On March 27, 2024, barely two months after hearing oral argument, the federal Fourth Circuit Court of Appeals issued its decision in Donna Buettner-Hartsoe v. Baltimore Lutheran High School Association,resoundingly rejecting the argument that Title IX applies to all Section 501(c)(3) organization solely on the basis that tax-exempt status could constitute receipt of “federal financial assistance.” Never before has the federal government viewed tax-exempt status under 501(c)(3) in such sweeping terms. The Buettner ruling reflects a strong judicial refusal to render this drastic change to our country’s longstanding tax framework. While the court’s jurisdiction covers only Maryland, North Carolina, South Carolina, Virginia, and West Virginia, its 14-page decision provides an excellent explanation of why such legal argument fails.
Our law firm’s February 27, 2024, blog article provides an analysis of the Court of Appeals’ oral argument along with key background on Section 501(c)(3) basics and historical background, Title IX’s anti-discrimination scope and school, applicability, and related court developments. This article addresses key points from the Fourth Circuit’s recent ruling.
The Court of Appeals first provided relevant factual background, noting that the case involves allegations of sexual harassment by a student at a private school, which does not accept federal education funding. The appellate court further identified the case’s procedural posture, on an interlocutory (intermediate) appeal from the trial court’s denial of the school’s motion to dismiss. The school had asserted that since it did not receive federal funding, Title IX could not apply. The trial court held, however, that the school’s Section 501(c)(3) – alone – constituted federal financial assistance for purposes of Title IX. The school appealed.
Turning to the issue of whether the trial court’s holding was legally correct or not, the Court of Appeals started with Title IX’s language itself and “the ordinary meaning of the words it uses.” Using various dictionary references, the court determined that the word “receive” means “to take,” “to accept” and “to come into possession of (something).” Additionally, the court determined that the word “assistance” means “aid,” “help,” or “support.” The court further identified “financial” as contemplating “monetary receipts and expenditures,” which “indicates a flow of funds.” Based on such linguistic common sense, the court concluded that Title IX’s operative phrase “receiving federal financial assistance” contemplates the transfer of funds from the federal government to an entity (e.g., a school). That is not the case with Section 501(c)(3).
The court then addressed prior judicial precedent involving indirect federal financial assistance. As it noted, the Supreme Court held in Grove City College v. Bell that “receiving” included receiving federal grants through indirect means. Significantly, the college received federal aid – albeit through an intermediary. The court contrasted the situation here from Grove City, finding Section 501(c)(3) merely confers a benefit – not any receipt of federal funds (whether direct or indirect).
The court moved on to a brief explanation of Section 501(c)(3) tax exemption. Noting the deep historical basis for charitable tax exemption, the court clarified that “tax exempt status is a tax benefit” (citing Bob Jones Univ. v. U.S.). The court further explained:
Tax exempt organizations keep the amount of tax they would have paid on their income. And by exempting organizations from tax, “all taxpayers are affected” because “other taxpayers can be said to be indirect and vicarious donors” (citing Bob Jones again). But even though “exemptions and deductions . . . are like cash subsidies,” they are not “in all respects identical” (citing Regan v. Tax’n with Representation of Wash.). “A subsidy involves the direct transfer of public monies to the subsidized enterprise and uses resources exacted from taxpayers as a whole. An exemption, on the other hand, involves no such transfer” (citing Walz v. Tax Comm’n of New York).
Against the backdrop of dictionary definitions, prior court rulings, and the nature of Section 501(c)(3) status, the court then announced it’s decision on whether 501(c)(3) status equates to “receiving federal financial assistance” for Title IX purposes with a concise answer, “we think not.” As the court observed, Title IX has never been applied in such a way over its fifty-year history: “And for good reason.” Explaining further, “[t]ax exemption . . .is the withholding of a tax burden, rather than the affirmative grant of funds.
The court continued its analysis, expressly rejecting the argument that tax exemption is akin to indirect grants (as involved in Grove City); “We are unconvinced.” In Grove City, there was a grant of federal aid to the school, just received through indirect means. Not so with Section 501(c)(3) status:
In contrast, with tax exemption, no funds actually change hands. Tax exemption merely allows organizations to keep the money they otherwise would owe in income tax. Therefore, tax exemption is distinguishable from the federal grants in Grove City as tax exemption is an indirect benefit, as opposed to federal financial aid through indirect means.
Last, the court likewise rejected the argument that Section 501(c)(3) allowance for deductibility of donors’ charitable contributions (per Section 170 of the Internal Revenue Code) is like the indirect grants in Grove City. Far from it! As the court recognized, Grove City involve federal funds transferred – through students – to the college. But here:
[D]onors do not actually receive any federal funds by claiming a charitable deduction. Instead, they are merely allowed to donate the full pre-tax amount of their donation. Thus, the charitable contribution deduction is not federal financial assistance for Title IX purposes. And even if it were, any benefit that [the school] receives by donors potentially donating more after claiming § 170’s charitable contribution deduction is far too attenuated to constitute “receiving” federal financial assistance.
The Fourth Circuit’s decision provides a well-reasoned legal analysis of why Section 501(c)(3) does not amount to “federal financial assistance” sufficient to render all tax-exempt organizations subject to Title IX. It is possible that the litigants will appeal to the U.S. Supreme Court. For now, this decision should be quite instructive for schools, other Section 501(c)(3) organizations (including houses of worship, which may hold additional religious liberty interests), and those seeking to assert similar legal arguments firmly rejected by this appellate court.
