This is the first of two blog posts focusing on restrictions on 501(c)(3)s in engaging in illegal activity or activity that violates fundamental public policy.
Bob Jones University recently announced that it will regain its tax-exempt 501(c)(3) status on March 1, 2017. The University lost its tax exemption more than 30 years ago in a landmark Supreme Court case, Bob Jones University v. United States, 461 U.S. 574 (1983), due to racially discriminatory policies that it had at the time. This case is best-known for the adoption of the “Public Policy Doctrine” in the context of Section 501(c)(3) tax-exempt organizations, which is getting debated these days in the context of same-sex marriage.
Racial Discrimination. By way of background, prior to 1970 universities were routinely granted tax exemptions as educational institutions despite having admissions policies that were racially discriminatory. Then, due to a revision of tax regulations in 1970, the IRS began to require that universities have admissions policies that were not racially discriminatory in order to qualify for tax exemption under Section 501(c)(3). Bob Jones University was granted its tax exemption under pre-1970 regulations and did not admit black students prior to 1971. After the new regulations were enacted, the University began to admit unmarried black applicants, but continued to promulgate policies that denied admission to interracially married students or those that advocated for interracial marriage, and prohibited interracial dating by its faculty, staff or students. The IRS revoked the University’s tax exemption in 1976 based upon these racially discriminatory policies and the University responded by filing a series of lawsuits, which eventually resulted in the Supreme Court hearing the case in 1982. Bob Jones University argued that the revocation of its tax exemption violated the University’s free exercise of religion rights under the First Amendment. However, the Supreme Court ultimately concluded that the government has a fundamental overriding interest in eradicating racial discrimination in education, and that this interest substantially outweighs whatever burden the denial of tax benefit places on the University’s exercise of religious beliefs.
The Supreme Court’s decision in Bob Jones was a landmark decision because the Supreme Court upheld the IRS’s position that entitlement to tax exemption depends on meeting certain common law standards of charity and public policy not specified by Congress when it enacted Section 501(c)(3). First enumerated as a common law tenant of the law of Trusts, the Public Policy Doctrine holds that tax exempt 501(c)(3) organizations must serve a charitable public purpose in the common law sense and cannot be operated in a manner contrary to established public policy. The Court noted that over the previous 25 years, every Supreme Court decision and many federal statutes and executive orders displayed a firm national policy to prohibit racial segregation and discrimination. Specifically, the Supreme Court’s decision in Brown v. Board of Education, 347 U.S. 483 (1954), signaled an end to racial discrimination in primary and secondary education. Thus, the Supreme Court held that the University’s policies practicing racial discrimination were contrary to established public policy and the IRS’s revocation of Section 501(c)(3) tax exemption was warranted. It is important to note, however, that the Supreme Court specifically noted that its opinion regarding the Public Policy Doctrine in Bob Jones addressed only educational 501(c)(3)s and did not consider churches or purely religious organizations.
Marriage Equality. The application of the Public Policy Doctrine outside of racial discrimination in the educational 501(c)(3) context is less clear especially given the lack of case law on the Doctrine since Bob Jones. Specifically many practitioners have pondered the applicability of the Doctrine to marriage equality since the Supreme Court ruled in Obergefell v. Hodges, 135 S. Ct. 2071 (2015), that prohibition of same-sex marriage is unconstitutional on equal protection and due process grounds. The Supreme Court’s ruling requires states to issue marriage licenses and recognize same-sex unions on par with opposite-sex unions under the Fourteenth Amendment, which would appear to establish that marriage equality is a matter of fundamental public policy. This ruling has left 501(c)(3) organizations that oppose marriage equality based on religious grounds wondering whether their exemptions are now at risk for challenge by the IRS under the Public Policy Doctrine.
At least one tax-exempt law practitioner, Jonathan T. McCants, believes that the Doctrine is more narrow and unlikely to be applied in a context where there is not unanimous support for a certain public policy position. McCants argues in “Does Bob Jones Support Exemption Revocations After Obergefell?” in the journal Taxation of Exempts that the public policy against racial discrimination was uniquely crystallized and that the policy against same-sex marriage discrimination has not been established to a level where 501(c)(3) revocation or denial would be justified under Bob Jones analysis:
Bob Jones does not provide the IRS with discretion to make judgment calls on what is and is not public policy. The Bob Jones Court noted that all branches of government were in unanimous agreement regarding this national policy. In addition, many of the cases striking down racial discrimination were unanimous (Brown v. Board of Education, Loving v. Virginia). On the issue of same-sex marriage, the people, the respective branches of government, and indeed the Court itself remains sharply divided.
However, Mr. McCants’ argument does beg the question of whether marriage equality will eventually crystallize to the point of being fundamental public policy. After all, Bob Jones was decided thirty years after Brown v. Board of Education. In any case, given the express limitation contained in Bob Jones, churches and purely religious 501(c)(3) organizations will likely not need to worry that their opposition to marriage equality will violate the Public Policy Doctrine. For all other 501(c)(3)s, however, the future of obtaining or retaining tax exemption for organizations that espouse opposition to marriage equality is far less certain.
Leaffer Law Group will continue to monitor developments regarding the application of the Public Policy Doctrine and whether it factors into IRS decisions on exempt status for organizations that advocate against, or disallow, same-sex marriage. In the meantime, be sure to check out next week’s post on illegal activity by exempt organizations, in the context of providing safe harbor to undocumented immigrants.