Monday, June 21, 2021

Racially Discriminatory Private Schools and Tax-Exempt Status

It is widely known that private schools in the South were used during the later part of the 20th century as a way to escape mandatory desegregation mandates.   However, it may come as a surprise that many private schools in the South and across the country continue to engage in racially discriminatory practices today and still benefit from federal tax-exemption.  In other words, as two of my tax colleagues pointed in their article “Subsidized Injustice,” tax money is used to subsidize or fund these discriminatory schools.  If such schools faced the loss of tax-exemption for racially discriminatory policies and practices, the two-fold fall out effect would require them to change their harmful ways.  First, a loss of tax-exemption would mean the schools would have to pay tax on their net income for a given year. Many private schools cost on average over $20,000 per student per year.  At the same time, they tend to have numerous business deductions, including salaries, which would decrease their overall tax liability. Second, a loss of tax-exemption would mean such schools could no longer provide donors with a tax deduction for their contributions.  Most private schools rely on donations from affiliated families and board members to support their programs.  In addition, as observers have noted, a loss of tax-exempt status would "signal" to potential applicants and current families that a private school was engaging in racially discriminatory practices. 

It is important to observe the history of private schools in the South, as it provides important insight as to the continued racially discriminatory practices today and how tax law can provide a solution.  As the Southern Education Foundation explains, a large-scale exodus from public schools in the South started in the 1940’s, which resulted in an approximately 43% increase in private school enrollment. This exodus from public schools began in the 1940s, after US Supreme Court decisions forbidding segregation in graduate and professional schools in the South.  Even though the Supreme Court decisions only dealt with higher education, they were a signal to Southern families that public elementary and secondary schools were next.

Once the Supreme Court destroyed the  “separate but equal” doctrine, another road to staying “separate” emerged in the form of private school migration.  Notably, from 1950-1965, private school enrollment grew at rapid rates across America, with the South having the highest rates.  According to the Southern Education Foundation, by 1958, private school enrollment in the South increased by over $250,000 in an eight-year period, resulting in one million students by 1965.

To bolster this migration, Southern state legislatures enacted approximately 450 laws and resolutions between 1954 and 1964 to subvert desegregation, including by specifically authorizing the systematic transfer of public assets and monies to private schools.  Although ultimately federal courts invalidated these laws, which also caused some Southern states to recant, many private schools still found more secretive ways to funnel public funds to private schools.  

During the next wave of migration from the mid-1960s to 1980, as public schools in the Deep South began to slowly desegregate due to federal court orders, private schools increased their enrollment by more than 200,000 students.  Approximately 67% of the growth occurred in the following six states: Alabama, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina.  At the same time, the issue of federal tax exemption for segregated private schools came to the forefront.  In the early 1960s, the IRS temporarily suspended applications of self-professed “segregation academies” given the pressure from civil rights organizations.  In 1970, the IRS announced a non-discrimination policy applicable to private schools, which due to continued resistance took eight years to implement.

Meanwhile, private school enrollment in the South grew at an alarming rate.  During the beginning of the 1980’s, the eleven Southern states that had made up the Confederacy enrolled around 675,000 and 750,000 white students.  The racial composition of these schools was startling, with an estimated 65 to 75 percent of enrolled students attending schools having a student body that was 90 percent or more white.

In the end, the IRS was successful in implementing its new policies, but faced criticism from religious private schools in the South.  Eventually, this controversy led to the landmark 1983 case, Bob Jones University v. United States, 461 U.S. 574 (1983). In Bob Jones,  the Supreme Court held that the Internal Revenue Service (IRS) may deny tax-exempt status to schools with racially discriminatory policies.  Such policies were denounced as “contrary to established public policy,” despite allegedly being based on religious beliefs.  

Due to the new IRS rules and the Bob Jones case, all private schools in the South adopted statements of non-discrimination in admission and began admitting at least a small number of black students and other students of color. The story should have ended back in 1983 of federally funded segregation in private schools and a new story of integration and opportunity should have started.  Unfortunately, the racist practices in private schools simply took on more covert forms in the South and in other areas, and private schools have continued to reap the benefits of tax exemption.

 

Khrista McCarden

Hoffman Fuller Associate Professor of Tax Law

Tulane Law School

https://lawprofessors.typepad.com/nonprofit/2021/06/racially-discriminatory-private-schools-and-tax-exempt-status.html

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