As described in our law firm’s preceding blog article, nonprofits’ tax-exempt privileges are increasingly being questioned. It thus may be helpful to understand not only the underlying rationales for income and property tax exemptions, but also to consider what may lie ahead in the aftermath of the U.S. Supreme Court’s recent Obergefell same-sex marriage decision.
During oral argument in Obergefell, U.S. Solicitor General Verrilli indicated that religious colleges’ tax-exempt status could become an issue for colleges that prohibit same-sex relationships. Post Obergefell, questions have now been raised as to whether this prediction will become a reality, not only for religious colleges but also for churches and other faith-based organizations.
Such debate inevitably harkens back to the historic Bob Jones decision, in which the U.S. Supreme Court approved the IRS’s rejection of a university’s tax-exempt status based on the school’s racially discriminatory policies. In that case, the IRS claimed the power to withhold tax-exempt status for any organization that participates in any activity “contrary to a fundamental public policy.” In siding with the IRS, a seven-justice majority rested its decision on the government’s “compelling . . . interest in eradicating racial discrimination in education.” In so ruling, the Court noted that it was dealing only with schools, not churches or other purely religious institutions. Two justices expressed great concern that the “public policy” authority accorded to the IRS strays dangerously from Section 501(c)(3)’s confines and is too heavy-handed.
Fast forward to 2015. Will Obergefell lead to new application of Bob Jones, within the context of same-sex marriage issues, such as religious colleges’ housing policies? Will the decision, in combination with anti-discrimination laws protecting sexual identity and gender orientation, mean that churches and other nonprofits’ tax-exempt status will be in jeopardy as being contrary to “public policy”? The answers are unknown. Neither the IRS nor the courts have applied the public policy doctrine to religious institutions, and the doctrine has not been developed further regarding nonprofits generally.
Fifteen state Attorneys General recently warned against extension of the public policy doctrine, specifically with respect to religious organizations but also with more broadly applicable language. They urged Congressional action against such IRS overreaching:
[S]tripping tax-exempt status from religious organizations in this way – a severe consequence that could force groups to exit the public square – would be an unprecedented assertion of governmental power over religious exercise. The public policy exception has never applied beyond educational organizations or the Government’s interest in “eradicating racial discrimination in education.” To allow the IRS to proceed in this way would suggest that the IRS has the power to target disfavored beliefs in any religious organization, to effectively decide the truth or correctness of a religious belief, and to penalize as a matter of “policy” a mainstream belief held by groups that long have received tax-exempt status. This would go beyond the common law public policy, beyond the text of the Internal Revenue Code, and beyond the strictures of the First Amendment and [the Religious Freedom Restoration Act].
Perhaps in response, the IRS reportedly issued a short statement on July 16, 2015, as follows: “The IRS does not intended to change the standards that it applies to section 501(c)(3) organizations by reason of the Obergefell decision.”