Proof of Nondiscrimination in Private Schools
By Richard R. Hammar, J.D., LL.M., CPA
© Copyright 1991, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference code: m65
In 1971, a federal district court in the District of Columbia ruled that the Internal Revenue Code “does not contemplate the granting of special Federal tax benefits to . . . organizations . . . whose organization or operation contravene Federal public policy.”1 The court claimed to have discovered a “Federal public policy against support for racial segregation of schools, public or private,”2 and accordingly concluded that the provisions of the Code granting federal tax exemptions to charitable organizations “can no longer be construed so as to provide to private schools operating on a racially discriminatory premise the support of the exemptions and deductions which Federal tax law affords to charitable organizations and their sponsors.”3
In 1971, the IRS ruled that a private school “not having a racially nondiscriminatory policy as to students is not `charitable' . . . and accordingly does not qualify as an organization exempt from Federal income tax.”4 The IRS subsequently issued two revenue procedures that gave detailed guidelines for determining whether a particular private school is in fact engaged in racial discrimination.5 Revenue Procedure 75--50 stipulates that “[a] school must show affirmatively both that it has adopted a racially nondiscriminatory policy as to students that is made known to the general public and that since the adoption of that policy it has operated in a bona fide manner in accordance therewith.” Specifically, Revenue Procedure 75--50 states that a private school must
1. Include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy toward students.
2. Include a statement of its racially nondiscriminatory policy toward students in all its brochures and catalogs dealing with student admissions, programs, and scholarships.
3. Make its racially nondiscriminatory policy known to all segments of the general community served by the school through the publication of a notice of its racially nondiscriminatory policy at least annually in a newspaper of general circulation serving all racial segments of the community,6 or through utilization of the broadcast media to publicize its nondiscriminatory policy if this use makes such nondiscriminatory policy known to all segments of the general community.7 However, such notice is not required if one or more of the following conditions is satisfied:
a. During the preceding three years the enrollment consists of students at least 75 percent of whom are members of the sponsoring religious denomination or unit and the school publicizes its nondiscriminatory policy in religious periodicals distributed in the community, provided that if the school chooses to advertise in newspapers of general circulation, then it must comply with the notice requirements for newspapers.b. The school customarily draws a substantial percentage of its students from around the world, across the nation, or throughout a large geographic section or sections of the United States and follows a racially nondiscriminatory policy toward students that is published in all brochures and catalogs dealing with student admissions, programs, and scholarships.
c. The school draws its students from local communities and follows a racially nondiscriminatory policy toward students and demonstrates that it follows a racially nondiscriminatory policy by showing that it currently enrolls students of racial minority groups in meaningful numbers.
4. Be able to show that all of its programs and facilities are operated in a racially nondiscriminatory manner.
5. Be able to show that all scholarships or other comparable benefits are offered on a racially nondiscriminatory basis. Their availability on this basis must be known throughout the general community being served by the school and should be referred to in the published or broadcast notices of nondiscriminatory policy.
6. Certify annually to the IRS that it has satisfied all the preceding requirements. The annual certification is accomplished by filing a Form 5578 with the IRS not later than May 15 for the preceding year.
In 1976, the United States Supreme Court held that private schools may not employ racially discriminatory admissions criteria.1 In so holding, the Court relied upon a federal statute2 stipulating that “[a]ll persons within the jurisdiction of the United States shall have the same right . . . to make and enforce contracts as is enjoyed by white citizens. . . .” The Court acknowledged that it was not deciding the issue of the legality of racially discriminatory admissions policies based upon religious beliefs. This narrower question was resolved by the Court in 1983 in the Bob Jones University decision.3 In Bob Jones, the Court upheld the authority of the IRS to revoke the tax--exempt status of Bob Jones University on the basis of the school's prohibition of interracial dating and marriage, despite the school's claim that its policies were founded on biblical principles. The Court agreed with the university that federal tax law contains no express requirement that tax--exempt organizations refrain from racial discrimination. However, the Court concluded that it was the intent of Congress that “entitlement to tax exemption depends on meeting certain common law standards of charity—namely, that an institution seeking tax--exempt status must serve a public purpose and not be contrary to established public policy,” and that it provide a benefit to society.4 The Court then referred to an “unbroken line of cases” that “establish beyond any doubt” its view that “racial discrimination in education violates a most fundamental national public policy” without conferring a public benefit.5 As a result, the university's ban on interracial dating and marriage, which the Court found to be a form of racial discrimination,6 disqualified it for tax--exempt status.
In rejecting the university's contention that only Congress and not the IRS could “amend” federal tax law by inserting the “public policy” requirement, the Court referred to the “broad authority” vested in the IRS to interpret the laws enacted by Congress:
In [the federal tax law] Congress has identified categories of traditionally exempt institutions and has specified certain additional requirements for tax exemption. Yet the need for continuing interpretation of those statutes is unavoidable. For more than 60 years, the IRS and its predecessors have constantly been called upon to interpret these and comparable provisions, and in doing so have referred consistently to principles of charitable trust law.7
The Court also found it relevant that Congress, although aware of lower court and IRS rulings denying tax--exempt status to private schools that engaged in racial discrimination, did nothing to legislatively overrule those rulings.
Finally, while acknowledging that the university's discriminatory practice was based on a genuine belief that the Bible forbids interracial dating and marriage, the Court concluded that those beliefs were “substantially outweighed” by the government's “compelling interest” in “eradicating racial discrimination in education.” Further, the Court observed that while its ruling inevitably would have an adverse impact on the university, it would not prevent the university from observing its religious beliefs. The Court emphasized that it was dealing with religious schools, and not with churches or “other purely religious institutions,” and that “sensitive determinations” by the IRS regarding the effect of an organization's activities on public policy “should be made only where there is no doubt that the organization's activities violated fundamental public policy.”8
In summary, racially discriminatory religious schools are ineligible for tax--exempt status under the Internal Revenue Code because they violate a fundamental public policy and confer no public benefit. The Court left unanswered the question of whether an organization providing a public benefit could be denied tax--exempt status if certain of its activities violated a law or public policy. Consider the practice of the Catholic Church in barring women from the priesthood. It is doubtful that the church's tax--exempt status is jeopardized by the Bob Jones decision, since (1) the Catholic Church undeniably provides a variety of public benefits, which distinguishes it from Bob Jones University under the Court's reasoning; (2) it cannot be said that the church's practice is without doubt “contrary to a fundamental public policy,” especially in view of the failure of the “equal rights amendment” to become a part of the federal Constitution; (3) the church's practice relates to the relationship between church and clergy, which the courts have consistently found to be exempt from governmental regulation;9 and (4) the church's practice relates to a fundamental and essential expression of its religious tradition, and therefore the exercise of its religion would be materially impeded by a requirement that it admit women to the priesthood.
In 1978, the IRS proposed a set of controversial guidelines to be used in determining whether a private school was guilty of racial discrimination. These guidelines proposed various “presumptions” and met with widespread criticism. Congress has since taken action prohibiting the IRS from using any funds to implement the guidelines.
For related information on this topic see the following articles:
Incorporation and Tax Exemption of Private Religious Schools
Right to Attend Private Schools
The Distinction Between Public and Private Education
Discharge and Discipline of Students of Private Schools
Discharge and Discipline of Teachers
Application of Federal Labor and Discrimination Laws to Private Schools
Government Regulation of Private Schools
Zoning Laws and Private Schools
Safety and Health Regulations for Private Schools
Taxation of Private Religious Schools
Child Abuse Reporting Requirements for Private Schools
Legal Liability for Student Injuries