Editors’ Note: Lloyd Hitoshi Mayer continues HistPhil‘s forum on ‘Uncivil Civil Society,’ highlighting the challenges in turning to the contrary-to-fundamental-public-policy doctrine laid out in the 1983 Bob Jones University Supreme Court case as a means of policing uncivil civil society.
In a recent article, Zachary B. Pohlman and I consider the application to churches of the U.S. Supreme Court’s landmark decision, Bob Jones University (1983), especially in light of recent legal and societal developments. In that case, the Court upheld the revocation of tax exempt status for two private religious schools because their racially discriminatory policies were contrary to the federal government’s fundamental public policy of opposing racial discrimination in education. The decision applies on its face to all nonprofits that claim the federal tax benefits provided by Congress to charities, including tax exemption and eligibility to receive tax deductible contributions. However, in rejecting the University’s First Amendment Free Exercise Clause defense the Court carefully reserved the issue of whether that constitutional provision might limit the decision’s application to “churches or other purely religious institutions.”
Reconsideration of Bob Jones University’s reach is particularly timely, given the growing awareness that many groups widely identified as “hate groups” enjoy tax benefits reserved for charities. In theory, the IRS could use the authority it has under that decision to deny tax benefits to such groups and other purported charities that represent the “uncivil” aspects of civil society. But practical, political, and legal realities sharply limit the ability of the IRS to use this authority except in the most egregious situations, especially with respect to churches.
The Supreme Court’s decision in Bob Jones University v. United States had the potential to dramatically shift the federal tax landscape for nonprofits that push against established public policies. The Court held that the Internal Revenue Code’s tax exemption and deductibility-of-contributions provisions for charities embodied the common-law standard for what it means to be “charitable.” As a result, the Court empowered the Internal Revenue Service to deny those benefits to otherwise qualified nonprofits if they engaged in actions or pursued goals that either furthered illegality or were contrary to “fundamental public policy.” While denial of tax benefits for furthering illegality was not particularly controversial, many commentators and politicians raised alarms about the extension of this authority to acting or pursuing goals contrary to fundamental public policy. These concerns arose in large part because this authority made the IRS the arbiter of what exactly constituted fundamental public policy for these purposes.
The IRS did use this authority to continue its denial of tax benefits to schools with racially discriminatory policies that, while not illegal, conflicted with longstanding policies adopted by all three branches of the federal government. Yet fears that the IRS would expand this authority to areas other than racial discrimination in education proved unfounded. As documented by Samuel D. Brunson and David J. Herzig, among others, the IRS has generally avoided applying the contrary-to-fundamental-public-policy doctrine to activity outside of racial discrimination and to organizations other than schools or other charities involved in education. The case has therefore had limited effect, even as numerous academic articles have speculated about both its soundness and its possible broader applications.
However, recent events as well as societal trends have led to increasing calls for the IRS to reconsider its limited use of the contrary-to-fundamental-public-policy doctrine endorsed in Bob Jones University. The most dramatic illustration was an exchange during the oral argument in the same-sex marriage case, Obergefell v. Hodges (2015), where Solicitor General Donald Verrilli acknowledged that a ruling in favor of same-sex marriage might lead to universities and colleges that oppose same-sex marriage losing their tax-exempt status. Moreover, if that were to occur it is unclear why the loss of that status would not extend to the other types of charities, including churches. In fact, as a presidential candidate, Beto O’Rourke called for exactly this result.
Less dramatically but perhaps more realistically, wider societal trends that have made their way into U.S. federal public policy may conflict with the activities and goals of many charities and particularly churches across the country. For example, policies against sex discrimination in education, employment, and other contexts now permeate federal law even as many religious charities and particularly churches continue to discriminate based on sex in a variety of ways, including with respect to leadership roles. Less common areas of current conflict between churches and what is arguably fundamental public policy include the sanctuary church movement that protects undocumented immigrants from deportation and the endorsement of polygamy by some minority religious faiths. And the increasing prominence of groups that promote white supremacy has led to the discovery that dozens of these and other organizations that could be characterized as hate groups enjoy federal tax benefits provided to nonprofits despite their goals appearing to conflict with federal anti-discrimination laws and other policies.
The Supreme Court’s recognition that the IRS has statutory authority to deny tax exemption and deductibility of contributions to otherwise qualified nonprofits that act or pursue goals contrary to fundamental public policy potentially could be extended to these areas. But there are practical, political, and legal reasons why the IRS is unlikely to turn this potential into reality except in the most egregious situations. As a result, any hope to use to the federal tax laws to reign in the uncivil aspects of civil society likely rests with Congress, not with the IRS invoking the contrary-to-fundamental-public-policy doctrine.
The practical limits on the IRS are well known. As I have documented, along with many others, the resources the IRS devotes to enforcing the federal tax laws with respect to tax-exempt charities have long been sharply limited. This situation arises in part from longstanding congressional disfavor of the IRS as a whole and in part from the relatively low priority given within the IRS to this role as compared to its primary, revenue-collection function. For example, the Treasury Inspector General for Tax Administration recently found that for Fiscal Year 2019 the chance of the IRS examining the return of a tax-exempt organization was in one in 742, as compared to one in 156 for businesses and one in 226 for individual taxpayers. While Congress has recently expressed interest in providing greater resources to the IRS, it has done so with an emphasis on the revenue-collection function and so presumably any new resources will be concentrated there. And given the uncertain parameters of the contrary-to-fundamental-public-policy doctrine, attempts by the IRS to revoke tax benefits based on it would likely require the dedication of more resources than needed for a typical examination.
The political limits faced by the IRS are also well known. The tax collector is understandably never popular, and the IRS has faced criticism not only from the public but also from members of Congress who oversee its activities and funding. It has not helped that in the tax-exempt organizations area the IRS recently had a major self-inflicted wound in the form of a botched application process for Tea Party and other politically active groups seeking tax-exempt status as social welfare organizations. While the criticisms of the IRS’s behavior were overblown, as Philip Hackney, Leandra Lederman, and others have explained, they illustrate the political price the IRS can pay when treading into politically sensitive areas. Seeking to revoke the tax-exempt status of charities based on sex discrimination, sexual orientation discrimination, or other allegedly hateful activities could easily lead to similar political attacks, particularly if the activities are religiously motivated.
Any attempt by the IRS to expand its application of the Bob Jones University decision would also face two significant legal limits. The first limit is the need to demonstrate that any expansion with respect to the activities or goals covered is justified by fundamental public policy. For example, some critics of charities that discriminate based on sexual orientation have acknowledged that sexual orientation discrimination has yet to reach the level of a fundamental public policy, a position also taken by then-IRS Commissioner Koskinen in the wake of the Obergefell decision.
The second legal limit relates to the types of charities subject to the decision, particularly whether churches can be treated in the same manner as the religious schools that were the parties in the case. The Supreme Court carefully reserved that issue in the Bob Jones University decision itself even while it rejected a free exercise of religion defense for religious schools. The IRS has taken the position that churches should be treated the same as other charities in this context. But for reasons Zachary B. Pohlman and I detail in our Harvard Journal of Law & Public Policy article, there is a strong argument that the unique protection that churches of all faiths enjoy under the First Amendment exempts them from the contrary-to-fundamental-public-policy doctrine endorsed by that decision, while still leaving them subject to the illegality doctrine with respect to criminal illegal activities. Perhaps for this reason, the IRS has very rarely sought to apply Bob Jones University to churches, and almost all those instances involved either criminal illegal activity or secular educational activities.
While any of these limits on their own might cause the IRS to avoid an expanded application of Bob Jones University, they also reinforce each other. For example, determining what is fundamental public policy is difficult legally and so would require a dedication of limited IRS resources that the IRS could reasonably determine should be used elsewhere. Similarly, such determinations are politically fraught, exposing the IRS to public and congressional criticism for wading into controversial areas no matter how carefully applied.
For all these reasons, reliance on Bob Jones University and the authority the IRS has under that decision to significantly curtail the uncivil aspects of civil society – whether limited to hate groups or expanded to include groups that discriminate more broadly based on sex or sexual orientation – is misplaced. The practical, political, and legal limits the IRS faces are too significant for the IRS to consider using that authority in this manner except in the most egregious cases. It therefore is better to consider other avenues or actors to counter the dark side of civil society that has been highlighted in recent years, including other, existing limitations on the tax benefits enjoyed by charities and other government and private actors, such as Congress and funders. For example, the IRS could place greater emphasis on the existing methodology test it applies to purported educational organizations to ensure they are not merely purveyors of inflammatory rhetoric based on distorted facts. As for Congress, it could explicitly condition these tax benefits on not engaging in certain types of discrimination, as it did decades ago in Internal Revenue Code section 501(i) by conditioning tax exemption for certain social clubs on not having written racial discrimination policies. But hoping the IRS will invoke the Bob Jones University decision to address these issues is unrealistic.
-Lloyd Hitoshi Mayer
Lloyd Hitoshi Mayer is a Professor of Law at the University of Notre Dame. He served as the university’s Associate Dean for Academic Affairs from 2011 to 2015. His areas of research interest and expertise focus on nonprofit organizations, including laws governing advocacy by nonprofit organizations and the regulation of nonprofit organizations both domestically and internationally.