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Can BSA be Tax Exempt?

     The following article appeared in Tax Analysts' Tax Notes Today, which is a trade publication for tax professionals and hardly a bastion of liberal ideology:


Copyright (c) 2000 Tax Analysts
Tax Notes Today

Months after the Supreme Court's June ruling in Boy Scouts of America, et al. v. Dale, upholding the Boy Scouts of America's (BSA's) ban on gay troop leaders, questions linger about tax-exempt status for groups that exclude homosexuals.


BSA's tax-exempt status became an issue in August 1999 after James Dale, an avowed homosexual and gay rights activist, won an earlier bout with BSA before the New Jersey Supreme Court. Only a few days after the state court ruling, an online participant in's live discussion of the ruling voiced his opposition to the court's holding, commenting that BSA "should not be forced to [accept gay members]," but should "give up all public funding [and] tax-exempt status," in exchange for its right to exclude gay people.

According to a series of press releases issued by one of Dale's legal representatives, the Lambda Legal Defense and Education Fund (Lambda), Dale's battle with BSA began in 1990 when he was expelled from the Boy Scouts after BSA officials read in a newspaper article that Dale was gay. Attorneys for Dale argued in New Jersey courts that BSA had violated the state's public accommodations law prohibiting sexual orientation discrimination.

The state supreme court ultimately ruled in Dale's favor in August 1999, reasoning that BSA's access to significant support from the state and local governments precluded the organization from attempts to exempt itself from compliance with New Jersey's civil rights laws.

But the U.S. Supreme Court in a 5-4 decision reversed in June 2000. The issue before the Court was the application of New Jersey's public accommodations law in light of BSA's claim to a First Amendment right of expressive association.

In its analysis, the Court addressed whether BSA's First Amendment "freedom not to associate" was outweighed by any compelling interest New Jersey had in eliminating sexual orientation discrimination. Ultimately, the Court determined that the state's law was similar to other "government actions that may unconstitutionally burden . . . [the] freedom . . . not to associate."

In his dissent, Justice John Paul Stevens noted that "the public perception of homosexuality in this country has changed." The majority responded by rejecting "societal acceptance" as an argument for "denying First Amendment protection to those who refuse to accept . . . [society's] views."

The Court's position on the impact of societal acceptance was, in the end, a far cry from the position it took in Bob Jones University v. United States, 461 U.S. 574 (1983). That case involved the IRS's revocation of the university's tax-exempt status on learning of the school's policy forbidding interracial dating. In Bob Jones, the Court found the governmental interest at stake more compelling than the burden that loss of tax-exempt status placed on the school's ability to exercise its religious beliefs.

The influence of societal views on race discrimination was an important factor in Bob Jones University because, according to the Court, to be tax-exempt a charitable institution "must demonstrably serve and be in harmony with the public interest . . . [and] must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred." The Court in Bob Jones further reasoned that denial of tax benefits would not "prevent [the organization] from observing . . . [its] . . . tenets."

In light of the Court's rationale in Bob Jones University, some scholars have queried whether BSA's sexual orientation-based discrimination is so at odds with the "community conscience" on homosexuality that it would serve as a legitimate reason for revoking an organization's tax-exempt status.

'Community Conscience' on Homosexuality

The nation's reaction to discrimination against the gay community and to the result in Boy Scouts of America v. Dale has been expressed in various ways.

On June 23, just days before the Supreme Court ruling, President Clinton issued Executive Order No. 13160, barring discrimination against gays. In July, Rep. Lynn Woolsey, D-Calif., introduced a bill calling for a revocation of BSA's federal charter. And in the months following the High Court's decision, major newspapers across the country reported that several BSA sponsors, including Chase Manhattan, the United Way, and Wells Fargo Bank, had threatened to withdraw their support of the group or had at least voiced concern about BSA's antigay policies.

The president's order was countered by statements from the Republican Party's 2000 GOP platform, which expressly supported the position of "organizations such as the Boy Scouts of America." In other turns of events, the bill to revoke the group's charter failed to pass the House, and several of BSA dissident sponsors later renewed their support for the organization.

Considering the vacillation between public rejection and acceptance of sexual orientation-based discrimination, there appears to be no clear "community conscience" on the issue. However, more recent reaction to the Boy Scouts v. Dale outcome -- like the refusal on November 3 by six leaders of a Cub Scout pack in Providence, R.I., to enforce BSA's antigay policy -- has kept commentators and exempt organizations practitioners talking about the IRS's potential involvement.

Practitioner Perspectives Michael I. Sanders, Powell, Goldstein, Frazer & Murphy, Washington, and David S. Buckel, Lambda Legal Defense & Education Fund, New York, responded to questions from Tax Analysts on the potential tax consequences of the Boy Scouts ruling.

Sanders, who has taught a graduate-level course in tax-exempt organizations for many years at Georgetown University Law Center, told Tax Analysts that the Service will have difficulty revoking the exemption of an organization that discriminates against homosexuals because "discrimination against homosexual[ity] is not yet viewed as violative of fundamental public policy."

Sanders further noted that "if a group can demonstrate, as [BSA] did, that including a particular class would impose a 'serious burden' on the organization's right of expressive association, the IRS may have to back down on any challenge to the group's tax-exempt status."

For Buckel, a senior staff attorney at Lambda, "the right to evade a state's anti-discrimination law does not extend to a generalized right to everything else." Buckel, who also coordinated the large number of amici curiae that filed briefs with the Supreme Court in the Boy Scouts case, believes that "the analysis [for tax exemption] is different." According to Buckel, "allowing organizations to avoid paying taxes, and to get tax deductibility for donations, is a privilege that Congress created to support the public interest."

Pointing to the Supreme Court's position in Regan v. Taxation With Representation, 460 U.S. 540 (1983), Buckel asserts that the Court has "described this privilege as a 'form of subsidy,' which the Supreme Court did not view as 'somehow not fully realized unless they are subsidized by the State'."

Buckel also cited the Court's reasoning in Bob Jones University regarding the need for an organization seeking tax exemption to demonstrate that it serves, and is in harmony with, the public interest. Thus, Buckel argues, the "analysis of Scout officials' exclusionary membership policy is . . . left to the IRS concerning federal tax exemption, which turns in part on compliance with state policies and laws against discrimination."

When asked about the impact of state policies and laws on certain issues regarding taxpayers, Sanders explained that "on federal constitutional issues" the IRS "looks to the Supreme Court, and not state law." The facts involved in the Boy Scouts case -- one of BSA's exempt purposes is to train young men, and homosexuals are not by definition a protected class -- "cannot be ignored," he said. "The Bob Jones case, which involved racial discrimination in education, provided a case of strong public policy issues with a compelling governmental interest."

Overall, the lesson from the Boy Scouts decision for legal representatives of tax-exempt organizations is that "there is still a good deal of leeway . . . to exclude certain non-protected classes from their number, or to take a certain position, as long as they can justify that with counterbalancing constitutional rights," Sanders said. "The IRS has not indicated that it will revoke . . . tax-exempt status because of an exempt organization's opinions about [non-protected classes like] sexual orientation," he added.

Buckel said he would advise exempt organizations "to stay mindful of the different legal analyses that apply, depending on the questions presented."

IRS Intervention?

Notwithstanding the "different legal analyses" used by the Supreme Court in determining First Amendment protection and tax- exempt status, many in the EO community still wonder about the IRS's analysis as to whether a publicly supported exempt organization that openly discriminates against members of the public may retain tax- exempt status. If one were to follow BSA's rationale for excluding homosexuals, the answer would be "no."

According to BSA's position statement in 1978, signed by Downing B. Jenks, then-president of BSA, and Harvey L. Price, Chief Scout Executive, access to the benefits of BSA membership and leadership is "a privilege not a right." If tax-exempt status is also a privilege and not a right as articulated by countless revenue rulings, why should extension of tax-exempt status be any less exclusive?

The most recent guidance that the Service has given on discrimination and tax-exempt status can be found in Chapter N of the IRS's Exempt Organizations Continuing Professional Education (CPE) Text for fiscal 2000 on Private Schools.

The chapter provides an historical account of the Service's role in eliminating tax-exempt status for private schools whose operations involve racial discrimination.

According to the CPE text, "the Service relied on a clearly established federal policy against racial discrimination in education" in formulating its policy, in 1970, that racially discriminatory schools are not exempt. The text also offers several historical landmarks to illustrate the development of the "established federal policy."

For example, the text points to the ruling in Brown v. Board of Education, 347 U.S. 483 (1954); the Civil Rights Act of 1964; and a 1970 class action suit that was brought in Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971). The final result of Green was a permanent injunction imposed on the Service, requiring denial of tax-exempt status to schools in Mississippi that discriminated on the basis of race, the CPE text reports.

Since the Service's policy stance in 1970, "public policy in the area of race discrimination has [continued to] evolve. . . ," says the CPE text. Still, "not all issues have been settled, and new questions have been raised," it states.

The CPE text relies on the Bob Jones University decision for the proposition that "the role of the [IRS] in the public policy arena remains somewhat limited.

The Service may recognize the effect of public policy on exemption only in those situations where there is no doubt as to the fundamental public policy at issue," the text explains.

Further, in what may be the CPE text's most revealing insight into predicting IRS intervention based on discrimination, the text cited the language from Bob Jones University: "these sensitive determinations should be made only where there is no doubt that the organization's activities violate fundamental public policy."

Based on the CPE text chapter, it appears that the Service believes it may not revoke or deny exempt status for an organization like BSA if there is doubt that the group's exclusion of homosexuals violates fundamental public policy or is, at a minimum, "at odds with the community conscience."

Those more hopeful that sexual orientation is on its way to becoming a protected class would probably agree with Buckel, who points to "shift[s] in support to nondiscriminatory youth groups like 4H Clubs and Campfire Boys and Girls" and the "withdrawals of participation from several cities, public schools, corporate and charitable foundations, and former Eagle Scouts" as evidence of today's community conscience. Sanders said he simply sees Boy Scouts as "a very interesting case, with important significance for society as a whole in the 21st century."

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