In University of Chicago v. Department of Revenue, 2020 IL App (1st) 191195 (opinion issued May 15, 2020), the First District of the Illinois Appellate Court faced a unique property tax dispute that required the interpretation of a curious phrase in section 15-35 of the Illinois Property Tax Code.  Section 15-35 states that "all property of schools, not sold or leased or otherwise used with a view to profit, is exempt" from property tax (emphasis added).  But what does it mean for property to be "used with a view to profit"?  Whose "view," and whose "profit," matters?  And can property be "used with a view to profit" even if the property’s owner – the taxpayer – does not even attempt to earn any profits from the property’s use?

The University of Chicago is a not-for-profit corporation that owns a lot of property on the South Side of Chicago.  Like many universities and research centers, it needs to provide day care options for its faculty and other employees.  It outsourced its daycare operations to Bright Horizons, a for-profit company, and authorized Bright Horizons to operate a day-care center (to be used primarily, but not exclusively, by parents who were University employees) from University-owned property.  The University charged no rent or administrative fees to Bright Horizons.  Bright Horizons charged parents tuition and earned a profit.  None of those profits were shared with the University. 

The University applied for a property tax exemption.  The Department of Revenue denied the University’s application.  The Department’s position was affirmed by an administrative law judgment but reversed in the University’s subsequent administrative appeal litigation in the circuit court of Cook County.

On appeal from the circuit court’s judgment in the University’s favor, the Illinois Appellate Court first concluded that on-campus childcare is a school purpose.  But then the appellate court was faced with a very interesting issue of statutory interpretation: Was the University-owned property in question "used with a view to profit"?  The University argued that it – the property owner and the taxpayer – was not profiting, and in fact earned no revenue at all, from the daycare operation.  The Department argued that "so long as the property is used with a view to profit, regardless of what entity profits, the exemption fails" (emphasis in original).

The appellate court then invoked two presumptions: first, deference is generally given to an administrative agency’s interpretation of an ambiguous statute; and second, tax exemptions are construed "narrowly and strictly in favor of taxation." 

The appellate court noted that the interpretation embraced by the University and adopted by the circuit court — that "used with a view to profit" referred to the taxpayer’s profit — was "plausible" if viewed "[i]n a vacuum."  After all, as noted by the circuit court, other language in section 15-35 refers to the sale or lease of the property, which necessarily profits the property owner/taxpayer and not someone else.

Yet "[t]here 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," and in light of the presumption in favor of taxation and the required deference to an administrative agency’s interpretation of an ambiguous statute, the Department’s interpretation carried the day.  The appellate court reversed the circuit court’s judgment in favor of the University.

On some level, this holding is counter-intuitive.  It seems pretty clear that the General Assembly meant "used with a view to profit by the owner."  The General Assembly probably just did not anticipate a scenario where, as here, a non-profit corporation foregoes any opportunity to profit from the use of its property but allows someone else to profit from the property’s use so that an essential service can be provided to a particular population in furtherance of the non-profit’s mission. Under those circumstances, a non-profit entity truly is using its property for purposes other than profit, so it would be strange to deprive the non-profit entity of its tax exemption just because somebody else incidentally turns a profit. 

Also, if the University hadn’t outsourced its daycare operation to Bright Horizons, it presumably would have run the daycare center itself.  In that case, the exemption would clearly apply, since the daycare center would then be operated by a non-profit entity (the University) and not by a for-profit business (Bright Horizons).  One would expect the tax authorities to be indifferent to whether the University directly manages a daycare center for its employees’ children or outsources that work to somebody else.

This issue of statutory interpretation is important enough that a petition for leave to appeal to the Illinois Supreme Court seems likely.  If the Illinois Supreme Court does not allow a petition for leave to appeal, the General Assembly would be well advised to consider amending section 15-35 to make its intentions clearer.