SCOTUS Reports

Tag: private school

  • Calhoun Academy v. Commissioner, 94 T.C. 284 (1990): Burden of Proof for Tax-Exempt Status and Racial Nondiscrimination Policies

    Calhoun Academy v. Commissioner, 94 T. C. 284 (1990)

    A private school must prove by a preponderance of evidence that it operates in good faith in accordance with a racially nondiscriminatory policy to qualify for tax-exempt status under IRC section 501(c)(3).

    Summary

    Calhoun Academy sought a declaratory judgment that it was exempt from federal income tax under section 501(c)(3). The school, founded during a period of public school desegregation, never enrolled a black student despite a significant local black population. The Tax Court held that Calhoun Academy did not meet its burden of proof to demonstrate a racially nondiscriminatory policy, emphasizing the absence of black students and the school’s historical context. The court clarified that while affirmative action is not required, schools must take steps to overcome unfavorable inferences of discrimination to secure tax-exempt status.

    Facts

    Calhoun Academy, a private school in South Carolina, was established in 1969 during a period of public school desegregation. It has operated continuously since the 1970-71 school year, serving grades 1 through 12 and later adding kindergarten. Despite a local population that was approximately 50% black, the school never enrolled a black student. In November 1985, the school formally announced a racially nondiscriminatory policy and amended its charter accordingly. It applied for tax-exempt status under section 501(c)(3) in 1986, which was denied by the IRS due to insufficient evidence of nondiscriminatory operation.

    Procedural History

    Calhoun Academy applied for tax-exempt status under section 501(c)(3) in June 1986. The IRS tentatively denied the application in April 1987, and after a conference and further correspondence, issued a final denial in February 1988. Calhoun Academy then sought a declaratory judgment from the U. S. Tax Court, which heard the case based on a stipulated administrative record and ruled in favor of the Commissioner in March 1990.

    Issue(s)

    1. Whether Calhoun Academy must prove by a preponderance of the evidence that it operates in good faith in accordance with a racially nondiscriminatory policy to qualify for tax-exempt status under section 501(c)(3).
    2. Whether Calhoun Academy has met its burden of proof to demonstrate that it operates in good faith in accordance with a racially nondiscriminatory policy.

    Holding

    1. Yes, because the Tax Court has established that the burden of proof in section 7428 and 501(c)(3) proceedings is proof by a preponderance of the evidence, as articulated in Federation Pharmacy Services v. Commissioner.
    2. No, because Calhoun Academy failed to show that it operates in good faith in accordance with a nondiscriminatory policy toward black students, as evidenced by the absence of black enrollment and insufficient efforts to attract black students.

    Court’s Reasoning

    The court applied the legal standard from Federation Pharmacy Services v. Commissioner, which requires proof by a preponderance of the evidence for tax-exempt status under section 501(c)(3). The court noted that while Revenue Procedure 75-50 provided guidelines, it was not substantive law. The court also recognized the principles from Bob Jones University v. United States, affirming that racially discriminatory schools do not qualify for tax exemption. The court found that Calhoun Academy’s historical context (founded during desegregation), lack of black enrollment, and late announcement of a nondiscriminatory policy created an inference of racial discrimination. The school’s evidence, including interactions with black outsiders and a formal policy statement, was insufficient to overcome this inference. The court emphasized that while affirmative action is not required, the school needed to take some steps to counteract the unfavorable evidence to meet its burden of proof.

    Practical Implications

    This decision sets a precedent for how private schools must demonstrate a racially nondiscriminatory policy to qualify for tax-exempt status. Schools with a history of racial discrimination must provide evidence of good faith operation beyond mere policy statements. This may include efforts to attract underrepresented groups, though affirmative action is not mandated. For legal practitioners, this case underscores the importance of thorough documentation and proactive measures to overcome historical discrimination when seeking tax-exempt status for educational institutions. Later cases, such as Virginia Education Fund v. Commissioner, have cited Calhoun Academy to reinforce the burden of proof required for tax-exempt status in similar contexts.

  • Fay v. Commissioner, 76 T.C. 408 (1981): Deductibility of Educational Expenses for Children with Learning Disabilities

    Fay v. Commissioner, 76 T. C. 408 (1981)

    Educational expenses for children with learning disabilities may be deductible as medical expenses if they are for a special program directly related to treating the disability.

    Summary

    In Fay v. Commissioner, the Tax Court addressed whether tuition paid for children with learning disabilities at a private school could be deducted as medical expenses. The Fays sent their children to Whitby School, which offered a Montessori education supplemented by a language development program (DLD) for learning-disabled students. The court held that regular tuition was not deductible because Whitby was not a “special school” primarily for medical care. However, the additional fee for the DLD program, which directly addressed the children’s learning disabilities, was deductible as a medical expense under Section 213 of the Internal Revenue Code.

    Facts

    The Fays’ children, Jennifer and Kevin, were diagnosed with learning disabilities in 1972-73. After unsuccessful attempts to get help from public schools, the Fays enrolled their children in Whitby School in 1973. Whitby used the Montessori method but also offered a department of language development (DLD) program for students with learning disabilities. In 1975, the Fays paid $5,115. 45 in regular tuition and an additional $1,800 for the DLD program. They claimed both amounts as medical expense deductions on their 1975 tax return, which the IRS disallowed.

    Procedural History

    The Fays filed a petition with the U. S. Tax Court challenging the IRS’s disallowance of their medical expense deductions. The Tax Court heard the case and issued its decision on February 26, 1981.

    Issue(s)

    1. Whether the regular tuition paid to Whitby School for Jennifer and Kevin’s education is deductible as a medical expense under Section 213 of the Internal Revenue Code.
    2. Whether the additional fee paid for the DLD program at Whitby School is deductible as a medical expense under Section 213 of the Internal Revenue Code.

    Holding

    1. No, because Whitby School does not qualify as a “special school” under the regulations, and the regular tuition was not primarily for medical care.
    2. Yes, because the DLD program was directly related to the treatment of the children’s learning disabilities, making the additional fee deductible as a medical expense.

    Court’s Reasoning

    The court applied Section 213 of the Internal Revenue Code and related regulations, which allow deductions for medical care expenses. It distinguished between regular educational expenses and those for “special schools” that primarily provide medical care. The court found that Whitby School’s primary purpose was education using the Montessori method, not medical care, so it did not qualify as a “special school. ” Therefore, the regular tuition was not deductible. However, the DLD program was specifically designed to address learning disabilities and was separate from the regular curriculum. The court determined that the additional fee for this program qualified as a medical expense because it was directly related to treating the children’s mental handicaps. The court emphasized that the therapeutic nature of the services, not the title of the provider or the institution, determines deductibility. The court also noted prior cases like Fischer v. Commissioner and Greisdorf v. Commissioner, which established that mental disorders can be treated as diseases for tax purposes and that educational services can be deductible if they directly address such conditions.

    Practical Implications

    Fay v. Commissioner provides guidance on the deductibility of educational expenses for children with learning disabilities. It clarifies that regular tuition at a school not primarily focused on medical care is not deductible, even if the school has programs for learning-disabled students. However, additional fees for specialized programs directly addressing a child’s disability may be deductible as medical expenses. This decision impacts how parents of children with learning disabilities should approach their tax planning and documentation of expenses. It also affects how schools structure and charge for specialized programs. Subsequent cases have cited Fay in analyzing the deductibility of educational expenses, often distinguishing between the primary purpose of the institution and the specific nature of the services provided.