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Fourth Circuit Clarifies Contours of Laws Applicable to Tax-Exempt Entities

April 9, 2024

The “hook” of many federal anti-discrimination measures, including Title VI, Title IX, Section 504 of the Rehabilitation Act, and Section 303 of the Age Discrimination Act, is “receiving Federal financial assistance.” However, the lack of a clear statutory definition for this phrase has left a gray area in the law and has resulted in inconsistent federal district court decisions as to whether these statutes apply to 501(c)(3) entities that operate without the support of federal funds. Compare the 2001 case of Johnny’s Icehouse, Inc. v. Amateur Hockey Ass’n Illinois, Inc. which held that “tax-exempt status, without more, is … insufficient to subject it to the antidiscrimination requirements of Title IX,” with the 1972 case of McGlotten v. Connally which held that “assistance provided through the tax system is within the scope of Title VI of the 1964 Civil Rights Act.”

On March 27, the Fourth Circuit Court of Appeals tackled the issue head-on in Buettner-Hartsoe v. Baltimore Lutheran High Sch. Ass’n and held, unequivocally in a published and unanimous decision, that “§ 501(c)(3) status does not constitute receipt of federal financial assistance.”

Buettner-Hartsoe arose out of a lawsuit filed by a former student of Concordia Preparatory School (“CPS”) who alleged she was sexually harassed, assaulted, and bullied at the school. CPS is a religiously affiliated private school exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. The plaintiff brought federal and state claims against CPS including a claim brought under Title IX on the basis that school officials failed to adequately address her complaints or take any meaningful action in response, thereby cultivating a hyper-sexualized culture at the school. CPS moved to dismiss the Title IX claim by contending it was not subject to Title IX jurisdiction as it was not a direct recipient of “Federal financial assistance.” In denying CPS’s motion, the district court held that the “tax-exempt status of CPS under 26 U.S.C. § 501(c)(3) constitutes federal financial assistance for the purposes of Title IX.”

On appeal, the Fourth Circuit first looked at the ordinary meaning of the phrase “receiving Federal financial assistance” and concluded that the phrase was textually limited to “affirmative forms of assistance,” akin to the “transfer of funds from the federal government to an entity.” The court then analyzed Supreme Court precedent and concluded the phrase also includes receiving “assistance through an intermediary,” but does not include merely benefiting from federal funding. Finally, the Fourth Circuit held that tax exemption “is the withholding of a tax burden, rather than the affirmative grant of funds.” And because “no funds actually exchange hands,” tax exemption is not federal financial assistance. Accordingly, the Fourth Circuit reversed the district court and held that CPS’s Section 501(c)(3) tax-exempt status does not equate to “receiving Federal financial assistance” for purposes of Title IX.

The Fourth Circuit’s decision is now the first published federal appellate decision that directly addresses this issue and provides clarity for 501(c)(3) entities, including many independent K-12 schools that operate without receiving federal funds.

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