Title IX and Tax-Exempt Status: What Two Recent Federal Court Rulings Mean for Independent Schools | Venable LLP

In the past, independent schools were not required to comply with certain federal non-discrimination laws, including Title IX of the Education Amendment Act of 1972 (Title IX), because they did not accept federal financial assistance and their 501(c)(3). Status was not considered federal financial assistance. Over the past two years, many independent schools have accepted federal financial assistance under the Paycheck Protection Program (PPP), with the understanding that doing so would require compliance with certain federal non-discrimination obligations until the PPP loan is fully forgiven or repaid.

In a departure from previous legal norms, the U.S. District Court for the District of Maryland ruled on July 21, 2022 that an independent school’s status as a 501(c)(3) tax-exempt organization is considered federal financial support that the school requires to Compliance with Title IX. On July 25, 2022, the U.S. District Court for the Central District of California similarly ruled that 501(c)(3) status constitutes federal financial assistance.

The choices

Maryland: Buettner-Hartsoe v. Baltimore Lutheran High School Association d/b/a Concordia Preparatory School

In a series of consolidated cases, five former students filed multiple lawsuits under federal and state law against Concordia Preparatory School, an independent school in Baltimore, Maryland, alleging that the school failed to address numerous complaints of unwanted sexual behavior and filed a “hyper “sexualized” culture from 2016 to 2019 (prior to the school’s acceptance of a PPP loan). Among the former students’ demands were claims that the school had failed to meet the requirements of Title IX.

Concordia Prep moved to dismiss the Title IX claims, arguing that the district court lacked jurisdiction because Concordia Prep was not a “recipient of federal grants” under Title IX. In response, and among other things, the alumni argued that Concordia Prep’s tax-exempt status under Section 501(c)(3) of the Internal Revenue Code constituted federal financial assistance within the meaning of Title IX.

The district court denied Concordia Prep’s motion on the grounds that 501(c)(3) status constitutes federal financial assistance for the purposes of Title IX and 501(c)(3) status constitutes receipt equivalent to a cash subsidy from the federal government.

California: EH vs. Valley Christian Academy

In which Valley Christian In this case, a student who played soccer for a public school traveled to Valley Christian for a soccer game in 2021. The student claims that after she removed her helmet and Valley Christian realized she was a woman, she was banned was to play against them in the future Tal Christian. The student then filed a lawsuit, alleging, among other things, violations of Title IX. Valley Christian moved to dismiss the Title IX allegations, claiming it received no federal financial assistance. In denying Valley Christian’s motion, the district court ruled that Valley Christian’s 501(c)(3) status constituted federal financial assistance even after Valley Christian’s PPP loan was forgiven.

Earlier interpretations of the term “Federal Financial Aid”

Prior to these rulings, 501(c)(3) did not qualify as federal financial assistance. Rather, the Title IX regulations define federal financial assistance as follows:

  • Grants or loans from federal funds provided for the purchase, construction, renovation, restoration, or repair of a building, as well as for scholarships, loans, grants, or wages to pay college tuition;
  • grants or gifts of federal property and interests in property;
  • Federal employee services;
  • The sale or lease of, and permission to use, federal property; and
  • Contracts, agreements or arrangements aimed at supporting educational programs or activities.

Concordia Prep’s motion to dismiss was heavily relied upon Johnny’s Icehouse, Inc. vs. Amateur Hockey Ass’n, a 2001 opinion of the United States District Court for the Northern District of Illinois, finding that a women’s ice hockey association is not subject to Title IX simply because of its 501(c)(3) status. in the Johnny’s Ice House, the district court found that the Title IX rules provided a clear definition of “federal financial assistance,” and found that income tax exemptions were “conspicuously absent from that laundry list.” In summary, the district court concluded that “‘federal financial assistance includes only direct transfers of federal funds, property or services from the government to a program,’ and that ‘[e]a tax exemption simply does not equate to such transfers.'”

In addition to Johnny’s Ice HousePrevious court decisions, including a 1999 decision of the Eleventh Circuit and a decision of the Eastern District of New York of 2012, have confirmed that 501(c)(3) independent school status does not imply federal funding for purposes of Title IX represents . Instead, courts have often considered whether the school accepted federal financial aid as part of a scholarship or program.

The impact on independent schools

These court decisions, if upheld on appeal, would significantly affect the policy of independent schools regarding their response to gender misconduct, since the vast majority of independent schools are 501(c)(3) tax-exempt organizations. Because these statements represent a departure from previous interpretations, we can expect them to be challenged. Furthermore, in the face of conflicting opinions, this interpretation is not a settled law. Therefore, we recommend that independent schools await further guidance and consult their legal counsel.

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