Tax-exempt Controversy

The Weekly Standard’s executive editor Terry Eastland was correct in identifying the highly possible IRS action toward Christian schools for rejecting same-sex marriage. Because the IRS is now recognized as an arm of the Democrat political party it isn’t too difficult to believe that all Christian schools (kindergarten through college) are under the “tax-exempt” gun.

“I don’t deny that, Justice Alito. It is—it is going to be an issue.” Donald Verrilli, U. S. Solicitor General

They Can’t Deny It

Same-sex marriage and the threat to colleges’ tax-exempt status.

 BY TERRY EASTLANDThe Weekly Standard, MAY 18, 2015, VOL. 20, NO. 34 

The most notable exchange during the argument last month in the same-sex marriage case before the Supreme Court, Obergefell v. Hodges, likely occurred between Justice Samuel Alito and Solicitor General Donald Verrilli.

Gay-rights activists protest outside the entrance  to Bob Jones University, Apri


“Well, in the Bob Jones case,” began Alito, “the Court held that a college was not entitled to tax-exempt status if it opposed interracial marriage or interracial dating.” In fact, as Alito and Verrilli of course know, what the Court held in Bob Jones was that the Internal Revenue Service acted within its authority in revoking the school’s tax-exempt status. Alito continued: “So would the same apply to a university or a college if it opposed same-sex marriage?” That is, would the IRS be acting within its authority if it decided it could revoke the tax-exempt status of a school opposed to same-sex marriage?

Verrilli’s response was, “You know, I—I don’t think I can answer that question without knowing more specifics, but it’s certainly going to be an issue. I—I don’t deny that. I don’t deny that, Justice Alito. It is—it is going to be an issue.”

What to make of that answer, which Verrilli has yet to clarify, and probably never will?

While unlikely in the extreme, what if, for Verrilli, the reason “it is going to be an issue” lies in doubts inside the administration about the validity of the Bob Jones ruling? What if Verrilli believes the case was wrongly decided and that Justice William Rehnquist, writing in solitary dissent, had the better argument—that in fact the IRS exceeded its authority in the matter?

Some background: Until 1970 the IRS granted tax-exempt status to private schools, including Bob Jones University, regardless of whether they had racial admissions policies. A year later, as a result of litigation in which the agency was prohibited from extending tax-exempt status to private schools in Mississippi, the IRS changed its position in a “revenue ruling”: Henceforth, the agency would not approve tax-exempt status for any school without a policy against racial discrimination.

Enter Bob Jones University, which prohibited interracial dating and marriage; the school denied that those practices, which it said were based on its religious beliefs, were discriminatory. When the IRS advised the university of its intention to enforce the new ruling, and thus challenge the school’s tax-exempt status, Bob Jones initiated its lawsuit, which dragged on for a dozen years before ending in 1983 with an opinion for the Court written by Chief Justice Warren Burger.

The Court approved the agency’s construction of the tax code: that an entity granted a tax exemption must be a charitable institution, and that under the common law of charitable trusts an entity that acted contrary to public policy was not charitable. The Court also affirmed the agency’s judgment that eradicating racial discrimination in education was a “fundamental public policy.” Furthering that policy, said the Court, “substantially outweighs whatever burden denial of tax benefits places on [the university’s] exercise of [its] religious beliefs.” That Congress refused to intervene, the Court said, was proof that it approved of the agency’s construction of the statute. “We therefore hold that the IRS did not exceed its authority when it announced its [new] interpretation” of the tax code.

Rehnquist agreed that there was such a fundamental policy against racial discrimination, and that it could indeed be enforced against “educational institutions that promote racial discrimination”—but only if Congress said so. And that was the problem: “Unlike the Court, I am convinced that Congress simply has failed to take this action.” The IRS took the action, with an interpretation of the tax code that gives it “a broad power which until now Congress has kept for itself.”

Again, it is hard to imagine that administration lawyers actually question Bob Jones. After all, they work for a president notorious for his frequent resort to unilateral executive action, spurning Congress time and again. Yet the speculation is a useful exercise, for if you agree with Rehnquist in Bob Jones, then the right venue for deciding whether “a university or a college .  .  . opposed to same-sex marriage” (to use Alito’s words) could be denied tax exemption is Congress, not the IRS. Not incidentally, the tax code says nothing about same-sex marriage.

Of course, Verrilli’s response to Alito deserves to be read as recognizing “the issue” that will arise if (when?) President Obama bypasses Congress and orchestrates the development of a new revenue rule by the IRS, under which the agency can strip tax-exempt status from religious colleges and charities (such as homeless shelters and adoption agencies) that dissent from same-sex marriage. Suffice to say, such action would be sharply contested in Congress and in the courts.

As for the “specifics” that Verrilli said he needed to know, note that the Court in Bob Jones seemed to set forth a test of sorts for whether something is a “national” or “fundamental” policy that the IRS may enforce. The Court said that “over the past quarter of a century, every pronouncement of this Court and myriad Acts of Congress and Executive Orders attest a firm national policy to prohibit racial segregation and discrimination in public education.” The Court then proceeded to identify those government actions. It’s an impressive and familiar list, starting with Brown v. Board of Education (1954). Advocates of same-sex marriage can’t match it; there aren’t enough “specifics” to say that “eradicating opposition to same-sex marriage” is a national policy to which the IRS may require a non-profit’s adherence on pain of losing tax-exempt status.


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