By Charlie Beller1
I. 501(c)(3) Tax Exempt Status and Title IX
Tax-exempt status confers a benefit on charitable, religious, and other qualified institutions that is legally distinct from other forms of governmental financial support. Money is fungible. Yet in tax—as in law (and religion)—form matters.
Two recent decisions from federal district courts threaten to upend well-established and historically grounded understandings of the interplay between federal tax-exempt status and federal antidiscrimination laws. The key legal issue in both cases is whether the 501(c)(3) tax-exempt status of independent, faith-based schools constitutes “federal financial assistance” within the meaning of Title IX of the Educational Amendments Act (20 U.S.C. § 1681) (Title IX).2 Both federal courts rely on strained logic, rather than taking a “page of history”3 to conclude that tax-exempt status constitutes “federal financial assistance”, and that independent, faith-based educational institutions are therefor subject to broad liability under Title IX. These decisions raise serious compliance issues for independent and faith-based schools, many of which lack the institutional capabilities necessary to comply with Title IX. These cases further highlight a growing risk that tax-exempt organizations may be subject to more expansive liability under federal antidiscrimination laws.
II. Baltimore Lutheran (D. Md.)
In Baltimore Lutheran,4 a student filed a traditional sex-based discrimination claim against a faith-based independent school located in Baltimore County, Maryland. In addition to bringing state law tort claims, the student alleged that the school violated Title IX, which provides statutory protections against sex-based discrimination. The Baltimore Lutheran complaint is traditional in the sense that it alleges a pattern of sexual assault and harassment for which an educational institution subject to Title IX has a statutory duty to take preventative and remedial measures.5 The key legal question is whether the independent faith-based school is in fact subject to Title IX by virtue of its tax-exempt status.6 A district court judge in Maryland responded in the affirmative, reasoning that tax-exempt status is a form of government subsidy that carries economic benefits equivalent to direct financial support; 501(c)(3) status therefor constitutes “federal financial assistance” within the meaning of Title IX.7
In Baltimore Lutheran, the federal district court relied principally on language from Supreme Court decisions that state relatively uncontroversial principles of tax economics and tax policy:
i.) Tax-exemption carries economic benefits similar to direct receipt of government funds,8 and;
ii.) Tax-exemption does not extend to activities that are illegal or against public policy, e.g., racial discrimination in admissions.9
None of the Supreme Court cases relied upon by the district court address the precise question of tax-exempt status and application of Title IX. The district court recognized the lack of any controlling legal precedent from either the Supreme Court or U.S. Courts of Appeal. Appreciating a divergence in lower federal court opinion and the critical importance of the legal issue, the district court certified an appeal on an “interlocutory” basis, which allows the controlling and potentially dispositive question of law to be addressed before continuing with the rest of the lawsuit. The school and amici representing a coalition of independent schools in the Mid-Atlantic region argue in support of the appeal that federal agency interpretations of Title IX and the majority of district courts to squarely address the legal question have concluded that 501(c)(3) tax-exempt status does not constitute “federal financial assistance.” In particular, the school and amici point to federal regulations from the Department of Education and Department of Treasury that define “federal financial assistance” without reference to tax-exempt status.10 If the Fourth Circuit takes the appeal, it will be the first US appellate court to squarely address this critical legal question.11
III. Valley Christian (C.D. Cal.)
Four days after the decision in Baltimore Lutheran, a federal district court in California addressed the same question in E.H. v. Valley Christian Academy, similarly deciding that tax-exempt status constitutes “federal financial assistance” and that, therefor, Title IX should apply to the defendant, an independent faith-based school in California.12 If Baltimore Lutheran presents a traditional sex-based discrimination claim under Title IX, E.H. v. Valley Christian Academy presents a “next-generation” Title IX claim. The claim in Valley Christian is based on an independent, faith-based school’s decision to abstain from playing football against a rival school based on the fact that one of the rival school’s players was female. Pointing to the absence of controlling authority from the Ninth Circuit on the application of Title IX to tax-exempt schools, the district court relied on what it characterized as Title IX’s “plain purpose” as an antidiscrimination protection.13 In the view of the district court, “distinctions as to the method of distribution of federal funds or their equivalent seem beside the point….”14 In addition, the court held that the school’s receipt of Paycheck Protection (PPP) loans under the CARES Act constituted federal financial assistance. The school has not appealed the decision; instead answering the complaint, meaning that the case is likely to proceed to the next phase of litigation.
IV. Considerations for Tax-Exempt Schools
Baltimore Lutheran and Valley Christian represent a willingness of federal courts to revisit settled expectations regarding the application of Title IX to tax-exempt independent and faith-based schools. While tax-exempt organizations may appreciate that receipt of direct financial support in the form of government loans and grants under the emergency relief provided by Congress in response to COVID-19 came with strings attached, the possibility that Title IX (and potentially other federal antidiscrimination laws) may apply simply by virtue of tax-exempt status represents a watershed legal development with serious compliance implications for tax-exempt educational institutions. If your organization is tax-exempt, check out Napa Legal’s resources on 501(c)(3) status to make sure you continue to protect your tax-exempt status and follow developments in the case law as important questions are litigated in the federal courts.
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1 Charlie is an attorney in Washington, D.C., and member of the inaugural Good Counselor Fellowship class. A beneficiary of Jesuit education, he writes in memory of Rev. John O’Malley, S.J.
2 The U.S. Department of Education enforces Title IX, which “protects people from discrimination based on sex in education programs or activities that receive federal financial assistance.” Office of Civil Rights, U.S. Dep’t of Education, Title IX and Sex Discrimination, https://www2.ed.gov/about/offices/list/ocr/docs/tix_dis.html
3 Neither the parties nor the federal district court have raised the Supreme Court’s Establishment Clause jurisprudence as persuasive authority on navigating the nuanced but significant differences between direct and indirect government subsidy through tax-exemption. Under the Supreme Court’s Establishment Clause jurisprudence, it matters very much whether the state provides direct as opposed to indirect economic benefits. For example, the court has refused to infer that the grant of a tax exemption bears the imprimatur of state action. Instead, the Court looks to the historical pedigree of charitable and religious tax-exemptions to demarcate the legal significance of direct and indirect financial support. See, e.g., Walz v. Tax Commissioner of the City of New York, 397 U.S. 664, 676 (1970) (citing New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921) (“The grant of a tax exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state. No one has ever suggested that tax-exemption has converted libraries, art galleries, or hospitals into arms of the state or put employees ‘on the public payroll.’ There is no genuine nexus between tax exemption and establishment of religion. As Mr. Justice Holmes commented in a related context ‘a page of history is worth of volume of logic.’”).
4See Donna Buettner-Hartsoe v. Baltimore Luther High School Association, No. 1:20-cv-03132 (D. Md.) [“Baltimore Lutheran”], on appeal to the U.S. Court of Appeals for the Fourth Circuit (No. 22-272).
5See Compl. ¶¶80-88, Baltimore Lutheran, ECF No. 1 (October 28, 2020) (alleging hostile environment and failure by school to take necessary preventive and remedial measures in response to alleged sexual assault and harassment).
6 In a footnote with relevance for independent, faith-based institutions, the district court noted that the parties “agree that thee PPP loan constitutes federal financial assistance for the purposes of Title IX” but that “once an SBA loan is forgiven, however, a recipient is no longer subject to any ‘legal obligation it incurs through its receipt of the loan’”). See Baltimore Lutheran, ECF 130 at 13 n. 11.
7See Donna Buettner-Hartsoe v. Baltimore Luther High School Association, No. 1:20-cv-03132 (July, 21, 2022 D. Md.), ECF 130.
8Id. citing Regan v. Taxation with Representation, 461 U.S. 540 (1983) (“The Supreme Court has therefore recognized § 501(c)(3) status as a form of Congressional subsidy and the equivalent of a cash grant”).
9Id. (citing Bob Jones Univ. v. United States, 461 U.S. 574, 592 (1983)).
10See, e.g., 31 C.F.R. § 28.105; 34 C.F.R. § 106.2(g).
11 The Eleventh Circuit confronted the certified question in M.H.D. v. Westminster Schools, but did not address it on the merits. See 172 F.3d 797, 802 n. 12 (11th Cir. 1999). Westminster Schools involved an analogous sexual assault claim against an independent school under Title IX. The district court dismissed the Title IX claim for lack of subject matter jurisdiction, reasoning that the school’s tax-exempt status did not constitute “federal financial assistance” under Title IX. The Court of Appeals noted that dismissal for failure to state a claim was the appropriate remedy in the absence of a substantive claim, and that dismissal for lack of jurisdiction was not appropriate if a claim was neither immaterial nor frivolous, recognizing the existence of contrary precedent on the question.)
12E.H. v. Valley Christian Academy, No. 2:21-cv-07574-MEMF, 2022 U.S. Dist. LEXIS 132893 (July 25, 2022 C.D. Cal.).
13Id. at *16.
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