Uncharitable treatment: 4th Circuit case could upend NC’s 501(c)3 legal protections

Private religious schools and potentially other non-profits throughout the country could soon feel the ripple effects of an appeal to be argued Jan. 25 at the United States Court of Appeals for the Fourth Circuit in Richmond, Virginia. The Court of Appeals, which covers North Carolina and four other states, will consider whether a private school can be subject to legal liability under Title IX of the Education Amendments Act of 1972 (usually referred to as simply “Title IX”) based on its status as a tax-exempt 501(c)(3) organization. 

The appeal arises from separate lawsuits brought in the US District Court for the District of Maryland by five women who were formerly students at a religious high school then known as Baltimore Lutheran. Each of the plaintiffs alleges that, while a student at Baltimore Lutheran, she endured sexual assault and harassment. The school, the plaintiffs contend, failed to adequately address complaints about these incidents, thus giving rise to liability for Baltimore Lutheran under Title IX.

Much like Title VII in the employment context, an educational intuition may be liable under Title IX when it has not responded adequately to incidents of sexual harassment. But there is an important caveat to this rule. Title IX only applies to educational institutions that receive “federal financial assistance.” 

Baltimore Lutheran, however, has never participated in any Title IX programs, like receiving educational grants from the federal government. So, how can Baltimore Lutheran be liable under Title IX? The plaintiffs argued, and the trial court agreed, that “501(c)(3) status [is] a form of Congressional subsidy and the equivalent of a cash grant.” The trial court held further that “an institution still qualifies as a recipient of federal assistance under Title IX even if it did not apply for the aid or the aid is indirectly provided.”

This is the important question of law the Fourth Circuit will have to consider, and how it rules could affect the operation of private schools in the Fourth Circuit and potentially throughout the United States. For that reason, a number of independent and private religious educational associations have joined Baltimore Lutheran in contesting the notion that 501(c)(3) status is, by itself, “federal financial assistance” for purposes of Title IX.

A point emphasized in the arguments for Baltimore Lutheran is that Title IX is fundamentally contractual in nature: the federal government provides aid to educational entities, which in turn agree to certain standards, including standards to prevent and address sexual harassment. Since Baltimore Lutheran never took any federal funding under Title IX, the ruling of the trial court to impose Title IX liability is a complete surprise, not only to Baltimore Lutheran but also to countless other private educational institutions that have never considered themselves to be covered by Title IX.

For example, in an amicus curiae brief supporting Baltimore Lutheran filed by a coalition of private school associations, including the North Carolina Association of Independent Schools, the amici explains that instead of implementing Title IX, these schools have “opted to develop policies and procedures to combat sex-based discrimination and harassment that more closely align with their unique identity, culture, and community size and budget” and further that “application of Title IX’s prescriptive regime would have a unique and detrimental impact on independent schools.” As this argument also suggests, avoiding governmental interference is often an important part of protecting a school’s religious character and the structure of governance that might be required by the school’s religious doctrines.

Moreover, the amicus curiae brief of the Thomas More Society (of which I was an author) highlights the fact that the plaintiffs fundamentally misunderstand the tax-code provision on which their theory of liability rests. The exemption that is today called § 501(c)(3) has existed in federal tax law for well over a century without a hint from Congress that, by simply availing oneself of it, an entity has received federal funds sufficient to bring it within the realm of regulation by other non-tax statutes.

Deeming an exemption from tax under § 501(c)(3) to be the equivalent of direct financial payments made by the government to a participant in a federal program runs counter to the definition of making an “expenditure” through the Internal Revenue Code. In federal budgeting, “[t]ax expenditures . . . [are] revenue losses attributable to provisions of Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” In other words, “tax expenditures” are something virtually all taxpayers, including individuals, may avail themselves of.

A 501(c)(3) organization’s tax-exempt status is not governmental “financial assistance” any more than an individual’s ability to deduct home mortgage interest is “financial assistance” from the government. In both cases, the taxpayer is simply keeping income that was already earned. 

The plaintiffs’ theory that tax-exempt status is a federal financial benefit under the law could ultimately impact not just 501(c)(3) organizations. Section 501(c) of the Internal Revenue Code contains 29 discrete categories of organizations, corporations, trusts, and other entities that are exempt from paying taxes on their income. This includes 501(c)(4) social welfare organizations as well as an array of other entities recognized under § 501(c), such as labor and agricultural organizations, chambers of commerce and business leagues, and fraternal societies.

Much like Baltimore Lutheran, it is doubtful that any of these 501(c) entities ever considered itself to be the recipient of “federal financial assistance” simply because of its tax-exempt status.

A decision from the Fourth Circuit rejecting the plaintiffs’ theory of liability under Title IX would signal a return to what was generally accepted as settled law prior to the ruling of the trial court in this case. An adverse ruling for Baltimore Lutheran, however, would be an alarming message to private religious schools that they, too, have heretofore unacknowledged obligations of Title IX — no matter how much they may have sought independence and distance from governmental involvement in their internal affairs.