Hillsdale College, Title IX, and the Charitable Contribution “Subsidy”

A recent Wall Street Journal opinion piece notified readers to a pending case against Hillsdale College by students who allege they were raped by classmates. The legal issue is whether Title IX — the federal law that prevents sex discrimination in education — applies to tax-exempt schools that do not receive federal funds. That’s the question that interest me. But I’m having trouble focusing on that issue because the WSJ piece is so weirdly inflammatory in its rhetoric that it is distracting. As tax professor Ted Seto pointed out in an email to the Taxprof Listserve, the claim (in the headline and first sentence of the piece) that the lawsuit is an “assault” on the college is absurdly hyperbolic.  Given that the plaintiffs are college students who allege they were raped by classmates at Hillsdale, the fact that the WSJ calls their lawsuit an “assault” on the college, despite the fact that they are trying to hold the school accountable for allegedly failing to meet minimum standards to protect them from harm, is to say the least distracting.  But, as they say, the WSJ Opinion Page will be the WSJ Opinion Page.

As for the substance of the legal issue, it’s actually quite important for nonprofit law generally, as well as being critical to the application of Title IX. Title IX is the federal law that governs sex discrimination in education. Congress wrote the law to apply to any “education program or activity receiving Federal financial assistance.” It does not apply to those that don’t. It is settled law that the “assistance” doesn’t have to go directly to the school, but that it is enough for the students who attend the school to receive them. What arguably is not settled is whether the fact that the school is exempt under section 501(c)(3) is sufficient by itself to constitute “Federal financial assistance.” On the one hand, there is a 2001 case out of the Northern District of Illinois called Johnny’s Icehouse, Inc., in which the court rejected the argument that the Amateur Hockey Association was subject to Title IX because of its tax exemption. It reasoned that Federal regulations define “Federal financial assistance” with a list of five enumerated types of assistance, none of which are the tax exemption provided in Section 501(c)(3) (to say nothing of the even juicier charitable tax deduction provided in Section 170). 34 C.F.R. 106.2(g). Since the regulations don’t define tax exemption to constitute Federal financial assistance for the purposes of law, the court held that it doesn’t.

On the other hand, there is a 2022 case out of the District of Maryland (currently on appeal to the Fourth Circuit) that holds the opposite. In that case, the court rejected a summary judgment motion by the defendant, who argued that Title IX didn’t apply to them because they receive no Federal financial assistance. The plaintiffs argued that tax exemption under section 501(c)(3) was sufficient financial assistance to subject the defendant school to Title IX, and the court agreed. It relied primarily on (very brief!) discussions of those two towering cases of the nonprofit law curriculum from 1983: Regan v. Taxation with Representation, 461 U.S. 540 (1983) and Bob Jones University v. United States, 461 U.S. 574 (1983). The court’s reasoning went something like this: (i) Taxation With Representation holds that tax exemption is a “subsidy;” (ii) in so holding, the Court said, “[a] tax exemption has much the same effect as a cash grant to the organization …;” (iii) Q.E.D., the fact that the Title IX regulations don’t specify that tax exemption is a form of financial assistance is not important because, “The Supreme Court has [recognized that tax exemption is] the equivalent of a cash subsidy.”

The problem with this reasoning is that it potentially opens up a can of worms in other areas of nonprofit law. At the heart of the theoretical foundation of all nonprofit law is the observation that tax exemption and the deduction for charitable contributions both acts as a subsidy and is different from other kinds of subsidies. It’s a subsidy that can be applied in a way that tries really hard to preserve the autonomy of the recipient from government control. That’s why it is a form of subsidy well designed for religious organizations, to take just one teensy example. Our Constitution prevents the government from establishing religion, which makes certain kinds of subsidies for religious organizations problematic. Because it is so broad and inclusive, the charitable tax exemption and contribution deduction serve the purpose of governmental support for religious organizations better in many instances than other types of more direct “financial assistance.” That’s true not just for religious organizations but in more instances than I could possibly list here.

With respect to actual question at hand – does Title IX apply to institutions that forego federal funds for themselves or their students – it seems to me that before deciding that based on the broad language of the Supreme Court about the equivalency of tax exemption and cash grants, I would want to know what Congress and/or the Department of Education think about the matter. By my reading, Congress’s choice of the phrase “Federal financial assistance” does not unambiguously include the concept of tax exemption. Therefore, the agency’s interpretation in regulations may be due some degree of deference (I know I know, everything I think I know about administrative law is either already wrong or will be by this time next year). In that case, I think a close reading of 34 C.F.R. 106.2(g) is warranted in this case. The operative question I think is whether Congress intended to apply Title IX to all schools that are tax-exempt? Or whether they intended Title IX to only apply to schools that accept some other kind of Federal financial assistance?

So, what is there to say about the pending lawsuit against Hillsdale College? First, the court will have to decide (without Sixth Circuit precedent) whether tax exemption alone constitutes “Federal financial assistance” sufficient to trigger the application of Title IX. In doing so, it has the reasoning of two sister district courts to aid its own analysis, one that applied a relatively narrow textual analysis of the Title IX regulations, one that reasoned in a broader way from principles announced in a 40 year old (but still great!) Supreme Court case. Obviously, I prefer the narrower analysis, although that doesn’t mean I necessarily know what that narrow analysis will produce in the suit against Hillsdale College. But also, while it is probably hyperbole to say (as Hillsdale’s president reportedly said) that a ruling for the plaintiffs on this issue would “sweep into the government’s net hundreds of thousands of American institutions that have sought to stay out of it,” it is also probably not completely untrue. Too many double negatives? Let me try again: I think that a ruling that relies on reasoning that tax exemption is the same as a cash subsidy in all cases is bad for nonprofit law. 

Benjamin Leff