RACE-CONSCIOUS AFFIRMATIVE ACTION BY TAX-EXEMPT 501(C)(3) CORPORATIONS AFTER GRUTTER AND GRATZ

St. John's Law Review, Fall 2003 by Brennen, David A

INTRODUCTION

The Equal Protection Clause of the Fourteenth Amendment generally acts as a legal limit on the permissible bounds of government action.1 Accordingly, public universities and other government entities are constitutionally prohibited from engaging in acts that violate equal protection of the laws.2 The Supreme Court recently reinforced this point when it ruled, in two related cases, that public universities may consider the race of applicants when making admissions decisions, so long as an applicant's race does not amount to a deciding factor when granting admission.3 By its very terms, the constitutional limitation imposed by the Equal Protection Clause only directly applies to government entities, not private ones.4 Private entities, however, are subject to other legal limits on the use of race as a factor that are not themselves constitutional limits but approximate to them.5 One of these pseudo-constitutional legal limits for private actors-at least those that are tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code-is the tax law's public policy limitation.6 Hence, the Supreme Court has ruled that a private university that discriminates against black people is not entitled to section 501(c)(3) tax-exempt status.7 This Article examines the impact of the Supreme Court's recent decisions concerning the permissible use of race by public universities on the scope of the public policy prohibition against racial preferences by private tax-exempt entities.8

The ultimate concern here is the continued permissibility of race-based affirmative action, in a very broad sense, in the taxexempt arena. Prior to the Supreme Court's clarification that governmental use of race is permissible for racial diversity purposes, federal courts were divided as to whether race could be justified on any basis other than remedying specific acts of prior discrimination. In light of this split in authority, the Internal Revenue Service (IRS) indicated that it could take the position, based on the direction of constitutional law, that race-based affirmative action violates established public policy. Such a position would effectively prohibit affirmative action by all section 501(c)(3) tax-exempt institutions, which includes many schools, hospitals, and other charitable entities. Thus, it is important to resolve the impact of the Supreme Court's recent decisions on private tax-exempt institutions that adopt affirmative action policies aimed at benefiting blacks, Latinas and Latinos, Native Americans, and other minorities.9 Although the Supreme Court has outlined the types of race-based affirmative action policies that may be used by public universities when making admissions decisions, it remains to be seen what impact the Court's decisions will have with respect to private entities that have obtained or desire section 501(c)(3) tax-exempt status.

Part I of this Article examines how the Equal Protection Clause limits the government's ability to engage in race-based affirmative action. Part I focuses on how constitutional law analysis has evolved in light of the Supreme Court's recent decisions in Grutter v. Bollinger and Gratz v. Bollinger. Part II provides a brief description of tax law's public policy limitation. This part shows how the IRS, though not required to do so, has generally followed Equal Protection Clause jurisprudence when applying the public policy limitation to race-based activity by private tax exempt 501(c)(3) institutions. Part III discusses how the Supreme Court's decisions in Grutter and Gratz will likely impact the way in which the IRS interprets the public policy limitation as a factor in determining the permissibility of racebased affirmative action by tax exempt 501(c)(3) institutions. Finally, this Article concludes that despite a contrary rule with respect to public institutions, private 501(c)(3) tax exempt institutions are not necessarily prohibited from using race as a deciding factor when making important decisions about matters such as admission to a private university.

I. EQUAL PROTECTION CLAUSE LIMITS ON THE USE OF RACE BY PUBLIC ENTITIES: GRUTTER AND GRATZ

On June 23, 2003, the Supreme Court decided two cases that directly impact how public universities may consider the race of an applicant for admission. In Grutier v. Bollinger, the Court upheld the University of Michigan Law School's affirmative action plan for admitting racial minorities as consistent with the Equal Protection Clause.10 In Gratz v. Bollinger, the Court struck down the University of Michigan's undergraduate minority admissions program as violative of the Equal Protection Clause.11 Both the law school and undergraduate admissions programs at issue in these cases, albeit in different ways, considered the race of each applicant. The law school program used race as one of many factors in the admission process, while the undergraduate school used race as a deciding factor in many cases. Both of these Supreme Court decisions will be pivotal in the realm of constitutional jurisprudence because they outline the parameters of appropriate race-based affirmative action by public universities and other government actors. Specifically, the Court in Grutter and Gratz finally answered a question that has divided federal courts of appeals for many years: May the government ever use race as a factor when making important decisions about matters like admission to state colleges and universities? The Supreme Court's answer to this question is yes, but only under certain conditions.