Taxes and Civil Rights; “Constitutionalizing” the Internal Revenue Code

Abstract

In McGlotten v. Connally, a three-judge federal court held that the Secretary of the Treasury could not grant federal income tax exemptions to fraternal orders that exclude nonwhites from membership or allow gifts supporting the charitable functions of such organizations to be deducted by the donors as charitable contributions in computing taxable income. In the court's view, these tax benefits constitute federal "subsidies" that, if granted to a fraternal order with a racially restrictive membership policy, would violate the Due Process Clause of the Fifth Amendment as well as the statutory prohibition on discrimination in "any program or activity receiving Federal financial assistance" imposed by Section 601 of the Civil Rights Act of 1964. The court also held that "a clearly indicated Congressional policy" against racial discrimination by "the beneficiaries of federal largesse" required that the Internal Revenue Code be construed to disallow a deduction for contributions to fraternal orders excluding nonwhites from membership. Although the plaintiff also attacked the income tax exemption of segregated nonprofit social clubs, the court held their exemption to be more limited than the tax benefits enjoyed by fraternal orders, and therefore not burdened with the same prohibition on racial discrimination.