Two on-campus daycare facilities affiliated with the nonprofit University of Chicago should not be exempt from property taxes, a state appeals panel ruled.
The 1st District Appellate Court held that since the facilities bring in a profit of nearly $1 million per year, they did not qualify for a charitable-use exemption.
Justice Maureen E. Connors wrote a 20-page opinion late last week, ruling the daycare centers do qualify for exempt status under one criterion of state law — being “reasonably necessary” to fulfill UChicago’s educational mission. That ruling is the first of its kind in Illinois, the court noted.
But the justices also cited language stating that university property “used with a view to profit” cannot be exempt even if the school itself outsourced the business to a third-party vendor. The decision affirmed the view of the state’s Department of Revenue.
”There is simply nothing in the statute stating that the owner of the property must be the entity that profits for the exemption to be inapplicable. We are therefore persuaded by the Department’s interpretation that the phrase ‘used with a view to profit’ refers to any entity profiting from the use of the property, not just the owner of the property,” Connors wrote.
“This interpretation follows the mandate that tax-exemption provisions be construed narrowly, and it gives the appropriate deference to the Department’s application of the statute,” she wrote.
The university and Bright Horizons Children’s Centers LLC sought exemptions for tax year 2015 for two properties used primarily for university employees’ childcare, one at 5610 S. Drexel Ave. and the other at 5824 S. Stony Island Ave.
They cited section 15-35 of the Illinois Property Tax Code, which states in part that “[a]ll property donated by the United States for school purposes, and all property of schools, not sold or leased or otherwise used with a view to profit, is exempt,” whether owned by a resident, non-resident or corporation.
The Illinois Department of Revenue denied the requests, and an administrative law judge upheld the denial in September 2017, ruling there was no evidence university employees were lacking in options for childcare in the area, and no corresponding government obligation to subsidize such a service through property tax relief.
The ALJ also wrote the properties were making profits, contrary to the intent of exemption in the tax code, with each one together bringing in more than $940,000.
But Cook County Circuit Judge Michael F. Otto reversed that ruling, finding it “absurd” to determine onsite childcare was unnecessary based merely on whether there were any other options in the neighborhood. The test of whether a property is serving a school-related purpose is whether it can be deemed “reasonably necessary” to achieve educational objectives and efficient administration, he wrote.
Giving some deference to the university warranted the finding that such a service could be deemed necessary, Otto ruled. He also stated that despite making money, the facilities were not used with a “view to profit” because UChicago was not profiting from them. Bright Horizons paid for some services from the school, like snow removal, but did not pay rent or give any tuition money to the school to use the buildings.
The appellate panel arguably issued a mixed decision. It noted the test for determining whether land is school-owned and used “for school purposes” is not whether it is “absolutely indispensable” to the school.
Rather, under the 1967 Illinois Supreme Court decision in MacMurray College v. Wright, the question is whether the property is “reasonably necessary” to achieve educational goals and efficient administration of the institution.
Connors, joined by Justices Joy V. Cunningham and Sheldon A. Harris, noted “there are no Illinois cases that have determined whether a childcare center is reasonably necessary for the accomplishment and fulfillment of the education objectives or efficient administration of a school.”
However, the 4th District Appellate Court used the MacMurray test in the 1992 case of Memorial Child Care v. Department of Revenue to determine whether a daycare facility was reasonably necessary to operate a charitable hospital.
In that case, the panel deemed that “the availability of secure, flexible child care is more than a mere convenience; it is a necessity that directly affects an employee’s willingness and ability to provide much needed services” to the community.
Although there was a documented lack of other childcare options in that case, and not in the current dispute, the panel here cited testimony from school officials that on-campus childcare was a significant incentive for drawing talented faculty and students to the school.
”There is no question that on-campus childcare would enable the University to better serve the needs of the students at the University by allowing the University to attract and retain quality professors and other staff members,” Connors wrote.
She added later, “We agree with our colleagues in the [4th District] that the availability of secure, on-campus childcare is more than a mere convenience. It is a necessity that directly affects an employee’s willingness and ability to provide services for the University.”
But because the facilities themselves turned profits and because the statute is supposed to be construed in favor of taxation, the facilities should not be exempt, Connors wrote.
Because the statute discussed property “not sold or leased or otherwise used with a view to profit,” and selling and leasing are activities engaged in by property owners themselves, then “otherwise used” must also refer to owners.
“In a vacuum, the circuit court’s interpretation is plausible. However, we must construe the statutory exemption narrowly and strictly in favor of taxation,” Connors wrote. Such an interpretation yields the conclusion that “with a view to profit” refers to any entity that profits from it, not just the owner, the panel wrote.
“For the foregoing reasons, we reverse the circuit court of Cook County’s order and affirm the Department’s decision that the University and Bright Horizons were not entitled to a tax exemption under section 15-35 of the Code,” the panel concluded.
Aaron T. Dozman, an assistant attorney general, represented the revenue department in the case. A spokeswoman for the office declined to comment.
Steven F. Pflaum, of Neal, Gerber & Eisenberg LLP, represented the plaintiffs. He said in an interview on Monday that it was “gratifying and significant” the appellate court ruled daycare facilities are reasonably necessary at schools.
But he said he and his team will look closely at an appeal on the other issue, which boils down to a determination on how outsourcing affects tax status. He said not-for-profit institutions outsource functions all the time.
“The appellate court has essentially ruled that outsourcing these functions — that interferes with the ability to get a property tax exemption,” he said.
The case is University of Chicago v. Department of Revenue, 2020 IL App (1st) 191195.