Tax-Exempt Private Schools Which Discriminate on the Basis of Race: A Proposed Revenue Procedure

Notre Dame Law Review Volume 55 | Issue 3 Article 3 2-1-1980 Tax-Exempt Private Schools Which Discriminate on the Basis of Race: A Proposed Revenue Procedure David L. Anderson Follow this and additional works at: http://scholarship.law.nd.edu/ndlr Part of the Law Commons Recommended Citation David L. Anderson, Tax-Exempt Private Schools Which Discriminate on the Basis of Race: A Proposed Revenue Procedure, 55 Notre Dame L. Rev. 356 (1980). Available at: http://scholarship.law.nd.edu/ndlr/vol55/iss3/3 This Article is brought to you for free and open access by NDLScholarship. It has been accepted for inclusion in Notre Dame Law Review by an authorized administrator of NDLScholarship. For more information, please contact . Tax-Exempt Private Schools Which Discriminate on the Basis of Race: A Proposed Revenue Procedure David L. Anderson* I. A Comparison of the Original and Revised Proposed Revenue Procedures On August 22, 1978, the Internal Revenue Service proposed revenue procedures which would revoke the section 501(c)(3) tax-exempt status of private schools which discriminate on the basis of race. The original rules proposed divided private schools into three classes: "adjudicated schools," "reviewable schools," and "other."' A "school adjudicated to be discriminatory" meant any private school found to be discriminatory in a final court or administrative agency decision. 2 A "reviewable school" was a private school which had never been adjudicated discriminatory but which was formed or substantially expanded at about the same time as public school desegregation in the community served by the school. 3 Such expansion was said to justify an inference of discrimination if the school did not have a minimum percentage of minority students, i.e., twenty percent of the minority school-age children in the community served by the school. "Other school" meant a school "neither ad4 judicated to be discriminatory" nor "reviewable." For the original and reviewable schools, objective standards were set forth which the schools had to meet to rebut the adjudication or inference of discrimination. 5 However, these standards could be expanded to the "other schools" category where minority enrollment was insubstantial and where the 6 school failed to show this enrollment level was unrelated to discrimination. The basic standards to rebut the adjudication or inference were: (1) a minimum number of minority students, i.e., twenty percent of the percentage of minority school-age children in the community, or (2) the presence of four out of five indices of good faith operation, i.e., significant financial aid to minority students, vigorous minority recruitment programs, an increasing percentage of minority students, employment of minority teachers, and "other substantial evidence of good faith." 7 However, even if four out of the five indices were met, the inference of discrimination would generally not be rebutted 8 if the school did not enroll any minority students. If the private school failed to rebut an adjudication or inference of discrimination, the Service would revoke its tax exemption and suspend ad* Bar. 1 2 3 4 5 6 7 8 B.A., Wheaton College, 1975; J.D., George Washington University, 1979. Member of the Ohio 43 Fed. Reg. 37,296 (1978). Id. at 37,297 (proposed § 3.02). Id. (proposed § 3.03). Id. (proposed 5 3.04). Id. at 37,298 (proposed § 4.02). Id. (proposed § 5.04). Id. (proposed 5 4). Id. (proposed § 4.02.2). [Vol. 55:3561 A PROPOSED REVENUE PROCEDURE vance assurance of the deductibility of contributions. The school could prevent this prompt revocation, but not the suspension of advanced assurance, by requesting a grace period and agreeing to meet the standard within a reasonable period, i.e., two school years or less. If the school failed to meet the standards during the grace period, its tax-exempt status would retroactively be revoked and all contributions made since the suspension of advance assurance would be denied deductibility. 9 Following the publication of the proposed revenue procedure on August 22, 1978, the Internal Revenue Service (IRS) received over 100,000 letters of public comment. As a result of the consideration of these comments, the IRS issued a revised version of the proposed guidelines, in which it limited itself to more narrowly defined "adjudicated" and "reviewable" schools. In addition, it substantially increased its discretion in the determination whether a private school has rebutted an inference or adjudication of racial discrimination. 0 The definition of reviewable schools is substantially narrowed by the addition of a third factor. To be a reviewable school, a school must not only (1) be formed or substantially expanded at the time of public school desegregation in the community and (2) not have less than a significant minority student enrollment, but also (3) be a school where formation or substantial expansion is "related in fact to the public school desegregation in the community."" Subsequently, the revised version sets out seven examples of specific facts which would tend to indicate the lack of a relationship in fact to school desegregation 2 and seven examples of facts which would support a relationship.' The definition of "reviewable schools" is further narrowed by providing that a one-year increase in students of twenty percent or less (as compared with ten percent previously) will not be considered substantial expansion 13 and by providing that the determination of whether a school's minority enrollment is insignificant will be based on all relevant facts and circumstances, with consideration given to special factors which limit the school's ability to attract minority students. 14 An example of such a factor would be an emphasis, for nondiscriminatory purposes, on specific programs or curricula which interest only groups not composed of significant numbers of minority students, i.e., 5 Hebrew or Amish schools.1 In addition, the revised procedure provides that where schools are part of a large system of commonly supervised schools, and some of the schools do not meet the enrollment criteria, these may still be considered to have significant minority enrollment if the minority enrollment throughout the system satisfies the proposed numerical standard.' 6 This would remove the Catholic school system from the reviewable category. Although the period for determining which formation or substantial expansions are suspect r6main the same, i.e., one year before and three years 9 10 11 12 13 14 15 16 Id. (proposed S 5). 44 Fed. Reg. 9,451 (1979). Id. at 9,452 (proposed 5 3.03). Id. at 9,453 (proposed 5 3.03(c)). Id. (proposed 5 3.03(a)). Id. (proposed S 3.03(b)). Id. (proposed S 3.03(c)(6)). Id. (proposed S 3.03(b)(1,2,3)). THE NOTRE DAME LAWYER [February 1980] after desegregation, 1 7 the revised version considers the time of desegregation to be when substantial implementation of the relevant desegregation order took place.18 (...truncated)