April 25, 2024

Title IX and Tax-Exempt Status: Fourth Circuit Holds That 501(c)(3) Status Is Not Federal Financial Assistance

2 min

In 2022, and as previously discussed here, two separate federal district courts each held that an independent school's status as a 501(c)(3) tax-exempt organization is considered a school's receipt of federal financial assistance. Both decisions were departures from prior precedent and legal interpretation. If upheld, independent schools that did not otherwise receive federal financial assistance would be required to comply with additional federal laws, including and among others, Title IX of the Education Amendments of 1972 (Title IX).

One of the district court decisions went up for appeal, and on March 27, 2024, the U.S. Court of Appeals for the Fourth Circuit affirmed that an independent school's status as a 501(c)(3) tax-exempt organization does not make the school a recipient of federal financial assistance, reversing the 2022 district court decision in Buettner-Hartsoe v. Baltimore Lutheran High School Association d/b/a Concordia Preparatory School.

The Fourth Circuit's Decision

On appeal, the Fourth Circuit analyzed the dictionary definitions of both "receive" and "assistance," concluding that "the plain text [meaning of the phrase "recipient of federal financial assistance"] contemplates the transfer of funds from the federal government to an entity." When applied to tax-exempt status, the Court concluded:

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…. 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."

In short, the tax benefit many independent schools receive by being tax-exempt does not qualify as federal financial assistance.

Impact on Independent Schools

The Fourth Circuit's opinion is welcome news for independent schools that do not otherwise receive federal funds. While the Fourth Circuit's decision makes it clear that a school's 501(c)(3) status will not subject it to Title IX or other, similar federal compliance obligations, schools should still carefully analyze any state or federal programs they participate in or may participate in to confirm the school's legal obligations, if any, associated with such participation.

Independent schools with questions about the legal obligations of federal financial assistance recipients are encouraged to contact Caryn Pass, Grace Lee, Janice Gregerson, or Ashley Sykes for assistance.

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