THE DEPARTMENT OF REVENUE OF THE STATE ) Honorable
OF ILLINOIS, ) Paul C. Komada,
Defendant-Appellant. ) Judge Presiding.
_________________________________________________________________

JUSTICE McCULLOUGH delivered the opinion of the court:

The Illinois Department of Revenue (Department) appeals
from an order of the circuit court of Coles County reversing on
administrative review a decision of the Department that a 1.465-
acre parcel of real estate leased to Lincolnland Home Care Founda-
tion, Inc. (Lincolnland), a not-for-profit corporation, by Coles-
Cumberland Professional Development Corporation (Coles-Cumberland),
a for-profit corporation, was not entitled to a real estate
taxation charitable exemption for the 1991 assessment year. The
issues are whether (1) real estate leased for profit by a for-
profit corporation is not entitled to a charitable exemption and
(2) improvements constructed on the subject real estate by a
charitable organization are not exempt from real estate taxation.
We reverse and reinstate the Department's decision.
It is undisputed that Lincolnland is a charitable
organization. Lincolnland began construction on the premises in
December 1990 and occupied the building on June 8, 1991. The
building is part two-story, part one-story, encompasses about 8,994
square feet of internal space, and cost approximately $843,000 to
construct. Most of the remainder of the parcel is used for
parking. It is also undisputed that, during 1991, the property was
in the actual process of development for exempt use or was actually
used for charitable purposes, and that the parking lot was used
exclusively for the charitable purpose of Lincolnland.
Although no evidence of the zoning ordinances of the City
of Charleston, Illinois, was presented, it was represented to the
Department by Lincolnland's attorney that the reason a 99-year
lease was employed in this case, rather than the sale of a fee, was
that the parcel was located within a planned unit development owned
by Coles-Cumberland, transfer of a fee would subject the parcel to
Charleston's subdivision ordinance, and said ordinance would not
accommodate a professional building such as Lincolnland construct-
ed. The lease required payment of $45,000 in rent, with an
immediate payment of $30,000 and a one-time additional payment of
$15,000. Coles-Cumberland had valued the property at $90,000 and
considered the $45,000 balance a charitable donation, although the
property had been valued for assessment purposes at the time
between $55,000 and $60,000. Lincolnland was obligated to pay
Coles-Cumberland a monthly maintenance fee of $375 for the upkeep
of common areas. After two years, Coles-Cumberland could adjust
the maintenance fee as required on a pro rata basis with other
tenants occupying premises within the development. Lincolnland was
also required to maintain the premises in good repair, purchase
casualty and liability insurance, and pay all property taxes.
The lease granted Lincolnland the unrestricted right to
build and own improvements on the land. Lincolnland was allowed to
mortgage these improvements. Upon the termination or expiration of
the lease, Lincolnland was permitted, but not required, to remove
any improvements it had built. In the event the property was
condemned by a public entity, Lincolnland and Coles-Cumberland were
to be apportioned separate awards for their respective interests in
the improvements and the land.
Lincolnland could not assign its leasehold without Coles-
Cumberland's consent. Coles-Cumberland could sell, subject to the
lease, the fee simple title at any time. Lincolnland had the right
of first refusal to purchase the property, if Coles-Cumberland
decided to sell. The agreed price would be $45,000, less rents
paid, plus $1. Such a sale would occur when (1) Coles-Cumberland
declared the property available for sale; (2) in the opinion of
Coles-Cumberland's counsel, title could be conveyed without result-
ing in noncompliance with Charleston's zoning laws; or (3) Coles-
Cumberland notified Lincolnland of an intent to sell its interest
in the premises to another. Coles-Cumberland retained the right to
encumber the fee simple interest, and an amendment to the lease
provided that the provisions relating to mortgage of the fee and
mortgage of the leasehold were not mutually exclusive.
In the event Lincolnland defaulted in its monthly
maintenance payments, or in performing any of its other duties
under the lease, or filed for bankruptcy, Coles-Cumberland could
terminate the lease. If Lincolnland's improvements were damaged or
destroyed, and Lincolnland elected not to repair them, then the
lease would terminate.
The facts in this case are undisputed. However, we
specifically note the absence of any testimony from a person
related to Coles-Cumberland or concerning the nature of Coles-
Cumberland's intentions as to this property.
"Where facts are undisputed, a determina-
tion of whether property is exempt from taxa-
tion is a question of law. (Harrisburg-Ra-
leigh Airport Authority v. Department of
Revenue (1989), 126 Ill. 2d 326, 331.) Thus,
the decision as to whether property is exempt
'depends solely upon an application of the
appropriate legal standard to the undisputed
facts.' Illinois Central Gulf R.R. Co. v.
Department of Local Government Affairs (1983),
95 Ill. 2d 111, 129.
'It is the well settled rule of law in
the State of Illinois that all property is
subject to taxation, unless exempt by statute,
in conformity with the constitutional provi-
sions relating thereto. Taxation is the
rule--tax exemption is the exception.' (Rog-
ers Park Post No. 108 v. Brenza (1956), 8 Ill. 2d 289, 289-90.) 'Provisions granting tax
exemptions are to be construed strictly and
must come not only within the terms of the
statute but also the authority given by the
constitution.' (Rogers Park Post, 8 Ill. 2d
at 290.) Courts have no power to create
exemption from taxation by judicial construc-
tion, and the burden of establishing statutory
authority within the limitations of the con-
stitution, for such an exemption rests upon
the person asserting it. People ex rel.
Cannon v. Southern Illinois Hospital Corp.
(1949), 404 Ill. 66, 68, citing Oak Park Club
v. Lindheimer (1938), 369 Ill. 462, 465-66.
Each individual claim must be determined
from the facts presented. (Coyne Electrical
School v. Paschen (1957), 12 Ill. 2d 387,
394.) In determining whether property is
included within the scope of a tax exemption
all facts are to be construed and all debat-
able questions resolved in favor of taxation.
Rogers Park Post, 8 Ill. 2d at 290." City of
Chicago v. Illinois Department of Revenue, 147 Ill. 2d 484, 491-92, 590 N.E.2d 478, 481
(1992).
In Springfield Marine Bank v. Property Tax Appeal Board,
44 Ill. 2d 428, 429-30, 256 N.E.2d 334, 335-36 (1970), the Supreme
Court of Illinois stated that, although a nonexempt lessee could be
taxed where there was an exempt lessor, a nonexempt lessor may be
taxed on the full value of the property even when the right to the
use of the property was transferred under a 99-year lease to a
charitable organization. Property "leased or otherwise used with
a view to profit" is not exempt. Ill. Rev. Stat. 1989, ch. 120,
par. 500.2. As a result, the appellate court has ruled that
property leased from a nonexempt owner and used for religious
purposes is not tax exempt. Victory Christian Church v. Department
of Revenue, 264 Ill. App. 3d 919, 922-23, 637 N.E.2d 463, 465
(1994); American National Bank & Trust Co. v. Department of
Revenue, 242 Ill. App. 3d 716, 724, 611 N.E.2d 32, 37-38 (1993).
Both decisions stated that the question of whether the property is
being used for profit depends on the intent of the owner.
The courts have long recognized that ownership is
separate from title in Illinois tax law. Immanuel Evangelical
Lutheran Church v. Department of Revenue, 267 Ill. App. 3d 678,
682, 642 N.E.2d 1344, 1347 (1994). The courts are concerned with
the realities of ownership, the key elements of which are control
and the right to enjoy the benefits of the property. Chicago
Patrolmen's Ass'n v. Department of Revenue, 171 Ill. 2d 263, 273,
664 N.E.2d 52, 57 (1996). However, in considering the question of
ownership, it must be noted this case is distinguishable from a
case involving a contract for purchase. See Christian Action
Ministry v. Department of Local Government Affairs, 74 Ill. 2d 51,
62, 383 N.E.2d 958, 964 (1978). In this case, the intent of Coles-
Cumberland and the determination of the extent of its ownership
interest must be gleaned from the lease.
Coles-Cumberland has rented the property to Lincolnland
for $45,000, plus payments including payment of real estate taxes.
The payment of the real estate taxes are part of the rent, and it
clearly benefits Coles-Cumberland not to have to pay these
expenses. Although the lease contained a provision relating to the
possibility of Coles-Cumberland selling the property to Lin-
colnland, Coles-Cumberland is not obligated to sell the property
and could retain it indefinitely with Lincolnland paying the real
estate taxes. The leasehold cannot be assigned without approval
from Coles-Cumberland, which also retained the right to mortgage
the fee simple interest. The lease further contains a provision
"authorizing" Lincolnland to allow for easements across the land
for construction and development of the planned unit development,
and easements had been granted. As a result, the development of
the parcel enhances Coles-Cumberland's ownership of the surrounding
parcels in the planned unit development. It certainly enhances the
value of the fee estate in this particular parcel.
Distinguishable from the case at bar is this court's
decision in Cole Hospital, Inc. v. Champaign County Board of
Review, 113 Ill. App. 3d 96, 446 N.E.2d 562 (1983). Cole Hospital
involved creative financing where the hospital, the owner of the
subject real estate, could not obtain traditional financing. The
hospital was forced to convey the property, subject to a lease-back
arrangement, which provided that the hospital pay all the real
estate taxes, maintenance, and insurance costs. It had the
absolute option to repurchase the property at 10 times the annual
rent at the eleventh and sixteenth anniversary dates, and it had a
right of first refusal if the owner received a bona fide offer to
purchase. Cole Hospital, 113 Ill. App. 3d at 100, 446 N.E.2d at
564-65. The right to choose when and if the property may be trans-
ferred is one of the most significant incidents of ownership.
Henderson County Retirement Center, Inc. v. Department of Revenue,
237 Ill. App. 3d 522, 527, 604 N.E.2d 1003, 1006 (1992). In this
case, Lincolnland has no power to force the sale of the property.
In Wheaton College v. Department of Revenue, 155 Ill.
App. 3d 945, 949, 508 N.E.2d 1136, 1138 (1987), cited with approval
by the Supreme Court of Illinois in Chicago Patrolmen's Ass'n, it
was determined that a 30-year lease was undertaken primarily for
the benefit of the nonexempt owner, and the denial of tax exemption
was affirmed. The same result pertains here.
The remaining issue is whether the value of the improve-
ments constructed by Lincolnland on the subject parcel should be
exempt. In Decatur Sports Foundation v. Department of Revenue, 156
Ill. App. 3d 623, 509 N.E.3d 1103 (1987), this court held that the
Department properly denied an exemption for improvements built by
a charitable organization where the underlying land was owned by a
for-profit organization. This court held that the improvement
constituted part of the real property, and thus its value should be
assessed against the landowner which was a noncharitable corpora-
tion. In reaching this conclusion, this court relied upon section
1(13) of the Revenue Act of 1939 (Act) (Ill. Rev. Stat. 1973, ch.
120, par. 482(13)), which defined real property as including "all
buildings, structures and improvements, and other permanent
fixtures, of whatsoever kind." Decatur Sports Foundation, 156 Ill.
App. 3d at 628-29, 509 N.E.2d at 1106, citing In re Tax Objections
of Hutchens, 34 Ill. App. 3d 1039, 1040, 341 N.E.2d 169, 170
(1976).
The decision in Decatur Sports Foundation was discussed
by the Supreme Court of Illinois in City of Chicago. There,
although considering an exemption under a different section of the
Act than was addressed in Decatur Sports Foundation, the decision
in City of Chicago stated the justices of the Supreme Court of
Illinois were "not convinced" the appropriate analysis was
undertaken in Decatur Sports Foundation. City of Chicago, 147 Ill. 2d at 498-99, 590 N.E.2d at 484-85. Thus, the determination of
whether Decatur Sports Foundation utilized the proper analysis was
left to an appropriate case. This is not such a case, even though
this case involves the same exemption as discussed in Decatur
Sports Foundation.
Although the Supreme Court of Illinois has recognized
that a partial or separate exemption may be had where multiple
entities share the use or ownership of a parcel (Chicago
Patrolmen's Ass'n, 171 Ill. 2d at 279-80, 664 N.E.2d at 60),
neither exists here. Moreover, in Chicago Patrolmen's Ass'n, the
Supreme Court of Illinois expressly distinguished the facts of that
case from cases involving leaseholds. Chicago Patrolmen's Ass'n,
171 Ill. 2d at 277, 664 N.E.2d at 59.
In this case, there is no division of use since Lin-
colnland is the only user of the premises, and there is no division
of ownership since Coles-Cumberland is the owner of the real estate
for tax purposes. That includes the improvements, even if the
reasoning in Decatur Sports Foundation is not employed.
It is true that Lincolnland paid for the construction of
the improvements. It is also true that the lease provided that
Lincolnland could take the improvements with it at the end of the
lease. But there was no testimony that the building and parking
lot could be moved. And Lincolnland was "under no obligation to
remove or change any buildings or other improvements" at the
termination of the lease. There was no provision for Coles-
Cumberland to pay Lincolnland anything for the improvements which
are not removed on termination of the lease or in the event that
Lincolnland defaults on the lease. If the improvements are damaged
and Lincolnland fails to repair, restore, or replace them within
the appropriate time, (1) insurance proceeds are paid one-half to
Lincolnland and one-half to Coles-Cumberland, (2) Coles-Cumberland
"shall raze and demolish" them, and (3) the lease would be
automatically terminated.
In essence, Lincolnland has paid for improvements to the
real estate which, realistically, will be left to Coles-Cumberland,
although Lincolnland currently has the right to use them. Under
the evidence presented in this case, the construction and mainte-
nance of a building on Coles-Cumberland property is part of the
rent.
In Victory Christian Church, the court indicated that it
would be inappropriate to allow "any private property not entitled
to exemption to become tax exempt merely by leasing it to" an
exempt organization. Victory Christian Church, 264 Ill. App. 3d
at 923, 637 N.E.2d at 465. In this case, Lincolnland has not
proved sufficient incidents of ownership in the land or the
improvements to warrant a tax exemption of the entire premises or
any divisible portion of it.
The judgment of the circuit court of Coles County is
reversed, and the decision of the Department is reinstated.
Circuit court reversed; Department decision reinstated.
STEIGMANN, J., concurs.
COOK, P.J., dissents.

 PRESIDING JUSTICE COOK, dissenting:
I respectfully dissent and would affirm the judgment of
the trial court.
Section 19.7 of the Act (Ill. Rev. Stat. 1991, ch. 120,
par. 500.7) has been interpreted as requiring three things before
a property will qualify for a charitable tax exemption: (1)
charitable use, (2) ownership by a charitable organization, and (3)
apparent from the section's plain language, the property "cannot be
'leased or otherwise used with a view to profit.'" Chicago
Patrolmen's Ass'n, 171 Ill. 2d at 270, 664 N.E.2d at 55-56, quoting
Ill. Rev. Stat. 1987, ch. 120, par. 500.7. At issue here is the
second requirement, charitable ownership. It is undisputed that
Lincolnland is a charitable, nonprofit organization and that
Lincolnland uses the property for charitable purposes. Lincolnland
neither leases out the property nor uses it to generate profit.
As the majority correctly notes, ownership is distinct
from title. Ownership, for purposes of the Act, defies any sort of
bright-line analysis. Rather, ownership is determined by the
"realities-of-ownership" test, the key elements of which are
control and the right to enjoy the benefits of the property.
Chicago Patrolmen's Ass'n, 171 Ill. 2d at 273, 664 N.E.2d at 57.
Courts applying the realities-of-ownership test have found non-
titleholders to be owners in Christian Action Ministry, Cole
Hospital, and Henderson County Retirement Center. Both Cole
Hospital and Henderson County Retirement Center involved long-term
leases to charities, similar to the lease at issue here.
I would hold that this 99-year lease grants Lincolnland
sufficient incidents of ownership that Lincolnland should be deemed
the owner of the land. Lincolnland's right to control the property
is substantial. Lincolnland can build, remove, mortgage, or
otherwise encumber any improvements it wishes without the consent
of Coles-Cumberland.
Moreover, the benefits of the lease arrangement inure
primarily to Lincolnland, not to Coles-Cumberland. Cf. Wheaton
College, 155 Ill. App. 3d at 949, 508 N.E.2d at 1138 (college-
lessee was not entitled to a tax exemption where the benefits of
the 30-year lease inured primarily to the lessor). Although Coles-
Cumberland may indirectly benefit from having another medical
service provider within its complex, the primary purpose of the
lease arrangement is to allow Lincolnland to continue its charita-
ble endeavors in proximity to Sarah Bush Lincoln Health Center
without running afoul of zoning ordinances. After the one-time
rent payment of $45,000, Coles-Cumberland receives no meaningful
benefit from the property. Although Lincolnland is obligated to
pay maintenance fees to Coles-Cumberland, the lease makes clear
those fees are to be tied to actual expenses for the maintenance of
common areas, to be shared on a pro rata basis with other tenants.
Such fees are not inconsistent with ownership; owners in planned
developments commonly pay maintenance fees. There is simply no
evidence Coles-Cumberland derives or intends to derive income from
the property through fees or any other mechanism.
The majority makes the assertion that Lincolnland's
obligation to pay real estate taxes is "part of the rent" due
Coles-Cumberland. Slip op. at 6. That begs the question of
whether real estate taxes are due. Had Coles-Cumberland simply
transferred title to Lincolnland, Coles-Cumberland would have
ceased to pay taxes and other upkeep expenses. In Cole Hospital,
Henderson County Retirement Center, and Christian Action Ministry,
the nontitleholder charities were obligated by lease or contract to
pay any real estate taxes due, but they were nevertheless found to
be owners.
The majority also characterizes the improvements on the
property as part of the rent due Coles-Cumberland. Slip op. at 10.
There is no indication that Coles-Cumberland will ever get to use
or enjoy these improvements. The useful life of these improvements
may not extend beyond the 99-year lease term. Even if the
improvements remain usable a century hence, Lincolnland is free to
raze or remove them.
As the majority notes, one of the most significant
incidents of ownership is the right to choose when and if the
property may be transferred. Slip op. at 7. In Henderson County
Retirement Center, a charitable organization was held not to own
leased property for purposes of section 19.7 of the Act, but the
organization later obtained an ownership interest when the lease
was amended to grant the organization an unconditional option to
purchase the property on the 15th and 20th anniversaries of the
lease for an amount equal to 125 times the average monthly rental.
Henderson County Retirement Center, 237 Ill. App. 3d at 524, 604 N.E.2d at 1004. Similarly, in Cole Hospital, this court found that
the hospital's unconditional option to buy the property on the 11th
and 16th anniversaries of the lease for 10 times the annual rent
was a factor in support of finding that the hospital enjoyed the
incidents of ownership. Cole Hospital, 113 Ill. App. 3d at 100,
446 N.E.2d at 565. Here, Lincolnland has no right to purchase
title on a certain date, but the lease contemplates that Lin-
colnland can purchase title as soon as Coles-Cumberland's attorney
believes such a purchase would be legally possible. There is no
reason to believe that Coles-Cumberland could block a sale in bad
faith. And unlike the charities in Henderson County Retirement
Center and Cole Hospital, Lincolnland may purchase title for the
nominal sum of $1. Lincolnland has essentially already paid the
purchase price. Because Lincolnland controls the property, enjoys
its benefits, and may obtain title for a nominal sum, I would find
that Lincolnland is the owner.
I would further rule that Lincolnland is at least
entitled to a charitable exemption for the value of the improve-
ments it constructed upon the leased land. The majority relies
upon Decatur Sports Foundation for the proposition that the im-
provements cannot be exempt where the underlying property is
taxable. I question the continued vitality of Decatur Sports
Foundation.
The supreme court criticized Decatur Sports Foundation in
City of Chicago (147 Ill. 2d at 499, 590 N.E.2d at 485). In City
of Chicago, the court held that the city was entitled to an
exemption for buildings it owned, although the land which it leased
from a private party was not tax-exempt. The court rejected the
Department's argument that section 1(13) of the Act mandated taxing
the land and the buildings as a single unit. Ill. Rev. Stat. 1987,
ch. 120, par. 482(13).
The City of Chicago court declined, however, to expressly
overrule Decatur Sports Foundation because the cases involved
different sections of the Act. City of Chicago, 147 Ill. 2d at
498-99, 590 N.E.2d at 484-85. City of Chicago was decided under
section 19.6 of the Act, which exempts municipal property. Ill.
Rev. Stat. 1987, ch. 120, par. 500.6. Section 19.6 exempts "public
buildings *** with the ground" (Ill. Rev. Stat. 1987, ch. 120, par.
500.6) while section 19.7, at issue in Decatur Sports Foundation
and this case, speaks simply of "[a]ll property of institutions of
public charity" (Ill. Rev. Stat. 1987, ch. 120, par. 500.7).
Nevertheless, the supreme court relied upon City of
Chicago when it later held that partial or separate exemptions were
permissible under section 19.7 of the Act. Chicago Patrolmen's
Ass'n, 171 Ill. 2d at 280, 664 N.E.2d at 60. In Chicago Patrol-
men's Ass'n, a charitable organization and a for-profit organiza-
tion, each held an undivided 50% interest in a property. The court
held that the property was entitled to a partial exemption of 50%
under section 19.7. Chicago Patrolmen's Ass'n, 171 Ill. 2d at 281,
664 N.E.2d at 61.
Reading City of Chicago and Chicago Patrolmen's Ass'n in
conjunction supports the conclusion that improvements may be
divisible from the land for tax purposes. Exemptions under section
19.7 of the Act are not necessarily all or nothing. It is
undisputed that Lincolnland's building and parking lot were
exclusively owned and used for charitable purposes. Allowing
Lincolnland an exemption for its improvements would further the
policy of encouraging charitable work.