Published: McLane.com
April 3, 2024
Independent schools recently received some much needed guidance regarding whether they might be obligated to comply with Title IX—and potentially other federal non-discrimination laws—simply because they are tax-exempt entities: On March 27, 2024, the U.S. Circuit Court of Appeals for the 4th Circuit ruled that an independent school's mere existence as a tax-exempt entity does not constitute the receipt of federal financial assistance that would obligate the school to comply with federal non-discrimination laws.
The 4th Circuit case, Buettner-Hartsoe, et al. v. Baltimore Lutheran High School Association, was initiated by several former students of a Maryland independent school in 2020. The plaintiffs alleged a variety of conduct of harassment based on gender, but took a novel approach in bringing the lawsuit—the plaintiffs asserted that the School was covered by Title IX because of its 501(c)(3) tax-exempt status. In a bombshell ruling in 2022, the federal district court in Maryland agreed. We wrote about that case, and the decision issued by the federal district court, here. That decision was appealed to the 4th Circuit, resulting in last week's illuminating decision.
The fulcrum of the 4th Circuit Court's decision concerned the interpretation of the phrase, "receiving federal financial assistance," a definition which is not explicitly contained in Title IX. This is because Title IX states that no person shall, on the basis of sex, be excluded from participation in, be denied the benefits of, or be subject to discrimination under any education program or activity receiving federal financial assistance. Accordingly, Title IX applies only to education programs which receive financial assistance from the federal government.
The 4th Circuit was tasked with balancing whether receipt of federal funds includes indirect means such as accepting the tax benefits afforded to an entity with 501(c)(3) tax-exempt status, against whether receipt of assistance is limited to direct actions such as accepting grants or loans, like a PPP loan. Here, the Court considered the purpose and impact of what a tax-exempt status means. The Court explained that while a tax exemption is similar to a subsidy, as the corporation benefiting from the exemption is able to keep the money it would have otherwise paid to the federal government, it is not identical. In borrowing from Supreme Court precedent, the 4th Circuit reasoned that "[a] subsidy involves the direct transfer of public monies to the subsidized enterprise and usevs resources exacted from taxpayers as a whole. An exemption, on the other hand, involves no such transfer."
The result of the Court's analysis: 501(c)(3) status does not constitute receipt of federal financial assistance. This ruling has larger implications than simply determining that 501(c)(3) tax status does not require an independent school to abide by Title IX. Indeed, the case suggests that any financial assistance that reduces an entity's financial obligation, rather than providing the entity with funds, does not constitute receipt of assistance. Such an interpretation may lead to more creative ways for programs to utilize the tax code for the benefit of their students.
Of course, this ruling is only binding within the 4th Circuit, which includes Maryland, Virginia, West Virginia, North Carolina, and South Carolina. This means that the majority of independent schools in the nation are not directly affected. While the decision will certainly be a signpost for future decisions within the other states, it is yet to be determined which way those cases may turn out. For example, the 9th Circuit has yet to hear a case specifically addressing whether tax-exempt status constitutes receipt of financial aid for the purposes of implicating Title IX. This is of importance, as a ruling in California back in July 2022 held that a religious school's tax-exempt status constituted federal financial assistance within the meaning of Title IX. On the other hand, Arizona, which is also within the 9th Circuit, recently found that exemption from certain federal taxes does not constitute federal financial assistance, similar to the 4th Circuit's ruling. This sets the stage for a future circuit-wide decision concerning this issue.
It is also worth keeping an eye on new Title IX regulations, which are expected in October of 2024, after being postponed three times.
Given the spectrum of opposing rulings referenced above, we strongly recommend that independent schools continue to closely monitor this issue moving forward. Should you have any questions or need assistance, please reach out to our team of trusted education attorneys.
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