On March 27, 2024, in a long-awaited decision that carries major implications for 501(c)(3) organizations and independent schools, the Fourth Circuit held that an independent school’s 501(c)(3) tax-exempt status did not constitute federal financial assistance for purposes of Title IX of the Education Amendments of 1972.
Read on to learn why educational and other nonprofit institutions should take note of the Buettner-Hartsoe opinion, which sets an important precedent for how tax-exempt status is interpreted in the context of Title IX and other laws that depend on the receipt of federal funding.
Certain federal laws — including Title IX of the Education Amendments of 1972, Title VI of the Civil Rights Amendment of 1964 and others — condition applicability on the receipt of federal funds. Thus, historically, educational institutions and other nonprofits have avoided application of these laws by declining to accept “federal financial assistance.” 20 U.S.C. § 1681(a). Independent schools and other nonprofit educational institutions that hold tax-exempt status under 26 U.S.C. § 501(c)(3) have long operated with the understanding that their tax-exempt status would not subject them to Title IX. However, this understanding recently came under challenge, as plaintiffs across the nation have attempted to argue that an institution’s 501(c)(3) status should qualify as “federal financial assistance” for purposes of Title IX.
In August 2022, McGuireWoods reported on a decision in which the U.S. District Court of Maryland permitted a plaintiff’s Title IX claims against an independent school to proceed past a motion to dismiss because of the school’s tax-exempt status under § 501(c)(3). The district court held that § 501(c)(3) status was a form of congressional subsidy, and therefore constituted federal financial assistance under Title IX. After that decision, the court certified an interlocutory appeal on the issue of whether § 501(c)(3) status constitutes receiving “federal financial assistance” for Title IX purposes. The Fourth U.S. Circuit Court of Appeals granted the school’s interlocutory appeal in Buettner-Hartsoe v. Baltimore Lutheran High School Association, d/b/a Concordia Preparatory School, et al.
On March 27, 2024, the Fourth Circuit reversed the district court’s decision. The appeals court agreed with the school’s position that maintaining its tax-exempt status was not synonymous with receiving federal financial assistance. The court analyzed the legislative context and the language of Title IX in deciding that although tax exemption is a tax benefit, § 501(c)(3) status is not “federal financial assistance” for Title IX purposes.
In examining the phrase “federal financial assistance,” the court noted that “assistance” means “aid, help, or support,” and that these terms connotate financial grants. The court found that a tax exemption is the withholding of a tax burden, and not the “affirmative grant of funds.” The court thus rejected the idea that a tax-exempt status was an indirect grant of financial assistance. The court recognized that organizations with a tax-exempt status never actually receive federal funds — instead, the tax exemption merely “allows organizations to keep the money they otherwise would owe in income tax.” The court further rejected the notion that 26 U.S.C. § 170’s charitable contribution deduction (after donations to 501(c)(3) organizations) constitutes federal financial assistance for Title IX purposes.
The Fourth Circuit’s holding in Buettner-Hartsoe sets an important precedent for how tax-exempt status is interpreted in the context of Title IX and other laws that depend on the receipt of federal funding. Consistent with longstanding historical understanding, educational and other nonprofit institutions in the Fourth Circuit will not be subject to Title IX just because of their § 501(c)(3) tax-exempt status. While this decision may serve as persuasive authority outside the Fourth Circuit, plaintiffs continue to pursue similar arguments across the country, and tax-exempt institutions outside the Fourth Circuit should consult with counsel to determine whether federal anti-discrimination laws like Title IX may apply to them.
McGuireWoods continues to monitor updates in this space. Please contact any of the authors of this legal alert if your organization faces questions about the applicability of federal anti-discrimination laws.