Determination 1036024: IRS revoked a private school's section 501(c)(3) exemption over racial discrimination

Plain-English summary

The IRS finalized its adverse determination that a private school did not qualify for exemption under IRC § 501(c)(3), after the school failed to protest a proposed denial. The IRS found that the school, formed around the time of court-ordered desegregation, had not demonstrated a racially nondiscriminatory policy toward Black students and employees. The determination cites the school's minimal Black enrollment, lack of Black faculty and administrators, limited outreach, and statements blaming Black families for the lack of enrollment. Contributions were not deductible under IRC § 170, and the school was directed to file Form 1120.

Ruling snapshot

• Question: Did the private school demonstrate that it operated with a racially nondiscriminatory policy required for IRC § 501(c)(3) exemption?
• Outcome: Revocation
• Key authorities: IRC §§ 501, 170, 6104, 6110, and 7428; Rev. Proc. 75-50

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201036024 Contact Person:
Release Date: 9/10/2010

Identification Number:
Date: June 14, 2010

Contact Number:

UIL: 501.03-23
Employer identification Number:
Form Required To Be Filed:
1120
Tax Years:
ALL
Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. You must file
Federal income tax returns on the form and for the years listed above within 30 days of this
letter, unless you request an extension of time to file. File the returns in accordance with their
instructions, and do not send them to this office. Failure to file the returns timely may result in a
penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if youI have any questions about how this determination may
affect your State responsibilities and requirements.

If youI have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If youI have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at
1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Robert Choi
Director, Exempt Organizations
Rulings & Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

April 21, 2010 Contact Person:

UIL: 501.03-23 Identification Number:
Contact Number:
FAX Number:

Employer Identification Number:

Legend:

Academy
Date 1
Date 2
Year 1
Year 2
County
State

Dear

WeI have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code section 501(a). Based on the information provided, weI have
concluded that you do not qualify for exemption under Code section 501(c)(3). The basis for
our conclusion is set forth below.

You were incorporated on Date 1 under the laws of the State. You were formed a month after a
court ordered desegregation of school districts in County and other counties in State.

Article V of your Charter of Incorporation provides that your purposes shall be exclusively
charitable and educational and to accomplish such purposes, you shall exercise such rights and
powers that include the following:

e establish, organize, own, administer and operate one or more kindergarten, primary
secondary schools;

e select and employ such principals, teachers, professors, instructors and other
employees as you may deem necessary and advisable, and provided that no person
shallI have a right to be employed or retained as a principal, teacher, professor,
instructor, administrator or other employee, but any such employment or retention is

solely at your will, pleasure and desire and may be denied or terminated at your will;
and

e fix the curricula for the school an the standards and qualifications for admission of
pupils and students and for their retention in the school, and to reject any applicant
for admission, or to expel any person so enrolled and attending for any cause
whatsoever. It being your intent and purposes that no person, making application or
already enrolled, shallI have a right to be admitted, but that any person so admitted or
retained solely in accordance with your will and desires and not otherwise.

You operate a school in County of State and currently offering grades K3 - 12. Initially you
offered Grades 1 - 12 during your first 10 years and since thenI have added K5, K4 and K3 after
each 8 school years thereafter, respectively. County’s population consists approximately %
black, % white and % other minority groups.

YouI have been operating for more than 40 years providing academic and sports program to
your students. In this regard, your letter dated December 1, 2009 states:

WeI have never had the opportunity toI have a black student participate in our sports
program ... because we cannot entice them to become students at (our school). It would
please us very much toI have black students, both in the academic program and sports
program, but so far weI have been unsuccessful in this endeavor. . . nothing would please
us more than toI have black students attend (our school), but we are at a loss as to how we
can persuade them to become a part of our educational facility.

In addition, you stated the following as possible reasons for your lack of enrolled black students:

[T]hey (black students) prefer to go to a school where the test scores show that the school
is failing ... where they are not be(ing) held accountable for making good grades, where
they do notI have to furnish their own transportation, where they are provided free lunches
and where they do notI have to pay any money to receive a good education. If we would
change this, we would. WeI have a situation here where it is not that we do not want the
blacks to attend school at (our school), but the blacks prefer to attend to a school where
they are not expected to perform well. Maybe this is the fault of the State... and maybe
this is the reason the state has so many schools that are not rated “failing”, but we do not
feel this is something that (our school) should suffer for.

In your prior letter dated July 15,20 _, you stated the following:
[T]he reason the blacks do not attend (our school) is not because they think they would be

mistreated. They know they are welcome and they know they would be treated fairly and
equitably. They simply do not want to pay for an education. The people who send their

children to (our school) do so because they know [this can be proven by public school test
scores] that their children get a better education at (our school). This is sad, because all of
us, both black and white, pay taxes to educate our children regardless of where they go to
school. The people who go to (our school) pay taxes and pay tuition, but they feel this is
justified by the quality of education they receive. The decision of whether or not to send
your child to (our school) is most often not based on the financial ability to do so, but
simply the they already pay taxes and the public school offers more opportunities that do
notI have to be paid for --- for example, free lunches, free transportation, etc.

Moreover, in your letter dated October 27,20 __, you stated:

...the history of the education process in ...County, you will find that even there was (our
school) in the county... the black students went to one school and the white children went
to another school. This was not MANDATORY, simply put IT WAS A MATTER OF
CHOICE. The students were friends, they just simply wanted to go to the school of their
choice (your emphasis). The black and white children of the public school and (our
school) are friends. They interact with each other from an athletic standpoint . . . Many of
the athletic teams that we play (football, basketball, softball)I have black players. They will
attest to the fact that they are welcomed to (our) campus, and treated just like the same as
any white player. Their parents are welcomed as a spectator and are treated no different
from anyone else.

Student enrollment data for school years 20 though 20 = shows 1 black student enrollment in
one year. The data show 3 non-black minority students in your total 170 enrollments in 20, 1
black and 2 non-black minority students in your total 172 enrollment in 20, and 3 non-black
minority students in your total 170 enrollment in 20 . Also, ina letter dated January 5,20 ,
you stated “beginning the new semester after the holidays, weI have a new minority student
registered and attending classes.”

In your school operation, you do notI have a black person on your faculty or administrative staff.
The data on faculty staff for school year 2009 show a racial composition of 100% white of the
total 16 faculty staff members.

In your letter dated December 1, 20 __, you stated:

There has never been a black teacher to apply for a teaching job at (our school). If one
should apply, we would use the same screening process that is used to hire any teacher.
Our only concern in hiring teachers is to employ teachers who are the best qualified and
who concentrate on the best means of teaching the students. Our emphasis is placed on
the best possible environment possible for a student, regardless of his color or nationality,
to learn.

Your prior letter dated October 27,20 , on the subject stated the following:

(Our school) has never had a black applicant for a faculty or administrative position. Were
this to happen, the person would be considered on the same standard as a white or

someone of another race. There is not much turnover in the staff or faculty at (our school).
Many of the teachersI have been here for many years. If you check, you will find there is
not much advertisement activity securing faculty, either in the public school or the
academy. Inasmall rural county, most people do not change jobs often. Because of the
number of teachers involved in public school(s), theyI have more difficulty getting teachers
than (our school) does. (Our school) does not offer retirement nor pay any toward the
health insurance of teachers, so this does not encourage applicants to apply for a job, so
this may be one of the reasons weI have not had any black applicants.

While you are lagging in the enrollment of black students and employing black teachers and
administration staff, youI have however, hired black contract laborers performing janitorial
services in 2007 through 2009 and in several prior years. In this regard, you state:

The fact that these men are black has nothing to do with why they are doing the work. It is
simply because they would do the best job and for the least amount of money.

Nine years ago in Year 2, your Board of Directors passed a resolution adopting a policy of not
discriminating on the basis of race, color, national, and ethnic origin in the administration of
educational and administration policies, scholarship and loan programs, athletic and other
school-administered programs. This policy is included in your advertisements on newspapers
in the County, your website, student handbooks and some brochures and flyers.

At that time, you also created an Outreach Committee with a mission to inform the area minority
community of your nondiscriminatory policy and to pursue minority enrollment and participation
in all your programs. The Outreach Committee was tasked to engage in hosting an annual
Open House, advertising in area newspapers your nondiscriminatory policies, distributing
brochures and newsletters to minority organizations the area, and making available presenters
to visit minority organizations. However, you stated that the Outreach Committee “was never
active as we would like it to be.”

You submitted a sample flyer which contains the following statement in bold large capital letters:
YOU'RE INVITED TO OPEN HOUSE AT ON DATE 2, FROM 5 UNTIL 8 P.M.
COME CHECK US OUT! THIS DOES NOT OBLIGATE YOU TO REGISTER YOUR
CHILD TO ATTEND SCHOOL AT

Underneath is a statement of your nondiscriminatory policy in small capital letters. You did not,
however, indicate where, how, and when the flyers were actually distributed.

YouI have also submitted copies of similar advertisements on newspapers for your Open House
for Date 2 from 5:00 PM to 8:00PM. The advertisement is an open invitation to visit your
campus with availability of staff to answer any questions. The advertisement does not
specifically mention the invitation for black and other minority groups. Rather, it described
offered classes and daycare services, fundraising sales, and promoted your academic
excellence. The advertisement included your nondiscriminatory policy statement written in
small letters.

The State has a program established in providing for the distribution and free loan of textbooks
to students of any participating public, private and other nonpublic schools. Under the rules
promulgated by the State Board of Education, an eligible school mustI have received
accreditation status and documented that it operates in a non-discriminatory manner in its
admission and enrollment practices. Notwithstanding the benefits that the program will provide
your students and the school, you indicated that you are not members of the textbook program
stating “WeI have never participated andI have never submitted an application for or requested
participation.”

Section 501(c)(3) of the Code provides, in part, for the exemption from federal income tax of
organizations organized and operated exclusively for educational, charitable or other exempt
purposes.

Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations (regulations) provides that an
organization will be regarded as “operated exclusively” for one or more exempt purposes only if
it engages primarily in activities which accomplish one or more of such exempt purposes
specified in section 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more of the purposes unless it serves a public rather than a
private interest.

Rev. Rul. 71-447, 1971-2 C.B. 230, provides that a private school which does notI have a racially
nondiscriminatory policy as to students does not qualify for exemption from federal income tax
under section 501(c)(3) of the Code. It defines a racially nondiscriminatory policy to mean “the
school admits the students of any race to all the rights, privileges, programs, and activities
generally accorded or made available to students at that school and that the school does not
discriminate on the basis of race in administration of its educational policies, admissions
policies, scholarship and loan programs, and athletic and other school-administered programs.”

Rev. Proc. 75-50, 1975-2 C.B. 587, sets forth guidelines and recordkeeping requirements for
determining whether private schools that are applying for recognition of exemption from federal
income tax under section 501(c)(3) of the Code or are presently recognized as exempt from tax
have racially nondiscriminatory policies as to students. Section 2.02 provides that a school must
show affirmatively both that it has adopted a racially nondiscriminatory policy as to students that
is made known to the general public and that since the adoption of that policy the school has
operated in accordance therewith. Section 4.03 provides that a school must make its racially
nondiscriminatory policy known to all segments of the genera community served by the school.
A school may demonstrate that it follows a racially nondiscriminatory policy by showing
enrollment of student of racial minority groups in meaningful numbers and whether that is
satisfied will be determined on the basis of facts and circumstances of each case. Actual
enrollment, however, is a meaningful indication of a racially nondiscriminatory policy in the case
in which schools become subject to desegregation orders of a federal court or otherwise

expressly became obligated to implement a desegregation plan under the terms of any written
contracts or other commitment to which any Federal agency was a party.

Section 4.07 of Rev. Proc. 75-50 also provides that the existence of a racially discriminatory
policy with respect to employment of faculty and administrative staff is indicative of a racially
discriminatory policy as to students.

In Green v. Connally, 330 F. Supp. 1150(D. D.C. 1971), affd sub nom., Coit v. Green, 404 U.S.
997, 92 S. Ct. 564, 30 L. Ed. 2d 550 (1971), and in the revised injunction orders issued on May
5 and June 2, 1980, the Internal Revenue Service is prohibited from:

according . . . and from continuing the tax-exempt status now enjoyed by, all

private schools or the organizations that operate them, which: (1)I have in the past been
determined in adversary or administrative proceedings to be racially discriminatory; or
were established or expanded at or about the time the public school districts in which
they are located or which they serve were desegregating, and which cannot demonstrate
that they do not racially discriminate in admissions, employment, scholarships, loan
programs, athletics, and extra-curricular programs. (2) The existence of conditions set
forth in paragraph (1) herein raises an inference of present discrimination against blacks.
Such inference may be overcome by evidence which clearly and convincingly reveals
objective acts and declarations establishing that such is not proximately caused by such
school's policies and practices. Such evidence might include, but is not limited to, proof
of active and vigorous recruitment programs to secure black students or teachers,
including students’ grants in aid; or proof of continued meaningful public advertisements
stressing the school's open admissions policy; or proof of meaningful communication
between the school and black groups and black leaders within the community
concerning the school's nondiscrimination policies, and any other similar evidence
calculated to show that the doors of the private school and all facilities and programs
-therein are indeed open to students or teachers of both the black and white races upon
the same standard of admission or employment.

In Prince Edward Sch. Found. v. Commissioner, 478 F. Supp. 107 (D. D.C. 1979), affd, D.C.
Cir. June 30, 1980, cert. denied, 450 U.S. 944, 101 S. Ct. 1408, 67 L. Ed. 2d 376 (1981), the
court held that private schools administering racially discriminatory admissions policies are
excluded from tax-exempt status under section 501(c)(3) of the Code. The court further held
that the foundation had failed to meet is burden of establishing its entitlement to exemption
under section 501(c)(3) because the foundation's record was completely devoid of evidence that
it was administering a nondiscriminatory admissions policy. The court also stated that the
inference that the plaintiff administered a racially discriminatory policy may be drawn from the
circumstances surrounding the school's establishment. Similar inferences as to the existence of
a racially discriminatory policy based on facts surrounding a school's establishment and lack of
minority enrollmentI have been drawn by other courts.

In Norwood v. Harrison, 382 F. Supp. 921 (N.D. Miss. 1974) on remand from the Supreme
Court, 413 U.S. 455, 93 S. Ct. 2804, 37 L. Ed. 2d 723 (1973) and Brumfield v. Dodd, 425 F.
Supp. 528 (E.D. La. 1976), the courts held that a prima facie case of racial discrimination arises

from proof (a) that the schools’ existence began close upon the heels of the massive
desegregation of public schools within its locale, and (b) that no blacks are orI have been in
attendance as students and none is or has ever been employed as a teacher or administrator at
the private school.

In Bob Jones University v. United States, 461 U.S. 574, 103 S. Ct. 2017, 76 L. Ed. 2d 157
(1983), the Supreme Court found that petitioner, a nonprofit private school that prescribes and
enforces racially discriminatory admissions standards on the basis of religious doctrine, did not
qualify as a tax-exempt organization under section 501(c)(3) of the Code. The court held that
racially discriminatory private schools violate a fundamental public policy and cannot be viewed
as conferring a public benefit within the meaning of common law standards of charity and
congressional intent underlying section 501(c)(3).

In Calhoun Academy v. Commissioner, 94 T.C. 284 (1990), the Tax Court held that a private
school failed to show that it operated in good faith in accordance with a nondiscriminatory policy
toward black students and concluded that the school did not qualify for exemption under section
501(c)(3) of the Code. The school was formed at the time of desegregation of the public
schools, and never enrolled a black student or employed a black teacher. The school and its
students participate in some educational and vocational programs and other school-sponsored
activities that directly involved blacks. The court noted:

In today's world, interaction with persons of another race in interscholastic and
community activities is unavoidable by all but the most reclusive or isolated groups.
Petitioner's burden is not met by showing that it interacts with outsiders. The relevant
criteria deal with restrictions on those who may become insiders, i.e. students at the
school.

The court also noted the following:

Petitioner places great emphasis on its teacher and students of Oriental descent,
labeling this evidence "perhaps the most telling." Petitioner has hired and continued to
employ a Japanese-American teacher, who has been subjected to no discriminatory
practices since his hiring. Petitioner has also admitted some American-Oriental
students. Nonetheless, that petitioner does not discriminate against those of Oriental
descent, which we assume to be true for present purposes, implies nothing about
petitioner's policy toward blacks. Petitioner concedes that the largest nonwhite racial
group in the local community is the black population. Petitioner's argument that
American-Orientals are "more of a minority than blacks," while certainly true for (its)
County, is totally without significance here. We decline to embrace the notion, grounded
in an erroneous application of a fortiori logic, that acceptance of a given minority group
implies acceptance of all larger minority groups.

An organization applying for exemption under section 501(c)(3) must establish that it is
organized and operated exclusively for an exempt purpose and in the case of a school must
include establishing that it has a racially nondiscriminatory policy as to students consistent with
the guidelines set forth in Rev. Proc 75-50 and findings by the courts.

The information submitted indicates that you were formed around the time the court handed the
desegregation of schools in the county where you operate a private school. As such, the strict
mandate in Green v. Connally, 330 F. Supp. 1150 (D. D.C. 1971), applies to you in prohibiting
us of according tax exempt status unless you clearly and convincingly demonstrate overcoming
the inference of racial discrimination against black students. In this regard, we find that while
youI have operated a school for more than _—years since the court-ordered desegregation, you
only decided in the last years of your existence and operation to adopt a racially discriminatory
policy. YouI have included the statement of your nondiscriminatory policy in your
advertisements on local newspapers, your website, student handbooks and brochures and
flyers. Also, during the last years, you decided creating an outreach committee, which was
tasked to inform the area minorities of the existence of your nondiscriminatory policy and pursue
minority enrollment and participation in all your programs.

While youI have adopted a racially nondiscriminatory policy and even created an outreach
committee, your school operation, however, failed to show enrollment of black students in which
you stated that the failure to “entice” them to become students at your school as not yours.
Instead, you suggested putting the blame on the black students themselves and their parents ---
black students do not want your offered good education; they prefer schools where they are not
held accountable for making good grades, and that it provided free lunches, transportation and
where they do notI have to pay. You even suggested that it is a traditional choice in the area
that black students go to one school and the white students go to another school. We believe,
however, that the lack of black students, and also that of teachers and administrative staff, in
your school is because of your failure to make intensive, comprehensive and good faith efforts
to reach the black community for their enrollment and employment. YouI have not provided us
sufficient evidence supporting any such efforts in your submitted materials. Moreover, we think
it is suffice with you to interact with the blacks only outside of your classroom, like in
participation in sports with them. However, such interaction is unavoidable and does not prove
that youI have implemented your nondiscrimination policy. The relevant criteria deal here is with
restrictions on those who may become insiders, i.e. students at your school. See Calhoun, 94
T.C. 284 (1990).

Furthermore, Rev. Proc 75-50, at section 4.07, provides that the existence of a racially
discriminatory policy with respect to employment of faculty and administrative staff is indicative
of a racially discriminatory policy as to students. To date, even with years of existence and
operation, youI have not employed any black teacher or administrative staff. Instead all your
teachers and administrative staff member are whites. In this regard, you stated that your only
concern in hiring teachers is to employ teachers who are the best qualified and who concentrate
on the best means of teaching the students. Also, you indicated that your emphasis is placed
on the best possible environment possible for a student, regardless of his color or nationality, to
learn.

Therefore, although youI have adopted a policy of nondiscrimination and made created an
outreach committee, it appears that your adoption of a nondiscriminatory policy and creation of
an outreach committee are merely done for compliance in form purposes and not in good faith.
Also, any efforts toward outreach to the black community are minimal.

WeI have also considered your admission of a few non-blacks as students in your school. We
think, however, that your admission of these non-blacks implies nothing about your policy
toward blacks. See Calhoun, 94 T.C. 284 (1990). Moreover, we think that the presence of your
school discriminatory policy is evident in your decision not to participate in or become a member
of the State’s free textbook program because of its strict requirement that participating schools
must be documented to be operating in a non-discriminatory manner in its admission and
enrollment practices.

Based on the foregoing, we conclude that you failed to demonstrate that youI have taken
sufficient steps to overcome inference of racial discrimination sets forth in the court cases cited
herein. As a school without a nondiscriminatory policy to students, as such term is defined in
Rev. Rul. 71-447, you are not considered operated exclusively for exempt purposes under
section 501(c)(3) of the Code.

Therefore, you do not qualify for exemption under section 501(c)(3) of the Code.

You must file federal income tax returns. Contributions to you are not deductible under section
170 of the Code.

YouI have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

Under penalties of perjury, |I declare that |I have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement contains
all the relevant facts, and such facts are true, correct, and complete.

You alsoI have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if youI have not already done
so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for

-10-

the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to this address:

Internal Revenue Service
SE:T:EO:RA:T:2

1111 Constitution Ave, N.W.
Washington, DC 20224

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax.

If youI have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Robert Choi
Director, Exempt Organizations
Rulings & Agreements