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Arizona Court Concludes That Tax-Exempt Status Is Not Considered Federal Financial Assistance Under Title IX And The Rehabilitation Act
An Arizona statute provides that interscholastic or intramural athletic teams designed for females, women, or girls may not be open to students of the male sex.
A group of students filed suit against several entities, including the Gregory School, a private school in Arizona that the students attend. The students alleged that the School violated Title IX, the Americans with Disabilities Act, and Section 504 of the Rehabilitation Act due to the School’s enforcement of this law.
The School filed a motion to dismiss, arguing that Title IX and the Rehabilitation Act do not apply to them because they do not receive federal financial assistance.
For the Title IX and Rehabilitation Act claims, the students argued that the School’s 501(c)(3) tax-exempt status constituted receipt of federal financial assistance, and therefore, the School was subject to these laws. In particular, the students argued that tax-exempt status is a subsidy that constitutes federal financial assistance under the “catchall” provision of the Department of Education’s Title IX regulations.
The Court disagreed with the students. The Court reasoned that neither Title IX nor the Rehabilitation Act defines federal assistance, but the Department of Education does define federal financial assistance for the purposes of Title IX. That definition does not include tax-exempt status as a form of federal financial assistance. The Court was not persuaded that the “catchall” provision extended to tax-exempt status. The categories listed in the Title IX regulations include affirmative grants of federal resources, such as funds, property, and personnel. In contrast, tax-exempt status is a designation provided by the IRS to certain organizations that meet criteria outlined in the Tax Code. The Court reasoned that the benefit of not having to pay certain taxes was realized only after the tax-exempt organization earns income that would otherwise be taxed. An entity with 501(c)(3) status may or may not have taxable income.
Although two trial courts recently have held that tax-exempt status does constitute federal financial assistance, this Court was not willing to make that leap.
The Court granted the School’s motion to dismiss the Title IX and Rehabilitation Act claims.
Note: Over the last few years, two courts (one California court and one Maryland court) have held that tax-exempt status constitutes federal financial assistance, obligating schools to follow Title IX and the Rehabilitation Act, among other statutes. This area of the law remains in flux and LCW will monitor these cases for further developments.
Doe v. Horne, Mot. to Dismiss (D. Ariz. Dec. 11, 2023), No. CV-23-00185-TUC-JGZ.