Paving a Path between the Campus and the Chapel: A Revised Section 501(c)(3) Standard for Determining Tax Exemptions

By Parker, John B. | Emory Law Journal, January 1, 2019 | Go to article overview

Paving a Path between the Campus and the Chapel: A Revised Section 501(c)(3) Standard for Determining Tax Exemptions


Parker, John B., Emory Law Journal


Introduction

The Internal Revenue Code (the "Code") has long contained an internal tension that is rising to the surface again in dramatic form. On the one hand, organizations that are formed for religious purposes have always been granted an exemption from federal income taxes.1 On the other, the Internal Revenue Service (IRS) and the Supreme Court have established that exemption can be lost when an institution engages in discrimination that conflicts with national public policy.2 In the context of discrimination based on same-sex marriage and sexual orientation, this tension raises the issue of how the government, as the author and enforcer of the Code, balances two of its broadest commitments to its citizens: freedom to practice one's religion and freedom from discrimination. Because some religious organizations receiving tax exemptions espouse discriminatory views based on sexual orientation and marital status, the government is left caught between a rock and a hard place, forced to choose between enforcing its constitutional mandate to ensure equality for its citizens and its mandate to protect free speech, freedom of association, and freedom of religion.3

This issue has taken on a new urgency in the wake of the Supreme Court's 2015 decision in Obergefell v. Hodges.4 In this landmark decision, the Court held that the Due Process and Equal Protection Clauses of the Fourteenth Amendment guaranteed same-sex couples the right to marry.5 While the decision was heralded as the beginning of "a new era in human dignity,"6 many in the legal field were quick to point out that the decision left many questions unanswered.7 A significant one was how to reconcile federal tax benefits for organizations who continue to discriminate against same-sex marriage and practices despite the Court's ruling.8 Prior to the Obergefell decision, the discussion around the issue had been merely hypothetical, since there was no national consensus that same-sex marriage was a fundamental right.9 Once Obergefell was decided, however, proponents of same-sex rights were given new foothold for their position that organizations discriminating based on same-sex marriage, or even sexual orientation more broadly, should not receive any kind of federal government benefit.10

The most famous example of public policy clashing with tax exemptions is Bob Jones University v. United States, where the Supreme Court determined that tax-exempt status was properly revoked when a religious educational institution implemented racially discriminatory policies and practices.11 The Court held that the IRS may revoke the tax-exempt status of an organization if their actions violate "established public policy."12 This revocation occurred even though the University's prohibition was based on its religious beliefs.13 Now, in the wake of the Court's decision in Obergefell, advocates for the LGBT community are insisting that the "public policy doctrine" from Bob Jones should be applied to discrimination based on marital status and even sexual orientation generally.14 Conversely, many in religious organizations, particularly religious schools, are deeply unsettled by the decision and worry that the Bob Jones precedent could be used to revoke their tax-exempt status, as well as the corresponding tax deduction for charitable donors, if the IRS were to determine, in light of Obergefell, that sexual orientation discrimination violates national public policy.15 This issue is even more pressing given the Bob Jones Court's failure to delineate any sort of test for what constitutes an "established public policy."16 The Obergefell Court was clear that the decision would not infringe upon religious groups' right to adhere traditional views of marriage,17 and the IRS Commissioner has released a statement since the decision that "[t]he IRS does not view Obergefell as having changed the law applicable to Section 501(c)(3) determinations or examinations."18 But proponents on both sides of the issue are still preparing for the possibility that Obergefell is a sign of things to come, and that subsequent shifts in public perceptions of marriage and sexual orientation could lead to tax exemptions being revoked in the future. …

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