In a particularly interesting feat of legal logic, two federal courts have determined that countless U.S. nonprofits, including schools and, most especially, religious schools, are subject — by way of their tax-exempt status — to aggressive federal intrusions on their character and policies.
Such intrusions could mean, among other things, forced adherence to government-endorsed directives regarding sexual orientation and gender identity, including the use of students’ preferred pronouns and admission of boys to girls’ locker rooms and athletic teams, even for private institutions whose religious beliefs preclude such policies.
If the two courts’ surprising decisions are upheld and adopted more broadly, they will have significant adverse consequences for America’s not-for-profit organizations, especially schools.
The courts (in California and Maryland) have held that tax-exempt status constitutes “federal financial assistance” for purposes of Title IX of the Education Amendments of 1972, thus potentially subjecting thousands of schools and other nonprofits to Title IX’s requirements for the first time. The courts’ rationale plausibly extends to a number of additional federal laws, potentially magnifying the unfavorable impact of the courts’ decisions.
In Buettner-Hartsoe v. Baltimore Lutheran High School Association, five female former students alleged that their private school failed to prevent and address the sexual assault and verbal sexual harassment they experienced on campus. They asserted that the school’s conduct constituted sex discrimination in violation of Title IX and state law.
In E.H. v. Valley Christian Academy, a female public high school student, claiming violations of Title IX and various state laws, sued a California Christian high school that declined to play full-contact tackle football against her and her school’s team.
Title IX only applies to education programs or activities that receive federal financial assistance. In each case, the court accepted the plaintiffs’ contention that the nonprofit schools received federal financial assistance and were thus subject to Title IX.
What funding did they allege the schools received? Grants? Low-interest loans? Contracts? No. Instead, they claimed that the schools took on all the obligations of Title IX simply because their nonprofit status and charitable character exempted them from federal income tax. These decisions contradict virtually all available precedent.
Department of Education regulations list various kinds of aid that qualify as federal financial assistance, including scholarships, grants, and loans. Tax-exempt status is conspicuously absent.
The Department of Justice has declared that “[t]ypical tax benefits—tax exemptions, tax deductions, and most tax credits—are not considered federal financial assistance.” An exhaustive May 2022 Congressional Research Service report entitled “Federal Financial Assistance and Civil Rights Requirements” does not even mention tax-exempt status as a potential trigger for the application of Title IX and other nondiscrimination requirements. And only a couple of older court decisions suggest that tax-exempt status might qualify as federal financial assistance.
Compounding their errors, neither court grappled with the fact that the Department of Education regulation defining federal financial assistance plainly states that aid qualifies only if it is “authorized or extended under a law administered by the Department [of Education].” To state the obvious, the IRS — not the Education Department — administers the laws governing tax-exempt status.
The vast majority of private K-12 schools in the United States do not receive federal grants, loans, or contracts. Until now, they have been confident that they are not recipients of federal financial assistance and thus not subject to the multitude of laws, regulations, and “guidance” federal agencies impose on such recipients. Indeed, a small number of institutions of higher education — including Grove City and Hillsdale Colleges — intentionally eschewed participating in federal student aid programs precisely to avoid federal government intrusion into their internal affairs.
If these rulings stand up on appeal and spread to other jurisdictions, everything will change. These schools and countless other nonprofits will face a choice: either give up their tax-exempt status or take on the burdensome obligation of complying with a host of federal laws and regulations for the first time.
Schools and other nonprofits newly subject to these statutes would face comprehensive regulation of their activities — including both student and employee relations. They will incur large compliance costs. And they could encounter aggressive enforcement efforts by both federal bureaucrats and agenda-driven activist organizations.
The application of Title IX will create problems for a multitude of schools that previously did not have to consider that law’s demands. The Biden administration has interpreted Title IX’s ban on sex discrimination to reach sexual orientation and gender identity. And it has declared that schools commit gender identity discrimination when they decline to allow boys to participate in girls’ sports, to grant access to sex-separated private spaces like locker rooms on the basis of biology rather than gender identity, or to refer to individuals who identify as the opposite sex by their “preferred pronouns.”
To be sure, Title IX includes a robust religious exemption. But the Biden administration is currently contemplating the repeal or revision of existing helpful regulations that reflect Congress’ intention to fully protect religious schools. In other words, Title IX’s religious exemption may not be so robust for much longer. And Title IX’s religious exemption does nothing to protect secular schools that object to allowing males to participate in female sports or to access girls’ private spaces.
What can be done? First, we can expect the schools in the two cases to appeal the rulings against them. We can hope that they will prevail — and that no other courts will follow the lead of these two erroneous decisions. In theory, the Supreme Court could eventually address and favorably decide this issue. But it would take years — with a lot of problems in the interim — for that to happen.
Congress should consider taking action. It never intended mere tax-exempt status to impose the onerous burdens of laws like Title IX on nonprofits. It should consider adopting legislation clarifying that “federal financial assistance” does not include tax-exempt status. Protecting nonprofits should be a bipartisan matter.
What’s more, the agencies that enforce Title IX and other conditions on federal financial assistance should make clear that they do not intend to follow these courts’ erroneous interpretation of the law. America’s nonprofits need the agencies to restore the certainty they’ve enjoyed. Title IX isn’t just about avoiding discrimination; it imposes a host of affirmative obligations. America’s nonprofits need to know whether they need to comply for the first time with these requirements.
Agencies can provide this sort of needed certainty through rulemaking, case adjudication, sub-regulatory guidance, and the simple exercise of restraint.
If neither Congress nor the agencies respond appropriately, litigation may provide another avenue to protect the interests of America’s not-for-profit organizations. But the easiest solution would be for the appellate courts to reverse the Maryland and California courts — and to do so soon.