Bob Jones Revisited entitled "The Power of the Treasury: - PDF document

Current News and Developments David A. Brennan in an expansive paper Bob Jones Revisited entitled "The Power of the Treasury: Social Federal Public Policy: Discrimination, Public Policy and 'Charity' In Contemporary Society" /21 questions The IRS Historic whether the IRS or Treasury have the power short of specific legislation to deny the bene- Challenge to Racially fits of tax-exempt status to charities that Discriminatory Private racially discriminate in violation of establish- ed federal public policies and how the IRS Schools or Treasury might be applying that rationale by Milton Cerny to other issues. This analysis is helpful in Caplin & Drysdale, Chartered reviewing the correctness of the IRS finding in the Kamehameha Schools that a preference Washington, D.C. limiting admission only to those of Hawaiian ancestry is not the type of pervasive racial The following materials were pre- discrimination that precludes an organization pared in connection with the remarks from establishing tax exemption under of the author at the January 20, 2000 section 501 (c)(3). meeting of the Exempt Organizations Committe of the Section of Taxation It would be well to revisit the application of of the American Bar Association in the federal public policy doctrine as it applies San Diego, California to the exemption of organizations described in section 501(c)(3), in light of this technical Introduction advice memorandum and the cUITently pend- ing United States Supreme Court review It has been 17 years since the historic of Rice v. Cavetano, 963 F. Supp. 1547 Supreme Coun ~ision in Bob Jones (1997), affd 146 F.3d 1075 (9th Cir. 1999) University v United States and the com- regarding whether a voting limitation impos- panion case of Go/dsboro Christian Schools ed by the State of Hawaii only to those of v United States. 461 US 54 (1983) The Coun ruled that the operation of a racially Hawaiian ancestry for whose benefit the trust discriminatory private school in violation of was established creates a prohibited racial the puhlic policy against racial discrimination preference in special trustee elections. It is in education could not qualify as a charitable important to understand not only the rationale organization under section 501(c)(3, of Bob Jones but also the historical context in which the IRS fonnulated its position and the application of the federal public policy to tax An IRS field office recently raised the issues. question of whether the Kamehameha Schools operated by the Bernice Pauahi Bishop Estate that restrict admission to children of Hawaiian ancestry is inconsistent with the requirements of tax exemption under section 501(c)(3) of the Internal Revenue Code of 1986. The Service in a well-reason- ed technical advice memorandum held that this preference was not the type of pervasive racial discretion that violates the public policy against racial discrimination in education. /1/ The real question might be asked as to why was this issue even raised in the light of Service history on this matter? Milt Cerny EO Tax Journal (vol. 5, no.2, February 2000) 26

Current News and Developments private schools stood as a haven in Private Schools those desegregating public school districts. Norwood v. Harrison, 382 F.Supp. 921 Brown v. Board of Education, (N.D. Miss 1974), on remandfrom the 347 U.S. 483 (1954), struck down state laws mandating "separate but equal " public Supreme Court, 413 U.S. 455 (1973); Brumfield v. Dodd, 405 F.Supp. 388 schools through separate black and white (E.D. La. 1975). school systems. Before 1970, a number of states were not vigorously enforcing the Encouraged by the Nixon White House, desegregation of the public school systems which saw the fonnation of these schools as required by Brown. The language in the as a roadblock to its plan for public school Brown decision requiring the states to insti- desegregation, the IRS published its position tute integration of the public school systems denying exemption to racially discriminatory I'with all deliberate speed" was in fact more private schools in Rev. Rul. 71-447,1971-2 "deliberate" than "speedy." With some states C.B.230. Rev. Rul. 71-447 was based on initiating massive resistance to integration, the common law concepts of charity --that the IRS began to see a movement toward all charitable trusts, educational or otherwise, creation of "white-only" academies, are subject to the requirement that their pur- predominantly in the southern states but also in the northern cities. In the south the issue pose may not be illegal or contrary to public policy. The IRS based its conclusion was further complicated by the fact that parents were concerned that certain religious regarding racially discriminatory schools on the general premise that racial discrimination values should be taught in the public schools. in education is contrary to federal public The Supreme Court had struck down man- dated prayer in public schools in Abington policy. The revenue ruling advances three premises in order to reach this Conclusion: ~ School District v. Schempp, 374 U.S. 203 (1963). 1) An educational trust must be a common law charity in order to be exempt under IRC On the one hand, the Lawyers Committee for Civil Rights, representing black parents in 501(c)(3); class action suits like Green v. Connally, 330 2) Every charitable trust is subject to the F.Supp 1150 (D.D.C. 1971), affd sub nom, requirement that its purpose may not be Coit v. Green, 404 U.S. 997 (1971), urged illegal or contrary to public policy; and the IRS to take more aggressive action against racially discriminatory schools. On the other hand, parents were forming their 3) As reflected in numerous federal statutes own schools, many of which were based and court cases, there is a clear public policy on biblical interpretation that encouraged against racial discrimination, whether public or private. separation of the races. The Service was in the middle of this struggle as these schools Looking to federal legislation, executive applied for tax exemption and the deduct- orders, and federal court interpretation of the ibility of contributions. These schools pre- civil rights law, the IRS detennined that there sented serious federal policy questions and was an established federal public policy constitutional issues of whether the govern- against racial discrimination in education. ment could grant a tax privilege to schools Whether a school was racially discriminatory that violated the public policy against racial was detennined by applying certain factors discrimination in education. The Service contained in Rev. Proc. 72-54, 1972-2 initially took a cautious approach by denying C.B. 834. tax exemption only to those schools that received government support. But the federal In 1975, the U.S. Commission on Civil court decisions made it clear that even de Rights criticized the IRS because it lacked facto school segregation could lead to court specific guidelines to identify whether ordered desegregation. The white-only EO Tax Journal (vol. 5, no.2, February 2000) 27