Tax-Exemption and Public Policy – Bob Jones University

Bob Jones University v. United States, 461 U.S. 574 (1983), is a landmark case in which the United States Supreme Court held that the IRS had the authority to revoke the 501(c)(3) tax-exempt status of Bob Jones University (BJU) based on the university’s racially discriminatory practices that were contrary to public policy. According to The Greenville News, BJU announced it would regain its 501(c)(3) status on March 1, 2017, 17 years after dropping its interracial dating and marriage ban.

Background: Revenue Ruling 71-447

A private school that does not have a racially nondiscriminatory policy as to students does not qualify for exemption.

The Federal policy against racial discrimination is well-settled in many areas of wide public interest as, for example, in transportation, housing, employment, hotels, restaurants and theaters. A recognition of a public interest in eliminating racial discrimination is shown in section 1.501(c)(3)-1(d)(2) of the regulations providing that the ‘promotion of social welfare’ includes activities ‘to eliminate prejudice and discrimination.’

Excerpts from the 1983 Decision

Until 1970, the IRS extended tax-exempt status to Bob Jones University under § 501(c)(3). By the letter of November 30, 1970, that followed the injunction issued in Green v. Kennedy, 309 F.Supp. 1127 (DC 1970), the IRS formally notified the University of the change in IRS policy, and announced its intention to challenge the tax-exempt status of private schools practicing racial discrimination in their admissions policies.

Thereafter, on April 16, 1975, the IRS notified the University of the proposed revocation of its tax-exempt status. On January 19, 1976, the IRS officially revoked the University’s tax-exempt status, effective as of December 1, 1970, the day after the University was formally notified of the change in IRS policy.

Therefore, a school not having a racially nondiscriminatory policy as to students is not ‘charitable’ within the common law concepts reflected in sections 170 and 501(c)(3) of the Code and in other relevant Federal statutes and accordingly does not qualify as an organization exempt from Federal income tax.

Section 501(c)(3) therefore must be.analyzed and construed within the framework of the Internal Revenue Code and against the background of the congressional purposes. Such an examination reveals unmistakable evidence that, underlying all relevant parts of the Code, is the intent that entitlement to tax exemption depends on meeting certain common law standards of charity — namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to established public policy.


This “charitable” concept appears explicitly in § 170 of the Code. That section contains a list of organizations virtually identical to that contained in § 501(c)(3). It is apparent that Congress intended that list to have the same meaning in both sections. In § 170, Congress used the list of organizations in defining the term “charitable contributions.” On its face, therefore, § 170 reveals that Congress’ intention was to provide tax benefits to organizations serving charitable purposes. The form of § 170 simply makes plain what common sense and history tell us: in enacting both § 170 and § 501(c)(3), Congress sought to provide tax benefits to charitable organizations, to encourage the development of private institutions that serve a useful public purpose or supplement or take the place of public institutions of the same kind.

An unbroken line of cases following Brown v. Board of Education establishes beyond doubt this Court’s view that racial discrimination in education violates a most fundamental national public policy, as well as rights of individuals.

On occasion, this Court has found certain governmental interests so compelling as to allow even regulations prohibiting religiously based conduct.

The governmental interest at stake here is compelling. … [T]he Government has a fundamental, overriding interest in eradicating racial discrimination in education — discrimination that prevailed, with official approval, for the first 165 years of this Nation’s constitutional history. That governmental interest substantially outweighs whatever burden denial of tax benefits places on petitioners’ exercise of their religious beliefs. The interests asserted by petitioners cannot be accommodated with that compelling governmental interest, see United States v. Lee, supra, at 259-260; and no “less restrictive means,” see Thomas v. Review Board of Indiana Employment Security Div., supra, at 718, are available to achieve the governmental interest.

Application Limitations

In Obergefell v. Hodges (2015), the United States Supreme Court held that the fundamental right to marry is guaranteed to same-sex couples under the United States Constitution. This decision raised the question of whether the IRS would now deny 501(c)(3) status to an institution with a discriminatory policy based on sexual orientation (or more narrowly, a policy prohibiting same-sex marriage) as not consistent with 501(c)(3) because it operated contrary to established public policy. Based on the current administration and the IRS’s historic reluctance to lead the development of public policy, it’s extremely doubtful we’ll see such denial in our immediate future. But in a few more years and with a developing body of law, as Martin Luther King, Jr.’s words remind us, the arc of the moral universe bends towards justice.

Deeper Dive

Obergefell, Bob Jones, and the IRS (Marcus S. Owens, Loeb & Loeb)

Bob Jones University v. United States  (Bruce R. Hopkins Nonprofit Law Center)