Fourth Circuit: Tax Exempt Status Is Not Federal Financial Assistance

Walter Olson

In a pair of cases decided within weeks of each other in 2022, federal judges ruled that private schools’ tax‐​exempt status under section 501 (c) (3) of the tax code constituted “federal financial assistance” and thus subjected the schools to federal regulation under Title IX. For a while, it began to look as if the independence of schools that do not take federal money—among them Michigan’s Hillsdale College, as well as thousands of private and religious K‑12 institutions—was at risk. Now, in welcome news, a unanimous panel of the Fourth Circuit has reversed one of the rulings.

Donna Buettner‐​Hartsoe and her daughter sued the Baltimore Lutheran High School Association after the daughter was allegedly subjected to bullying and sexual harassment at Concordia Prep, a Lutheran high school in Towson. They sought to invoke the federal Title IX law on the grounds that the school was organized under the familiar tax exemption provisions of 501(c)(3) of the tax code, which apply to much of the nonprofit sector (including the Cato Institute).

Although considerable precedent suggested that tax exemption did not by itself constitute “federal financial assistance,” and the federal government itself had not sought to press such a claim, a Baltimore federal judge nonetheless agreed. Weeks later, a California federal judge adopted the same view in a case against a school called Valley Christian Academy. In that case, which is still pending, the judge also ruled that accepting money under the federal government’s Payroll Protection Program (PPP), which was intended to avert layoffs during the Covid pandemic, also separately constituted federal financial assistance for which it would have to submit to Title IX regulation.

Advocates were soon raising similar arguments elsewhere, including in a suit against Hillsdale College, the Michigan institution famous for spurning the federal dollar and the regulations that go with it. In December of last year, I spoke with Tunku Varadarajan for a piece he wrote on the Hillsdale College case for the Wall Street Journal. I said:

The proposition that nonprofit tax status should subject private institutions to the regulations applied to government grantees would be a radical departure from longstanding tax and legal principles and would put at risk the fundamental independence of America’s private charitable and educational sectors, to say nothing of its religious institutions.

Fortunately, back East, the Fourth Circuit panel was having none of it. In a ruling based on statutory interpretation, as opposed to the Constitution, the court marched through the text and its application over time, and distinguished cases in which federal financial assistance had been found in programs that granted students money to attend a school, thus assisting it indirectly. The court also distinguished the famous Bob Jones University case, in which a tax exemption was stripped for an institution for acting against settled public policy, as resting on an entirely different basis. (More here on why the logic of the Bob Jones case did not spread as far as some predicted.)

Let’s hope the Valley Christian Academy ruling from California is speedily reversed as well. America’s nonprofit sector should not be subjected to prolonged uncertainty about its legal status.