An appellate court recently ruled that tax exemption does not equate to federal financial assistance. While a lower court had tied the two concepts in a case involving a Christian school, the U.S. Court of Appeals for the Fourth Circuit corrected that misunderstanding.

Former students of Concordia Preparatory School, a private institution affiliated with the Lutheran Church Missouri-Synod, claimed in federal court that the school had not adequately responded to their sexual assault and harassment allegations. Pointing out that it was not subject to Title IX education claims since it did not receive federal funds, the school argued the lawsuit should be dismissed. However, a U.S. district judge in Maryland countered that such an “argument is without merit” and Concordia Prep “cannot avail itself of federal tax exemption but not adhere to the mandates of Title IX.” The district judge said the school’s tax-exempt status constituted federal financial assistance.

In a unanimous ruling, the Fourth Circuit’s panel of judges reversed the lower court’s faulty assumption. The appellate judges explained that tax-exempt status “is the withholding of a tax burden, rather than the affirmative grant of funds.” It is, therefore, not federal financial assistance.

“This is not a novel concept,” they added.

The Fourth Circuit panel also rejected claims that the charitable deduction can be considered federal financial assistance for a tax-exempt organization.

“[D]onors do not actually receive any federal funds by claiming a charitable deduction,” the court determined. “Instead, they are merely allowed to donate the full pre-tax amount of their donation.”

While the distinction between tax exemption and federal financial assistance is reaffirmed in this case, this is not the only time such an argument has been made. In fact, Sen. Marco Rubio (R-Fla.) and Rep. Greg Steube (R-Fla.) proposed the Safeguarding Charity Act earlier this year to clarify in federal law that tax exemption does not trigger federal financial assistance rules.

“Civic organizations like churches, schools, and charities are crucial to our communities,” said Rubio when introducing the bill. “I remain concerned by recent court decisions that could subject these organizations to burdensome federal regulations simply because they are tax-exempt.”

ECFA will continue to monitor this matter in Congress and the courts.