Bob Jones University v. U.S.

• Decision Date: 19 January 1981
• Docket Number: Nos. 79-1215,79-1216 and 79-1293,s. 79-1215
• Citation: 639 F.2d 147
• Parties: 81-1 USTC P 9124 BOB JONES UNIVERSITY, Appellee, v. UNITED STATES of America, Appellant. BOB JONES UNIVERSITY, Appellee, v. UNITED STATES of America, Appellant. BOB JONES UNIVERSITY, Appellee, v. W. Michael BLUMENTHAL, Secretary of the Treasury and Jerome Kurtz, Commissioner of Internal Revenue, Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 147

639 F.2d 147

81-1 USTC P 9124

BOB JONES UNIVERSITY, Appellee, v. UNITED STATES of America, Appellant.

BOB JONES UNIVERSITY, Appellee, v. UNITED STATES of America, Appellant.

BOB JONES UNIVERSITY, Appellee, v. W. Michael BLUMENTHAL, Secretary of the Treasury and Jerome

Kurtz, Commissioner of Internal Revenue, Appellants.

Nos. 79-1215, 79-1216 and 79-1293.

United States Court of Appeals Fourth Circuit.

Argued March 3, 1980.

Decided Dec. 30, 1980.

As Corrected Jan. 19, 1981.

Leonard J. Henzke, Jr., Tax Div., Dept. of Justice, Washington, D. C. (M. Carr Ferguson, Asst. Atty. Gen., Washington, D. C., Thomas E. Lydon, U. S. Atty., Columbia, S. C., Gilbert E. Andrews, Tax Div., Dept. of Justice, Washington, D. C., on brief) for appellant.

Wesley M. Walker, Greenville, S. C. (J. D. Todd, Jr., O. Jack Taylor, Jr., Natalma M. McKnew, Leatherwood, Walker, Todd & Mann, Greenville, S. C., John C. Stophel, Stophel, Caldwell & Heggie, Chattanooga, Tenn., on brief) for appellee.

Before WIDENER and HALL, Circuit Judges; and MERHIGE ^*, District Judge.

K. K. HALL, Circuit Judge:

Bob Jones University conducts "an institution of learning for the general education of youth in the essentials of culture and in the arts and sciences, giving special emphasis to the Christian religion and the ethics revealed in the Holy Scriptures...." ¹ Its religious teachings include a strict prohibition against interracial dating and marriage. The admissions and disciplinary policies used to enforce this belief have resulted in the loss of the University's tax exempt status, which we are now asked to review.

Bob Jones University (taxpayer) brought this action to recover Twenty-One Dollars which it paid in 1975 under the Federal Unemployment Tax Act (FUTA). ² The government counterclaimed for FUTA taxes for the taxable years 1971 through 1975 in the amount of $489,675.59, plus interest. The district court concluded, on both statutory and constitutional grounds, that the IRS was without authority to revoke the University's tax-exempt status. Bob Jones University v. United States, 468 F.Supp. 890 (D.S.C.1978). We reverse.

I.

A. The University and its Racial Policies

Bob Jones University was founded in Florida in 1927. It moved to Greenville, South Carolina in 1940 and has been incorporated there as an eleemosynary institution since 1952. Taxpayer is not affiliated with any religious denomination, but maintains a fundamentalist orientation in its educational approach. It is a religious institution in its own right, as well as an educational one.

Taxpayer accepts students from kindergarten through college and graduate school. It enrolls about five thousand students and offers some fifty accredited degrees, in addition to its nondegree Institute of Christian Service. All courses, however, are taught according to Biblical Scripture. Teachers are required to be "born again" Christians; students are screened as to their religious beliefs and their conduct is strictly regulated.

Bob Jones University believes that the Scriptures forbid interracial marriage and dating. Prior to 1971, it completely excluded blacks. From 1971 to May, 1975, taxpayer accepted no applications from unmarried black students, with the exception, since 1973, of staff members who had been at the University four years or longer. Following this court's decision in McCrary v. Runyon, 515 F.2d 1082 (4th Cir. 1975) (reh. den. May 29, 1975), aff'd 427 U.S. 160, 96 S.Ct. 2586, 49 L.Ed.2d 415 (1976), prohibiting racial exclusion from private schools, taxpayer revised its policy. After May 29, 1975, unmarried blacks were permitted to enroll, but a disciplinary rule was added to prevent racial intermarriage and dating.

There is to be no interracial dating

1. Students who are partners in an interracial marriage will be expelled.

2. Students who are members of or affiliated with any group or organization which holds as one of its goals or advocates interracial marriage will be expelled.

3. Students who date outside their own race will be expelled.

4. Students who espouse, promote, or encourage others to violate the University's dating rules and regulations will be expelled.

B. THE IRS' non-discrimination policy

Prior to 1970, the Internal Revenue Service extended tax exempt status under § 501(c)(3) of the Internal Revenue Code, 26 U.S.C. § 501(c)(3) to all private schools, regardless of racial policy. In 1970, however black Mississippi parents and children obtained a preliminary injunction prohibiting the IRS, pendente lite, from according tax-exempt status to private schools in Mississippi which discriminated on the basis of race. Green v. Kennedy, 309 F.Supp. 1127 (D.D.C.1970). The IRS later announced nationally that it would no longer allow charitable contributions and deductions, 26 U.S.C. § 170(c)(2), and tax exempt status, § 501(c)(3), to racially discriminatory schools, including church-related schools.

On June 30, 1971, the three judge district court in Green ruled that the issuance of tax exempt status to racially discriminatory private schools was illegal, and issued a permanent injunction enjoining the Commissioner of Internal Revenue from approving tax exempt status to any school in Mississippi that does not publicly maintain a policy of nondiscrimination. Green v. Connally, 330 F.Supp. 1150 (D.D.C.1971). That decision was affirmed by the Supreme Court in Coit v. Green, 404 U.S. 997, 92 S.Ct. 564, 30 L.Ed.2d 550 (1971) (per curiam).

Following the Green decision, the Service formalized the nondiscrimination policy in several rulings. Rev.Rul. 71-447, 1971-2 Cum.Bull. 230; Rev.Proc. 72-54, 1972-2 Cum.Bull. 834. The 1972 procedures were superseded in 1975 by Rev.Proc. 75-50, 1975-2 Cum.Bull. 587, see also Rev.Rul. 75-231, 1975-1 Cum.Bull. 158 (nondiscrimination requirement for church operated schools). Revenue Procedure 75-50 provides that in order to qualify under section 501(c) (3), a private school must be able to show that all of its programs and facilities are operated in a nondiscriminatory manner. ³

Bob Jones University is subject to the Revenue procedures prohibiting racial discrimination in private schools. The University is an educational institution as well as a religious one. See 26 C.F.R. § 1.501(c)(3)-1(d)(3) (educational defined), and the rulings and procedures promulgated by the Service apply to all private schools. We decline to create an exception for religion-based schools where the Service has made none.

We, therefore, must address two questions. Does the IRS have the statutory authority to deny tax exempt status to Bob Jones University because of its racial policies and, if so, does the denial contravene the First Amendment to the Constitution of the United States?

II. Statutory Authority for the Nondiscrimination Condition

The district court found that the University was entitled to the section 501(c)(3) exemption because "its primary purpose is religious and it exists as a religious institution." 468 F.Supp. at 897. The court reasoned that since the statute and the regulations enumerate seven distinct tax exempt purposes, one of which is "religious," see 26 C.F.R. § 1.501(c)(3)-(d)(1)(iii), the exemption must be granted once it has been established as a fact that the institution fits one of those enumerated categories.

This simplistic reading of the statute, however, tears section 501(c)(3) from its roots. In Green v. Connally, 330 F.Supp. 1150 (D.D.C.1971), aff'd per curiam sub nom. Coit v. Green, 404 U.S. 997, 92 S.Ct. 564, 30 L.Ed.2d 550 (1971), a three judge district court held "(t)he code must be construed and applied in consonance with the federal public policy against support for racial segregation of schools, public and private." 330 F.Supp. at 1163. ⁴ Accordingly, it upheld the application of the IRS's nondiscrimination condition to private schools in Mississippi which practiced racial discrimination. ⁵

In that persuasive and scholarly opinion, Judge Leventhal viewed section 501(c)(3) against its background in the law of charitable trusts, concluding that to be eligible under that section, an institution must be "charitable" in the broad common law sense, ⁶ and therefore must not violate public policy. Green, supra, 330 F.Supp. at 1156-60.

The legislative history of § 501(c)(3) verifies the exemption's foundation in public policy.

The exemption from taxation of money and property devoted to charitable and other purposes is based upon the theory that the Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from other public funds, and by the benefits resulting from the promotion of the general welfare. H.R.Rep.No.1820, 75th Cong.3d Sess. 19 (1939). (emphasis added)

Accordingly, it is appropriate that the Service interpreted section 501(c)(3) in a manner that reflects its purpose and history. Moreover, as the Green court noted, tax benefits such as deductions and exclusions generally are subject to limitation on public policy grounds. In Tank Truck Rentals v. Commissioner, 356 U.S. 30, 78 S.Ct. 507, 2 L.Ed.2d 562 (1958), the Court upheld the service in disallowing the deduction of fines paid for violations of highway weight limits under the "ordinary and necessary" business expense provision of the Code, 26 U.S.C. § 162. The allowance of the claimed deduction, the Court held, would frustrate the purpose of the State weight law by diluting the punishment imposed. The court held that the expense could not be deemed a "necessity" if allowing the deduction would frustrate "sharply defined" public policy. 356 U.S. at 33, 78 S.Ct. at 509.

Bob Jones University's racial policies violated the clearly defined public policy, rooted in our Constitution, condemning racial discrimination and, more specifically, the government policy against subsidizing racial discrimination in education, public or private.

Bob Jones' pre-May 1975 policy...