No. 2--03--0006

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT

JUSTICE O'MALLEY delivered the opinion of the court:

Plaintiff, Cook Communications Ministries, applied for a real property tax exemption for 1999. Defendant, the Illinois Department of Revenue (Department), denied the application, rulingthat plaintiff's property was not "used exclusively for religious purposes" within section 15--40 of theProperty Tax Code (Code) (35 ILCS 200/15--40 (West 1998)). The circuit court reversed theDepartment. The Department appeals, arguing that its decision was not clearly erroneous. We agreeand reverse.

Plaintiff owns 9.22 acres at 850 North Grove Avenue in Elgin. As of 1999, the property wasimproved with a 190,000-square-foot building. After the Department denied plaintiff's applicationfor a tax exemption, plaintiff appealed and presented evidence at a hearing before an administrativelaw judge (ALJ). We summarize the evidence.

The sole witness at the hearing was David Hachtel, plaintiff's vice-president of finance since1986. He testified as follows. In 1875, David C. Cook, a pastor, founded a sole proprietorship toprint and distribute materials for children's Bible studies. In 1884, the business incorporated, and itwas family-owned and operated for profit until 1944. In 1900 or 1901, the corporation (the C-Corp)bought the property at 850 North Grove. Since then, the building has always been used primarily toprint, warehouse, and ship nondenominational Christian educational publications, although books areprinted off the site by commercial printers.

In 1944, a nonprofit corporation, the David C. Cook Foundation (the Foundation), wascreated. According to its articles of incorporation, the Foundation's purposes are to encourage theacceptance of Jesus and his teachings; to advance Christian education "in churches, and Sundayschools, internationally, by Christian literature and literacy"; and to aid the needy and institutions ofreligious education, either directly or through established charities. Article 6 states in part:

"(d) The net income of the corporation, as well as the principal and corpus of its fundsand property, shall be applied exclusively for the Christian religious, charitable and publiceducational purposes for which the corporation is organized, and for no other purpose. Thecorporation shall not engage in carrying on propaganda (other than the dissemination ofChristian religious teachings), nor engage by any means in attempting to influence legislation.

(e) No incorporator, member, officer or employee of the corporation, and no personwho shall have contributed to the funds or property of the corporation, shall receive, or belawfully entitled to receive, any dividend, distribution or pecuniary profit from thecorporation, nor any share or distribution of the assets therefrom, except that reasonablecompensation may be paid to an officer or employee for services actually rendered for thecorporation.

(f) In case of the dissolution of the corporation, all of the remaining funds andproperty of the corporation, if any, shall be paid and distributed to such Christian religious,charitable and public educational institution or institutions as the Board of Directors maydeem appropriate, to be used exclusively for Christian religious, charitable and publiceducational purposes, and no part thereof shall accrue to, or be distributed or paid to, anyincorporator, member, officer or employee of this corporation, nor to any person who shallhave contributed to the funds or property of the corporation, nor to any person claiming by,through or under any such incorporator, contributor, member, officer or employee."

Hachtel testified that from its creation, the Foundation was exempt from federal taxes. Between 1944 and 1952, the Cook family members who owned stock in the for-profit C-Corpdonated all of their stock to the Foundation, making the Foundation the sole owner of the C-Corp. In 1994, the Foundation adopted its present name, Cook Communications Ministries.

Between 1986 and 1995, plaintiff made about 10 to 12 acquisitions. Most were smallChristian book publishers, but in 1986, the Foundation also bought Day Spring, a Christian greetingcard company. Starting in 1998, plaintiff gradually acquired the C-Corp's assets. As of June 29,1999, the C-Corp's only asset was Day Spring. On July 16, 1999, the C-Corp took Day Spring'sname and was sold to Hallmark. At the hearing, Hachtel explained that Day Spring had been highlysuccessful while plaintiff owned it, having "gone from revenue of $12 million to $50 million and ***doing so cost effectively." However, this very success caused a disproportionate share of plaintiff'scapital to go toward "gifts and cards" rather than the Sunday school curriculum and books. Theprofits from the sale of Day Spring were used to reduce plaintiff's debt, set up an endowment forinternational ministries, build an addition to the structure at 850 North Grove, and upgrade officeequipment. With the sale of Day Spring, plaintiff now has no for-profit purposes.

Hachtel testified that plaintiff is still exempt from federal taxation. Plaintiff's corporate officeis in Colorado Springs and is exempt from Colorado property taxes. In October 1998, theDepartment notified plaintiff of its conclusion that plaintiff was "organized exclusively for religiouspurposes." Thus, at least until March 1, 2003, any sales to plaintiff were exempt from the "Retailers'Occupation Tax, the Service Occupation Tax (both state and local), the Use Tax, and the Service UseTax," although not from several other specified occupational or excise taxes.

Plaintiff earns the vast majority of its income by publishing Christian educational materialsand selling them to churches, teachers, and Christian bookstores. In the fiscal year ending May 31,2000, plaintiff received $618,403 in contributions, gifts, or grants. None of plaintiff's income isderived from fees charged for services. Consistent with past practice, any profit that plaintiff makesfrom the operations formerly performed by the C-Corp funds either the "distribution" of plaintiff'spublications or the training sessions plaintiff holds two to three times a year. Plaintiff's distributionefforts are primarily international, with all materials "given with no money expected in return." Atthe training sessions, the Foundation teaches people from abroad how to edit, publish, and distributereligious educational materials in their own countries.

The ALJ admitted copies of plaintiff's tax returns for the fiscal years ending May 31, 1999,and May 31, 2000. Discussing the first return, Hachtel noted that plaintiff's gross income for June1, 1998, through May 31, 1999, was $51,564,398, which exceeded plaintiff's total expenses anddisbursements by $8,362,406. This extraordinary surplus resulted from the transfer of assets fromthe C-Corp to plaintiff. Plaintiff's consolidated financial report for the same period, also admitted into evidence, showed that factoring in "those portions that were still in the C-Corp" reduced thesurplus to about $4.7 million. In the period covered by the second tax return, June 1, 1999, throughMay 31, 2000, plaintiff's gross revenues were $66,858,491, but plaintiff actually lost $3,392,085. Plaintiff employs about 650 people in all, with 175 to 200 of them in Elgin and the remainderin Colorado Springs. For the fiscal year ending May 1, 1999, plaintiff's chairman was paid $92,400. Five other employees received more than $50,000, their salaries ranging from $73,600 to $83,820. For the fiscal year ending May 31, 2000, plaintiff's chairman was paid $239,883. Two other officersreceived $175,090 and $149,151, and the five remaining highest-paid employees' salaries ranged from$92,090 to $118,919. Plaintiff's board of trustees consists of 3 officers and 11 outside individualsand meets twice a year for two days at a time. Each trustee is paid $2,500 per two-day session. Trustees customarily repay half or all of this amount, but they are not required to do so.

The ALJ recommended denying the requested exemption. The ALJ reasoned as follows. Under section 15--40, "[a]ll property used exclusively for religious purposes *** and not leased orotherwise used with a view to profit, is exempt." 35 ILCS 200/15--40 (West 1998). Plaintiff usesits property in Elgin to publish religious educational materials for others to use, thereby fulfillingplaintiff's goal of fostering Christian education. However, unlike a church or a Sunday school, plaintiffitself is unaffiliated with any church and does not itself conduct worship services or teach religiondirectly. Thus, the Elgin property is not "used exclusively for religious purposes" in the traditionalsense, i.e., "by a religious society or body of persons as a stated place for public worship, Sundayschools and religious instruction." People ex rel. McCullough v. Deutsche Evangelisch LutherischeJehovah Gemeinde Ungeaenderter Augsburgischer Confession, 249 Ill. 132, 136-37 (1911). The ALJfurther stated that, nonetheless, under more recent case law, the publication and distribution ofreligious materials may be either (1) primarily religious with incidental commercial aspects, and thuswithin section 15--40 of the Code; or (2) primarily commercial with religious overtones, and thusoutside section 15--40.

The ALJ concluded that in 1999, plaintiff was the second type of enterprise, not the first. TheALJ emphasized that the vast bulk of plaintiff's revenues came from the gross profits it made fromthe commercial sales of its publications. Only a tiny percentage of plaintiff's income came fromcontributions. Moreover, plaintiff's president received a large salary, and each of its trustees was paid$2,500 per two-day meeting although there was no evidence that this was reasonable compensationfor the work done. Therefore, plaintiff used the property primarily for a nonreligious purpose evenafter it liquidated the for-profit C-Corp midway through 1999.

The Department adopted the ALJ's recommendation and denied plaintiff the exemption. Onadministrative review, the circuit court reversed the Department. The Department timely appealed. On appeal, the Department argues that its decision to deny plaintiff a property tax exemption undersection 15--40 of the Code is not manifestly erroneous. For the reasons that follow, we agree.

We review the holding of the Department, not the ruling of the circuit court. Central IllinoisLight Co. v. Department of Revenue (CILCO), 336 Ill. App. 3d 908, 911 (2003). Here, theDepartment's task was to apply a given legal standard to undisputed facts. Thus, the Departmentconfronted a "mixed question of law and fact," and we must accept the Department's answer unlessit is clearly erroneous. See AFM Messenger Service, Inc. v. Department of Employment Security,198 Ill. 2d 380, 392-93 (2001); Du Page County Board v. Department of Revenue, 339 Ill. App. 3d230, 234 (2003).

The issue before the Department was whether, during 1999, plaintiff's property at 850 NorthGrove was "used exclusively for religious purposes *** and not leased or otherwise used with a viewto profit." 35 ILCS 200/15--40 (West 1998). In this context, "exclusively" refers to the primarypurpose for which the property is used. Evangelical Hospitals Corp. v. Department of Revenue, 223Ill. App. 3d 225, 230 (1991). Plaintiff had the burden to establish its entitlement to the exemption,with all debatable questions to be resolved in favor of taxation. See CILCO, 336 Ill. App. 3d at 912.

We agree with the Department and the ALJ that, throughout 1999, plaintiff's property wasineligible for the requested tax exemption because it was not used exclusively for a religious purpose. Additionally, we conclude that until plaintiff disposed of the for-profit greeting card company, itsproperty was not tax exempt because it was used with a view to a profit. The Department's decisionis not clearly erroneous and, indeed, is compelled by the case law.

We explain first why the case law compels a holding that plaintiff's property was not usedexclusively, i.e., primarily, for a religious purpose. The earliest pertinent opinion appears to beCongregational Sunday School & Publishing Society v. Board of Review, 290 Ill. 108 (1919). There,the plaintiff operated a missionary department that organized Sunday schools and maintainedmissionaries to assist these schools; published and circulated several religious periodicals; publishedand sold religious books; and published educational materials that it sold specifically to Sundayschools. The plaintiff's Chicago store sold religious books and supplies. The plaintiff relied ondonations for its funds. Over the long term, the Chicago store did not make a substantial profit, andprofits it made in a given year were devoted to maintaining the missionary department. Congregational Sunday School, 290 Ill. at 111-12.

The plaintiff sought a personal property tax exemption for its Chicago property on twogrounds: because the property was used exclusively for a religious purpose and because the plaintiffwas an institution of public charity. The supreme court considered these two grounds togetherbecause they were so "closely associated" under the facts of the case. Congregational SundaySchool, 290 Ill. at 112. In allowing the exemption, the court reasoned that the plaintiff's dominantpurpose was to spread the gospel and that the plaintiff did this directly by distributing its religiousbooks and Sunday School supplies. The court noted as well that plaintiff's work was "to send itsworkers and missionaries into those parts of our land where religious teaching among the young hasbeen neglected, and there to take the young into Sunday schools for moral and religious instructionand provide for them wholesome literature." Congregational Sunday School, 290 Ill. at 117.

In Scripture Press Foundation v. Annunzio, 414 Ill. 339 (1953), the supreme court limited,if it did not partially abrogate, its holding in Congregational Sunday School by ruling that the merepublication and distribution of religious literature is not a religious purpose. The plaintiff, a nonprofitcorporation, published and distributed Christian literature. It sought an exemption fromunemployment compensation contributions on the ground that it was organized and operatedexclusively for religious purposes. Scripture Press Foundation, 414 Ill. at 341-42. Relying on thecorresponding property tax exemption, the supreme court held that the plaintiff was not exempt. Thecourt explained:

"[Plaintiff] was incorporated and organized by [people], who, although Christian persons witha long record of religious service, were neither ordained ministers, pastors, norrepresentatives of any ecclesiastical or church organization. No church or ecclesiasticalorganization was an incorporator or a member of the corporation. A study of its charterpowers in the light of its actual operation indicates that [plaintiff] was organized for theprimary purpose of producing, distributing and selling religious literature and supplies toreligious organizations. It is true that the language of its charter powers indicates a purposefor 'The dissemination of the Gospel, the distribution of the Scriptures, of extracts therefrom,of devotional and other literature relating thereto, and of helps and supplies for use inChristian activities.' Such purpose is accomplished only by the distribution and sale of suchliterature and supplies to religious organizations, which organizations in turn use them inconducting their religious activity. We are of the opinion that *** such activities are secularin nature and not exclusively religious, *** the same as any other commercial serviceorganization furnishing to a religious institution necessary services such as fuel, lights,building material or any other item necessary to its ordinary and customary functioning." (Emphasis added.) Scripture Press Foundation, 414 Ill. at 355-56.

The court observed that there was no evidence that the plaintiff itself engaged directly inreligious activities such as maintaining missionaries in the field. Scripture Press Foundation, 414 Ill.at 356. Earlier, the court had noted that the plaintiff did not conduct Bible or Sunday schools. Scripture Press Foundation, 414 Ill. at 343. Also, it was "pertinent" that the plaintiff's profits werereinvested in production and sales at a profit and that, upon a dissolution, the plaintiff's assets couldgo to secular organizations or private individuals, including its officers. Scripture Press Foundation,414 Ill. at 357-58. Finally, the court distinguished Congressional Sunday School, questionably, in ourview, on the ground that the earlier opinion interpreted only a statutory tax exemption for a"charitable and beneficent organization" and not one based on "religious purposes." Scripture PressFoundation, 414 Ill. at 359-60.

Cases following Scripture Press Foundation have adhered to its distinction between nonprofit organizations that engage directly in religious activities, such as worship, missionary work, andreligious education, and secular organizations that merely supply religious entities with materials toconduct such activities. Thus, in Inter-Varsity Christian Fellowship v. Hoffman, 62 Ill. App. 3d 798(1978), the plaintiff sought a property tax exemption for its literature division, which preparedreligious publications that it sold or, at times, gave away. The cost of producing the materialsregularly exceeded the revenue from the sales, and the literature division relied on donations for mostof its revenues. In ruling that the literature division used its property exclusively for a religiouspurpose, we distinguished Scripture Press Foundation on several grounds. First, the plaintiff engageddirectly in religious activities such as Christian education and the support of numerous missionariesin the field. Second, on dissolution, the plaintiff would have to distribute its capital surplus to areligious or charitable entity. Third, the plaintiff's literature division sold its publications at cost orless and made a profit only if it received sufficient donations. Inter-Varsity, 62 Ill. App. 3d at 802-03.

In Evangelical Teacher Training Ass'n v. Novak, 118 Ill. App. 3d 21 (1983) (ETTA), theplaintiff, a nonprofit association of religious educational institutions, promoted Christian educationby sending its officers to lecture at religious colleges, advising religious educators on trainingseminary students, preparing materials for Bible courses that were written by faculty at memberschools, and distributing its publications, often free, to libraries and schools. ETTA, 118 Ill. App.3d at 23. In affirming the plaintiff's entitlement to a property tax exemption, the appellate courtdistinguished Scripture Press Foundation in several respects. First, ETTA's constituents werereligious organizations and its officers were ministers. ETTA, 118 Ill. App. 3d at 25-26. Second,upon dissolution, ETTA's assets would go to a charitable purpose. ETTA, 118 Ill. App. 3d at 25. Third, ETTA did far more than distribute religious materials to others; its officers were deeplyinvolved in religious teaching, which served "to directly accomplish ETTA's corporate purpose, thepromotion of Christian education, in a manner which could not be achieved through the mere sale ordistribution of its books and religious materials." ETTA, 118 Ill. App. 3d at 26.

Although the foregoing opinions do not lay down a completely clear or rigid formula fordeciding whether property is being used exclusively for a religious purpose, they compel us to agreewith the Department that plaintiff's property was not so used in 1999. Plaintiff was founded manyyears ago by a pastor, but there is no evidence that in 1999 it was affiliated with any religiousorganization or that its officers were members of the clergy. More importantly, the evidenceoverwhelmingly shows that in 1999, plaintiff directly engaged in little or no specifically religiousactivity and used its Elgin property for no such purpose. Instead, like the plaintiff in Scripture PressFoundation, but unlike those in Hoffman and ETTA, plaintiff achieved its corporate purpose,advancing Christian education, almost entirely by selling Christian educational materials toorganizations that then did the actual teaching. Plaintiff itself did no religious teaching. Moreover,plaintiff received the bulk of its revenues either from such sales or from selling items produced by itsfor-profit greeting card company. Only a tiny portion of plaintiff's revenues came from contributions,and plaintiff made a profit in one of the two fiscal years that included part of calendar year 1999.

We recognize that, unlike the plaintiff in Scripture Press Foundation, plaintiff here did notroutinely make a profit and, upon a dissolution, it could not distribute its net income or assets toprivate parties. However, we do not believe that these factors are dispositive here. The clear importof the excerpt that we have quoted from Scripture Press Foundation is that, when a secular nonprofitorganization does not directly engage in religious activities but merely supplies materials to assistothers in doing so, the organization is not using its real property "exclusively for religious purposes." 35 ILCS 200/15--40 (West 1998). The additional factors that plaintiff cites do not refute theinescapable conclusion that plaintiff did not use its property primarily for religious purposes. At most,they tend to prove that plaintiff did not use its property "with a view to profit" (35 ILCS 200/15--40(West 1998)), although, as we shall discuss, even that conclusion must be qualified.

Plaintiff insists that its case is similar to Congregational Sunday School and that a similarresult is required. However, in view of the supreme court's later decision in Scripture PressFoundation, Congregational Sunday School is of dubious validity, at least as a precedent forconstruing section 15--40's exemption of property that is used exclusively for "religious purposes." 35 ILCS 200/15--40 (West 1998). Also, Congregational Sunday School is distinguishable on itsfacts. There, the plaintiff did not merely produce and distribute materials for others to use in religiousinstruction but engaged directly in organizing and conducting religious instruction itself. Furthermore, the plaintiff did not receive most of its revenues from sales but relied heavily ondonations to stay solvent. Thus, even if Congregational Sunday School is relevant precedent, thiscase more nearly resembles Scripture Press Foundation. To the extent that the precedents areambiguous, the Department's application of them to the facts here was not clearly erroneous. See DuPage County Board, 339 Ill. App. 3d at 235.⁽¹⁾

There is another compelling reason to hold that plaintiff did not satisfy section 15--40 for atleast part of 1999. For approximately half that year, plaintiff's property was used in part for theoperations of Day Spring, a for-profit company. From Hachtel's testimony, it is evident that thecompany did make a profit and that it also made a huge contribution to plaintiff's revenue. Indeed,Day Spring was sold because it was becoming too successful. Thus, until plaintiff divested itself ofDay Spring, its property was being used in large part "with a view to profit" (35 ILCS 200/15--40(West 1998)) and was therefore ineligible for the requested exemption.

It is of no moment that the profits Day Spring made were plowed back into plaintiff'snonprofit operations. See Salvation Army v. Department of Revenue, 170 Ill. App. 3d 336 (1988)(property devoted to for-profit thrift store owned by plaintiff charitable organization was not eligiblefor tax exemption even though profits went to fund plaintiff's charitable operations). Also, while wedo not know exactly what portion of the property was used for Day Spring's needs, it wasundoubtedly significant (and, in any event, any doubt would have to be resolved against plaintiff). When the property in unidentifiable portions is used both for an exempt purpose and a nonexemptone, the property will be wholly exempt only if the exempt use is primary and the nonexempt use isincidental. Evangelical Hospitals Corp. v. Department of Revenue, 223 Ill. App. 3d 225, 231 (1991). Day Spring's use of the facility can hardly be characterized as incidental. Thus, even were plaintiff'sother operations tax-exempt, we would hold that for as long as Day Spring operated out of the Elginfacility, the property as a whole was ineligible for the requested exemption.

The judgment of the circuit court of Kane County is reversed.

Reversed.

BOWMAN and GILLERAN JOHNSON, JJ., concur.

1. The ALJ's (and thus the Department's) emphasis on the compensation paid plaintiff'sofficers and trustees seems misplaced. Whether this compensation is excessive is debatable, and,even if the officers and trustees were overpaid, the amounts involved were so slight in relation tothe scale of plaintiff's operation that we would hesitate to rely on this consideration as a ground touphold the Department's decision. However, there are more than sufficient grounds to affirm theDepartment in any event, so its questionable reasoning in one respect is of no consequence here.