Coit v. Green (1971)
Religious Tax Exemptions: Racial Discrimination
Should private schools that engage in racial discrimination be permitted to retain their tax exempt status? This depends upon just why tax deductions exist. If private schools receive their tax deduction simply because they are involved with education, then their discriminatory policies shouldn't matter.
Background Information
Black families who had children attending public schools in Mississippi filed suit to have the IRS revoke the tax exempt status of private schools in Mississippi that excluded black students from enrolling. The families argued for a court declaration that either granting tax exempt status to such schools violated the IRS code or, if it is in accordance with the code, then that portion of the code was unconstitutional.
Parents and children who supported or attended the private schools engaging in racial discrimination entered the case as a class, arguing that the tax exemptions should be retained.
Court Decision
During litigation, the IRS changed how it applied the tax code and held that:
it can no longer legally justify allowing tax-exempt status to private schools which practice racial discrimination nor can it treat gifts to such schools as charitable deductions for income tax purposes.
As the Court's decision explained, charitable trusts (whether for the purpose of education, religion, or the relief of poverty) are created to "serve the general welfare" and are expected to be "beneficial to the community." Such standards can, of course, change over time - for example, at one time a trust for relieving the suffering of animals might not have been recognized, but today it would be uncontroversial.
Similarly, something that would have been treated as a charitable trust in the past need not be treated as such today, and schools which engage in racial discrimination were found to qualify:
All charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy. ...This public policy doctrine operates as a necessary exception to or qualifier of the precept that in general trusts for education are considered to be for the benefit of the community. Otherwise, for example, Fagin's school for pickpockets would qualify for a charitable trust.
As a consequence, the Court ruled that section 501(c) (3) of the Internal Revenue Code does not permit tax deductions for contributions to any educational organization unless the school has a racially nondiscriminatory policies for students. Furthermore, the Court enjoined the IRS from approving any application for tax exempt status from such a school.
The Court specifically did not rule on the hypothetical possibility of a school which discriminated against minorities for religious reasons.
Without comment, the Supreme Court affirmed the judgment of the United States District Court for the District of Columbia at the end of 1971.
Significance
This decision helped establish a precedent for the idea that tax deductions were not an automatic right and are, in fact, conditioned upon the principle that charitable trusts receiving tax deductions are serving some general community interest in the work they do. If, in fact, they operate contrary to the community interests, then their tax deduction can be revoked.
