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Legal Updates

Federal Court Of Appeals: Independent School Nonprofit Status Is Not Federal Funding

In a welcome development for independent schools, the 2022 decision by a U.S. District Court in Maryland in Buettner-Hartsoe v. Baltimore Lutheran High School was recently overturned on appeal. The Fourth Circuit Court of Appeals rejected the lower court’s ruling and affirmed that tax-exempt status is not federal financial assistance (“FFA”), and that tax-exempt organizations are not, simply by virtue of their federal tax-exempt status, subject to federal civil rights oversight.

Two federal district courts stunned the independent school world in 2022 by ruling that schools’ 501(c)(3) federal tax-exempt status was the equivalent of receiving FFA, making those schools subject to Title IX and its sexual harassment rules and regulations. These rulings threw into question what had appeared to be a settled principle – that tax-exempt status does not, by itself, qualify as FFA.

The potential implications of these district court decisions for independent schools, many of which receive no direct or indirect federal funding, include substantial additional federal compliance obligations, as well as being subject to discrimination suits under federal civil rights laws that would otherwise not apply—like the Title IX sexual harassment and discrimination suits in the cases at issue.

Although independent schools can take comfort in the Fourth Circuit’s decision, schools should continue to be vigilant and not make assumptions about how courts will treat even long-established legal principles that underlie tax-exempt nonprofit organizations.

Case And Statutory Background

The plaintiffs’ claims in Buettner-Hartsoe were based on allegations of sexual assault and harassment by male students at the School. One of those claims was under Title IX, the federal statute that prohibits discrimination on the basis of sex under any education program or activity receiving FFA—a category in which the School defendants argued they did not belong. Conversely, the plaintiffs argued that the School’s tax-exempt status meant it was receiving FFA, and the School was therefore subject to Title IX.

On this pivotal question, the implementing regulations for Title IX say that any entity or person “to whom Federal financial assistance is extended directly or through another recipient and which operates an education program or activity which receives such assistance” receives FFA. 34 C.F.R. § 106.2(i). Yet nowhere in Title IX or the implementing regulations is “Federal financial assistance” or a “recipient” of FFA defined.

The district court’s decision in Buettner-Hartsoe was brief and rested on relatively little legal authority. The primary bases were a pair of Supreme Court cases from the 1980s—neither of which dealt directly with FFA. One of these decisions, Bob Jones Univ. v. U.S., held that an organization’s tax-exempt status could be revoked if its policies discriminated on the basis of race or another protected category. The other case, Reagan v. Taxation With Representation, analyzed the limitations on lobbying for tax-exempt organizations. In holding such limitations constitutional, the Supreme Court described tax-exempt status as a “subsidy” and concluded that Congress could choose to subsidize some activities undertaken by nonprofits while declining to treat other activities—such as lobbying—in the same manner.

Despite the fact that neither of these Supreme Court cases was on-point, the district court in Buettner-Hartsoe cited Bob Jones and Reagan broadly for the conclusion that tax-exempt status is a form of FFA for purposes of Title IX.

Fourth Circuit’s Ruling

On review of the district court’s holding in Buettner-Hartsoe, the Fourth Circuit reversed the decision, concluding that neither the Bob Jones nor the Reagan decision warranted a finding that tax-exempt status qualifies as FFA. The appellate court summarized its conclusion in a single paragraph:

Tax exemption is not “Federal financial assistance.” This is not a novel concept. Indeed, since Title IX’s inception over fifty years ago, it has never been applied to organizations based solely on their tax exempt status. And for good reason. Although tax exemption is a tax benefit, that does not mean it is “Federal financial assistance” for Title IX purposes. As noted above, “assistance” means “aid, help, or support,” which all connotate financial grants. Tax exemption, however, is the withholding of a tax burden, rather than the affirmative grant of funds. Thus, tax exemption is not “Federal financial assistance.”

Thus, the Fourth Circuit affirmed what most observers had assumed all along, before the Buettner-Hartsoe district court ruling: tax-exempt status is not a form of FFA.

Implications For Independent Schools

For independent schools in the region covered by the Fourth Circuit—North Carolina, South Carolina, Virginia, West Virginia, and Maryland—the Court of Appeals’ decision in Buettner-Hartsoe is an especially welcome turn of events. Under the decision, independent schools in those states will not be implicated in Title IX regulations and potential litigation.

For schools outside the Fourth Circuit, while the decision stands as a helpful precedent, there is still reason to be wary of the plaintiffs’ arguments. Notably, the 2022 federal court decision in the Central District of California embracing the same “tax exemption as FFA” argument remains on the books, as the decision was not appealed, and the parties ultimately settled the litigation. While federal district court decisions are not legally binding in other cases, that decision could still prove persuasive to courts considering similar claims.

Accordingly, it is critical for schools to be both informed and vigilant regarding what might constitute FFA and the legal and regulatory implications of accepting FFA. As these recent cases demonstrate, even long-established interpretations regarding the applicability of Title IX and other civil rights laws can be revisited and changed. We recommend that schools consult regularly with legal counsel on any programs that may involve FFA or impact their Title IX status.

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If your school has questions about the issues implicating tax-exempt status as potential FFA, or about FFA and school programs generally, please feel free to reach out to one of our experienced education attorneys to discuss risk management or possible policy solutions.