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Congressional Research Service
Informing the legislative debate since 1914
October 21, 2024
The Public Policy Doctrine and 501(c)(3) Organizations
The Supreme Court first applied the public policy doctrine
to organizations exempt under Internal Revenue Code
(IRC) Section 501(c)(3) in a pair of cases, Bob Jones
University v. United States and Goldsboro Christian
Schools, Inc. v. United States, 461 U.S. 574 (1983)
(collectively Bob Jones). In Bob Jones, the Court
established that entitlement to 501(c)(3) status depend[ed]
on meeting certain common-law standards of charity,
which meant that a 501(c)(3) organization must serve a
public purpose and not be contrary to established public
policy. Then, the Court held that two schools with racially
discriminatory admissions policies did not qualify for
501(c)(3) status. Lower courts and the Internal Revenue
Service (IRS) had begun relying on common law concepts
of charity to deny tax-exempt status to organizations
discriminating based on race several years before the
Court's decision. Despite Bob Jones's noteworthiness, the
public policy doctrine has had limited application outside
racial discrimination in education. Courts only occasionally
reference the public policy doctrine as potential grounds for
revocation or denial of 501(c)(3) status, and the IRS rarely
asserts it as a basis to revoke or deny tax exemption.
This In Focus provides background on the public policy
doctrine and discusses its application.
The Orins of the Publc Po cy Doctr ne
In 1969, a group of Black taxpayers and their minor
children brought a class action to enjoin the IRS from
granting 501(c)(3) status to Mississippi private schools that
excluded Black students. At the time, the IRS granted
501(c)(3) status to private schools regardless of their racial
admission policies. The class sought a declaration that
granting tax-exempt status to schools that excluded students
based on race violated IRC Section 501, governing
charities, and IRC Section 170, governing charitable
contributions. If the court found that the IRC provisions did
authorize granting schools such status, the class sought a
declaration that those provisions were unconstitutional. On
January 12, 1970, in Green v. Kennedy, 309 F. Supp. 1127
(D.D.C. 1970), a three-judge district court for the District of
Columbia granted the class a preliminary injunction
prohibiting the IRS from granting tax-exempt status to
Mississippi private schools with racially discriminatory
admissions policies. The court concluded that the class had
a reasonable probability of success on the merits.
Before the court reached a decision on the merits, the IRS
issued two news releases in July 1970 announcing that it
had reversed its position and would deny tax-exempt status
to racially discriminatory private schools. In its July 10,
1970, news release, the IRS avowed that it c[ould] no
longer legally justify allowing tax-exempt status to private
schools which practice racial discrimination nor c[ould] it
treat gifts to such schools as charitable deductions.
In testimony before the Senate Select Committee on Equal
Educational Opportunity on August 12, 1970, the IRS
Commissioner stated that the IRS's position change rested
on the basic principles of the common law of charities.
He explained, An organization seeking exemption as being
organized and operated exclusively for educational
purposes, within the meaning of section 501(c)(3) and
section 170, must meet the tests of being 'charitable' in the
common-law sense.
On June 30, 1971, the three-judge district court for the
District of Columbia issued an opinion on the merits in
Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), aff'd
sub nom Coit v. Green, 404 U.S. 997 (1971) (per curiam).
Although the court determined there was merit in
interpreting IRC Sections 170 and 501(c)(3) by reference to
their common-law background, it concluded the ultimate
criterion for determining whether an organization was
charitable rested on federal policy. The court referred to the
general and well-established principle that Congressional
intent in providing tax deductions and exemptions is not
construed to be applicable to activities that are either illegal
or contrary to public policy. Thus, charitable exemptions
and deductions must be construed to avoid frustrations of
Federal policy. Because the court found that there was a
declared federal public policy against support for racial
discrimination in education, it held that IRC Sections 170
and 501(c)(3) could no longerbe construed to provide tax
exemption for racially discriminatory private schools and
charitable deductions to their donors. The court determined
there was such a federal public policy based on civil rights
cases, including Brown v. Board ofEducation, 347 U.S.
483 (1954); the Civil Rights Act of 1964, 42 U.S.C. §§
2000c to 2000d-4; and the ultimate source, the Thirteenth
Amendment's Enforcement Clause.
After the opinion on the merits in Green v. Connally, the
IRS formalized its change in position in Revenue Ruling
71-447, 1971-2 C.B. 230. In the ruling, the IRS stated that a
private school that did not have a racially
nondiscriminatory policy as to students did not qualify for
exemption under IRC Section 501(c)(3) because the private
school was not charitable within the common law
concepts reflected in IRC Sections 170(c) and 501(c)(3).
Relying on the common law of charitable trusts, the IRS
concluded that the purpose of a 501(c)(3) must not be
illegal or contrary to public policy. While the IRS
determined that a private school operating on a
discriminatory basis was not prohibited by federal law,
Titles IV and VI of the Civil Rights Act of 1964, Brown,
and subsequent federal court cases reflected a federal public](ViewImageLocal?handle=hein.crs/goverax0001&div=1&collection=&method=preview&ext=.png&size=3)