Paving a Path Between the Campus and the Chapel: a Revised Section 501(c)(3) Standard for Determining Tax Exemptions

• Jurisdiction: United States,Federal
• Publication year: 2019
• Citation: Vol. 69 No. 2

Paving a Path between the Campus and the Chapel: A Revised Section 501(c)(3) Standard for Determining Tax Exemptions

John B. Parker

PAVING A PATH BETWEEN THE CAMPUS AND THE CHAPEL: A REVISED SECTION 501(C)(3) STANDARD FOR DETERMINING TAX EXEMPTIONS

Abstract

Section 501(c)(3) of the Internal Revenue Code grants an exemption from federal income taxes to organizations that are formed for religious purposes. While religious tax exemptions are a deep-rooted principle long embodied in U.S. tax law, issues can arise when a tax-exempt institution engages in discrimination which conflicts with national public policy. The most famous example of this is the case of Bob Jones University v. United States, in which the Supreme Court revoked the tax-exempt status of a religious university for its racially discriminatory policies. The Court found that, because the government had expressed a unified opposition to race discrimination in education for a number of years, an institution that engaged in such discrimination conflicted with national public policy, such that it should not receive tax-exempt status. Now, in the wake of the Supreme Court ruling on the constitutionality of same-sex marriage in Obergefell v. Hodges, advocates for both religious freedom and LGBT rights are questioning whether this "public policy doctrine" could now apply to discrimination based on marital status, or even sexual orientation in general. However, legal scholars have shown that such an application of the doctrine may be problematic when implemented outside of race discrimination.

Although the public policy doctrine's application is limited, the Supreme Court still correctly observed in Bob Jones that discrimination of a minority group in education harms the overall educational process. This Comment argues that Section 501(c)(3) should be amended to require an institution filing for tax-exempt status to designate the "primary purpose" for which it is claiming an exemption. That primary purpose will then have priority over any secondary qualifying purpose for tax-exempt purposes. This would allow primarily "religious" institutions, such as churches and synagogues, to adhere to their religious beliefs regarding marriage and sexuality while retaining their exemption. Primarily "educational" institutions, however, would be unable to retain policies and practices that stifle discussion of homosexual identity and the ethics of same-sex marriage, as these practices do not further the purpose of an "educational" institution to provide a "full and fair exposition" of issues.

[Page 322]

Introduction.............................................................................................323

I. Background of 501(c)(3) Tax Exemptions.................................327

A. History of 501(c)(3) Exemptions .............................................. 328
B. Tax Exemption Ambiguities ...................................................... 330
C. The Conflicting Rationales of "Charities"............................... 332

II. Bob Jones and its Inapplicability to Sexual Orientation Discrimination...............................................................................335

A. Circumstances Leading to Bob Jones....................................... 336
B. Bob Jones University v. United States...................................... 337
C. The Difficulty in Applying Bob Jones to Sexual Orientation Discrimination .......................................................................... 341

III. Accounting for Education: A Revised 501(c)(3) Standard ... 346

A. Other Proposed Solutions......................................................... 348
B. A Revised Standard: The Modified "Primary Purpose" Requirement.............................................................................. 350
C. Potential Issues......................................................................... 355

Conclusion.................................................................................................356

[Page 323]

Introduction

The Internal Revenue Code (the "Code") has long contained an internal tension that is rising to the surface again in dramatic form. On the one hand, organizations that are formed for religious purposes have always been granted an exemption from federal income taxes.¹ On the other, the Internal Revenue Service (IRS) and the Supreme Court have established that exemption can be lost when an institution engages in discrimination that conflicts with national public policy.² In the context of discrimination based on same-sex marriage and sexual orientation, this tension raises the issue of how the government, as the author and enforcer of the Code, balances two of its broadest commitments to its citizens: freedom to practice one's religion and freedom from discrimination. Because some religious organizations receiving tax exemptions espouse discriminatory views based on sexual orientation and marital status, the government is left caught between a rock and a hard place, forced to choose between enforcing its constitutional mandate to ensure equality for its citizens and its mandate to protect free speech, freedom of association, and freedom of religion.³

This issue has taken on a new urgency in the wake of the Supreme Court's 2015 decision in Obergefell v. Hodges.⁴ In this landmark decision, the Court held that the Due Process and Equal Protection Clauses of the Fourteenth Amendment guaranteed same-sex couples the right to marry.⁵ While the decision was heralded as the beginning of "a new era in human dignity,"⁶ many in the legal field were quick to point out that the decision left many questions unanswered.⁷ A significant one was how to reconcile federal tax benefits for organizations who continue to discriminate against same-sex marriage and

[Page 324]

practices despite the Court's ruling.⁸ Prior to the Obergefell decision, the discussion around the issue had been merely hypothetical, since there was no national consensus that same-sex marriage was a fundamental right.⁹ Once Obergefell was decided, however, proponents of same-sex rights were given new foothold for their position that organizations discriminating based on same-sex marriage, or even sexual orientation more broadly, should not receive any kind of federal government benefit.¹⁰

The most famous example of public policy clashing with tax exemptions is Bob Jones University v. United States, where the Supreme Court determined that tax-exempt status was properly revoked when a religious educational institution implemented racially discriminatory policies and practices.¹¹ The Court held that the IRS may revoke the tax-exempt status of an organization if their actions violate "established public policy."¹² This revocation occurred even though the University's prohibition was based on its religious beliefs.¹³ Now, in the wake of the Court's decision in Obergefell, advocates for the LGBT community are insisting that the "public policy doctrine" from Bob Jones should be applied to discrimination based on marital status and even sexual orientation generally.¹⁴

[Page 325]

Conversely, many in religious organizations, particularly religious schools, are deeply unsettled by the decision and worry that the Bob Jones precedent could be used to revoke their tax-exempt status, as well as the corresponding tax deduction for charitable donors, if the IRS were to determine, in light of Obergefell, that sexual orientation discrimination violates national public policy.¹⁵ This issue is even more pressing given the Bob Jones Court's failure to delineate any sort of test for what constitutes an "established public policy."¹⁶ The Obergefell Court was clear that the decision would not infringe upon religious groups' right to adhere traditional views of marriage,¹⁷ and the IRS Commissioner has released a statement since the decision that "[t]he IRS does not view Obergefell as having changed the law applicable to Section 501(c)(3) determinations or examinations."¹⁸ But proponents on both sides of the issue are still preparing for the possibility that Obergefell is a sign of things to come, and that subsequent shifts in public perceptions of marriage and sexual orientation could lead to tax exemptions being revoked in the future.¹⁹

In the context of charitable deductions, this concern comes at a time when giving is more popular than ever. In 2017, charitable donations in the United States reached a record high for the third straight year, with over four hundred billion dollars being donated to charitable causes.²⁰ Giving to religious organizations, which have historically received the largest share of charitable donations, increased almost three percent; meanwhile, giving to educational institutions rose six percent.²¹ A loss of tax exemptions and deductions for donors, even for a small number of these schools and other institutions, would mean an enormous loss to organizations that have traditionally counted on these

[Page 326]

donations and benefits to keep their doors open.²² The timing of this debate could not be more crucial.

This Comment will examine current doctrine and theories on both religious and educational tax exemptions and argue that, in light of the Obergefell decision and the opportunity it provides for debate and discussion on issues of same-sex marriage and sexual orientation in the public forum, Section 501(c)(3) should be amended to strike a more appropriate balance between the public benefit offered by religious schools and protecting against discrimination based on sexual orientation. Part I will briefly examine the history and ambiguities of religious tax exemption and Section 501(c)(3), as well as the debate over the proper definition of a "charitable" organization for the purposes of the statute. Part II will summarize the decision in Bob Jones and discuss why it is an inappropriate precedent for a religious school that discriminates based on sexual orientation. Part III will...