Title IX prohibits discrimination on the basis of sex in any school or educational program that receives federal funding. But does Title IX apply to all Section 501(c)(3) organizations, solely on the basis that tax-exempt status could constitute federal funding? In January 2024, a federal court of appeals heard oral argument on this issue, which in turns depends on whether tax-exempt status equates to a “grant” or “financial assistance” in light of its accompanying economic benefits. Never before has the federal government viewed tax-exempt status under 501(c)(3) in such sweeping terms.
The court case is Donna Buettner-Hartsoe v. Baltimore Lutheran High School Association (dba Concordia Preparatory School), now pending in the Fourth Circuit Court of Appeals. Former students of Concordia Preparatory School claimed that the school did not properly address their sexual harassment and sexual assault complaints as required under Title IX. But Concordia asserted that it was not subject to Title IX because it does not receive federal funding. The district court rejected Concordia’s argument, reasoning that Title IX did apply because the school received federal aid in the form of tax exemption under Section 501(c)(3). On appeal, the Fourth Circuit is considering whether tax-exempt status alone sweeps a school into the ambit of Title IX.
This article summarizes the fascinating oral argument, featuring four attorneys’ competing theories and rationales for tax exemption under Section 501(c)(3). As essential backdrop, the article first provides Section 501(c)(3)’s basic framework and important historical context, explains Title IX’s contours as a significant federal law guarding against sex discrimination in schools, and notes other litigation prior to Buettner. The key question is whether, and to what extent, government-provided financial advantages under Section 501(c)(3) result in attached strings like Title IX compliance.
Section 501(c)(3) Basics and Historical Background
Section 501(c)(3) tax-exempt status is a wonderful benefit, allowing public charities and private foundations to engage in a plethora of charitable, religious, educational, and other activities consistent with our country’s pluralistic values and commitments, not subject to federal income tax for contributions received. Section 501(c)(3) of the Tax Code confers tax exemption on organizations “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports compensation or for the prevention of cruelty to children or animals” provided that certain other conditions are met.[1] Section 501(c)(3) provides two key benefits: (a) donors may deduct their contributions to such organizations on their annual income tax returns; and (b) exempt organizations’ income (i.e. contributions, grants, program service revenue, etc.) is generally exempt from tax. (Section 501(c)(3) organizations are typically subject to federal income tax only on unrelated business income over a certain threshold.)
Notably, churches, synagogues, mosques, and other houses of worship qualify automatically for Section 501(c)(3) status under Section 508 of the Code. Other organizations like schools, social service organizations, and other charities must affirmatively apply to the IRS for recognition of exemption. All Section 501(c)(3) organizations are subject to the IRS’s oversight, regulations, and potential revocation for noncompliance with applicable legal requirements.
Tax exemption under 501(c)(3) is historically rooted in charitable trust legal principles, public benefit policy considerations, and our country’s long-standing commitment to pluralism. For example, in the landmark Walz decision (concerning property tax exemption), the U.S. Supreme Court recognized Section 501(c)(3) organizations’ generally “beneficial and stabilizing influences in community life.”[2] The Supreme Court addressed similar tax benefits of 501(c)(3) organizations in its Bob Jones decision, which upheld the IRS’s revocation of Section 501(c)(3) status for Bob Jones University because its racial discrimination policies violated “fundamental public policy,” thus preventing the organization from being “operated exclusively for charitable purposes.”[3] In that decision, Justice Powell’s concurring opinion quoted Walz in observing that nonprofit organizations receive tax exemptions because “each group contributes to the diversity of association, viewpoint, and enterprise essential to a vigorous, pluralistic society.”[4]
Notably, the Walz Court distinguished between conferring a direct money subsidy on churches, which would be highly problematic under First Amendment principles, and the historical exemption of churches from government taxation. The Walz Court thus rejected tax exemption as equivalent to a government subsidy “because the government does not transfer part of its revenue to churches, but, instead, merely abstains from demanding that the church supports the state.” The Court thus recognized that tax-exempt status only involves minimal and remote government involvement. Such observations were critically important to the Fourth Circuit panel’s discussion, as addressed below.
Title IX
Title IX refers to the title within the Higher Education Act that prohibits discrimination on the basis of sex in any education program or activity that receives federal financial assistance. As described in the U.S. Department of Education’s website, “Title IX states ‘No person in the United States shall, on the basis of sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any education program or activity receiving Federal financial assistance[.]’ All federal agencies that provide grants of financial assistance are required to enforce Title IX’s nondiscrimination mandate.” (Emphasis added.)
Title IX involves quite costly compliance requirements for schools, as enforced by the Department of Education’s Office for Civil Rights. Students may file discrimination complaints for a myriad of issues including: sexual harassment; the failure to provide equal athletic opportunity; sex-based discrimination in a school’s science, technology, engineering, and math courses and programs; discrimination based on pregnancy; and retaliation for filing complaints or for advocating for related rights.[5] Aggrieved students may file lawsuits if their schools do not sufficiently address such matters. For every complaint filed, a covered school must appoint a Title IX coordinator, an investigator, a decision maker, and an appeals officer,[6] and provide additional training and protocols.
Court Developments Preceding Buettner Oral Argument
Public schools and many private schools receive some type of federal financial assistance, such as federally subsidized school lunch programs, government grants for libraries, and a plethora of other direct government aid. Consequently, Title IX already has an extremely broad reach. The question now is whether the mere fact of tax exemption under Section 501(c)(3) equates to “federal financial assistance” and automatically requires compliance with Title IX (and potentially other federal laws too under similar legal analysis).
That seems like quite a stretch – and one that, until recently, has failed to pass muster. Tax practitioners and law professors have long debated tax subsidy theory and other rationales for exemption under 501(c)(3). This case, and others like it, have brought this issue out of the realm of theory. In 2022, two federal trial courts issued preliminary rulings favoring such expansive Title IX coverage – the Maryland case now on appeal in Buettner, and a second in California, which has now been settled.[7] A third federal trial court (in Arizona) just rejected the argument that tax-exempt status constitutes federal financial assistance for the purposes of Title IX, quickly concluding it does not involve any direct transfer of government funds.[8]
These trial court rulings set the stage well for Buettner, for both how to define the critical terms at stake and the sweeping impact of such a ground-breaking legal interpretation. Does Section 501(c)(3) tax-exempt status equate to such “financial assistance”? And should it?
Buettner Oral Argument
Oral arguments in Buettner lasted forty minutes, packed with concisely worded arguments and peppered with plenty of probing questions from the three-judge panel.
Against Title IX’s Applicability to All Section 501(c)(3) Schools
Starting on behalf of the appellant, Concordia Preparatory School attorney Gregg Viola dove right in with the central question: Does Title IX apply to the school, based solely on its status as a Section 501(c)(3) tax-exempt organization? Seeking reversal of the lower court’s ruling, he argued no. More specifically, he asserted that Section 501(c)(3) does not involve any government contract, federal loan, or other grant of federal financial assistance as legally required for Title IX’s applicability to the School. In other words, Section 501(c)(3) tax-exempt status alone is not enough. Viola distinguished between legislatively provided contracts for federal funds, which require clarity and a “meeting of the minds” such that all parties understand that a contract exists and its resulting obligations.
The judges quickly chimed in, noting that Section 501(c)(3) provides economic benefit in the form of exemption from income tax. However, Viola argued that Section 501(c)(3)’s economic benefit is not equivalent to a loan or similar direct financial assistance as contemplated by Title IX’s statutory language. In the latter situation, federal funds are transferred directly from the government to a Section 501(c)(3) recipient. Not so with tax-exempt status under 501(c)(3). In other words, the mere existence of economic benefit arising from Section 501(c)(3) exemption does not amount to the requisite “financial assistance” under Title IX or other federal law. The Title IX context thus differs from the Bob Jones case.
Next up was attorney Joshua Richards, likewise arguing on behalf of amicus National Association of Independent Schools (“NAIS”) against the application of Title IX to schools that do not receive direct federal funding. Richards cited a variety of cases including Grove City College v. Bell, National Collegiate Athletic Ass’n v. Smith, and even Bob Jones, which addressed questions about direct and indirect aid as recognizable federal “financial assistance.” But, he argued, none of these cases ever implied that Section 501(c)(3) status, by itself, would amount to such “financial assistance.” Richards further warned that such a ruling would carry a “seismic impact,” especially since no principled distinction exists between schools, churches, other religious organizations holding Section 501(c)(3) status.
The judicial dialogue soon shifted to policy questions, such as “what’s wrong” with requiring Title IX compliance? And is the “sky falling in,” as some of the amicus briefs contended, if Title IX’s coverage expanded to all Section 501(c)(3) organizations? In response, Richards explained that Title IX requires a highly prescriptive compliance regime that not only changes with each federal government administration but also involves extensive and expensive requirements along with very significant potential liability. The costs are immense indeed.
One judge then asked about Section 1686 of Title IX, which specifies that a school “receiving federal funds” is still allowed to required sex-segregated living quarters, as an exception from otherwise applicable sex discrimination prohibitions. In response, Richards agreed that the term “receiving federal funds” certainly helps frame the definitional question of what “financial assistance” means for Title IX’s applicability. In other words, such words should be accorded their plain meaning – direct receipt of federal funds should be a precondition for Title IX’s applicability, not some general economic benefit accorded through tax-exempt status.
For Title IX’s Applicability to All Section 501(c)(3) Organizations
Arguing for the students who filed this Title IX challenge, attorney Howard Bashman began by asserting it is “undeniable” that Section 501(c)(3) involves economic benefit. The judges seemed skeptical that such fact was enough for resulting Title IX applicability. One judge asked whether the IRS is a government agency that is empowered to enforce Title IX by revoking an organization’s tax exemption under Section 501(c)(3). She swiftly followed up by asking for the best-case authority for why Section 501(c)(3) amounts to the required grant of financial assistance from the federal government. In response, Bashman cited the 1983 ruling of Regan v. Taxation with Representation, in which the Supreme Court recognized that tax-exempt status involves some degree of tax benefit and upheld Section 501(c)(3)’s lobbying restriction. The judge indicated that a tax benefit is not the same as a tax subsidy. Bashman disagreed, asserting that Section 501(c)(3) status amounts to a tax subsidy.
The dialogue continued with one judge expressing hesitation since no other appellate court has recognized that Section 501(c)(3) status amounts to a federal grant. Bashman conceded the point but then asserted that Title IX itself gives sufficiently clear notice that such tax-exempt status results in its applicability. The judges seemed resistant. One judge stated that she was “hung up” on the fact no such recognition has ever been given, as well as that no IRS enforcement action has ever been taken against a school based solely on its Section 501(c)(3) status? She then noted how odd it is that a law could be “so clear” for so many decades and yet nevertheless present a novel issue for them to resolve. Another judge stated more forthrightly that the decades-long interpretation is that Section 501(c)(3) status – alone – is not enough; some type of grant or other clear federal financial assistance is needed. Expressed bluntly, she asked “how is that,” that Section 501(c)(3) status is equivalent to a grant?
Bashman and the judges then briefly discussed the relevance of the 1984 Grove City case. In that case, the Supreme Court ruled that Title IX requirements only apply to a school’s specific program or activity that was benefitted by grants received by students – but not to the entire school, and not based on the school’s tax-exempts status. Notably, such federal funds went to the school indirectly – through the students’ initial receipt and then payment for school expenses. The school thus benefitted indirectly. Contrasting the pending case, one judge observed that not only is the financial benefit of Section 501(c)(3) status indirect, it is “several steps removed” and ‘really, really indirect.”
Bashman disagreed, stating that because a school does not have to pay any tax on its net income because of its 501(c)(3) status, such retained funds constitute federal financial assistance. The judges remained resistant. One judge expressed concern about the potentially enormous impact of ruling that 501(c)(3) status renders Title IX automatically applicable. Another judge queried, “Can you help me find that line?” Still further, a judge asked why it is important legally to make clear what types of potential liability could result from Title IX, but not necessarily about whether Title IX even applies at all. In other words, if the proverbial strings that come with government assistance are to apply, shouldn’t organizations be aware of such results – knowingly accepting such conditions, especially since federal spending legislation requires clarity for recipients of federal assistance (whether direct or indirect)?
Bashman again disagreed with the judges. The judges continued questioning him, asking now about personal tax deductions and tax credits, indicating that they were “dumbfounded” by his assertions. One judge pushed: “I have more money in my pocket than if the government didn’t take a deduction.” So are tax deductions and tax credits a form of indirect (or even direct) financial assistance or grants? What is the principled distinction here? Bashman responded that tax-exempt organizations must affirmatively seek exempt status, while tax credits and deductions are available through IRS tax returns. The judges seemed unpersuaded, with one judge indicating that the same effect results with tax-exempt status, tax credits, and tax deduction. All involve some degree of financial benefit from the federal government, but no one has asserted that tax credits and tax deductions equate to “financial assistance.”
Attorney Sean Ouellette wrapped up the court session as another amicus counsel. Buttressing Bashman’s arguments, he started by citing Bob Jones and stating that 501(c)(3) status is a monetary benefit, different from personal tax credits and deductions. The judges pushed back. As one judge asked, “What is the rule to apply to decide if tax deductions and credits equate to federal financial assistance”? Ouellette stated that it depends on what Congress intends, and here Congress has intended to offer federal financial assistance through the benefit of Section 501(c)(3) status. Consequently, under his interpretation, Title IX does apply to Section 501(c)(3) organizations based solely on their tax-exempt status – notwithstanding that the sizable economic benefits received through other tax credits and deduction which are, somehow distinguishable.
Implications of Buettner Ruling
Will the Fourth Circuit rule that Section 501(c)(3) tax exemption equates to “financial assistance” and therefore tax-exempt organizations fall subject to Title IX’s regulatory ambit? That seems doubtful based on the three-judge panel’s expressed concerns about the lack of legislative clarity, their hard questions distinguishing between types of tax benefits, and their overall hesitancy to lead any judicial trend on this issue. Additionally, any affirmative ruling upholding this expansion could cause significant constitutional problems, since churches and other houses of worship are Section 501(c)(3) organizations too.[9]
Notably, the Fourth Circuit’s jurisdiction covers Maryland, North Carolina, South Carolina, Virginia, and West Virginia; it is not nationwide. Other litigants may file cases and test the legal waters further. A Fourth Circuit ruling against equating Section 501(c)(3) tax exemption to “federal financial assistance” could possibly put to rest such arguments, or at least help clarify the issues for future litigation.
Section 501(c)(3) tax exemption may be a very favorable privilege indeed, and admittedly it involves significant tax benefit. But does it render tax-exempt organizations subject to Title IX (or perhaps other government regulatory “strings”), not just schools that accept federal government funding? It will be quite instructive to see what the Fourth Circuit decides!
[1] 26 U.S.C. § 501(c)(3). Correspondingly, Section 170 of the Code provides that donations to such tax-exempt organizations qualify for tax deductibility, which is a unique benefit among the Section 501(c) categories. 26 U.S.C. § 170(a)(1).
[2] Walz v. Tax Commission, 397 U.S. 664, 676 (1970). In this landmark ruling, in which the Court upheld the constitutionality of a church’s property tax exemption, the Court recognized the “deeply embedded” importance of government “benevolent neutrality toward churches and religious exercise generally.” See also Trinidad v. Sagrada, 263 U.S. 578 (1924) (focusing on the extent to which commercial activity may in practice be consistent with charitable status: tax exemptions are given “in recognition of the benefit which the public derives”).
[3] For more information about Bob Jones’ articulation of this “fundamental public policy” constraint undergirding Section 501(c)(3) tax-exempt status, see Why Religious Organizations Shouldn't Lose Tax-Exempt Status Based on Public Policy, Post-Obergefell (S. Wagenmaker, Jan. 11, 2018), available at SSRN here.
[4] Bob Jones University v. United States, 461 U.S. 574, 609 (1983).
[5] A fuller list of Title IX issues OCR addresses appears here.
[6] For more information about Title XI’s compliance requirements, see here.
[7] Herrera ex rel. E.H. v. Valley Christian Acad., 616 F. Supp. 3d 1040, 1044, 1053–54 (C.D. Cal. 2022).
[8] See Doe v. Horne (Case No. CV-23-00185-TUC-JGZ; Dec. 11, 2023) (“[T]he comprehensive definition of ‘federal financial assistance’ set out in the Department of Education’s regulation did not include tax-exempt status because the benefit of such status was simply too indirect to constitute federal financial assistance.”) (citing Johnny’s Icehouse, Inc. v. Amateur Hockey Ass’n (N.D. Ill. 2001).
[9] Such implications fall far beyond this article’s scope, but they are nonetheless critical within our country’s constitutional and tax-exempt framework. See our law firm’s blog articles: FEMA is for Churches Too and The Gift of Religious Tax Exemptions, On Balance.
