Don't Sic IRS On Racist Frat Boys

This post was originally published on Forbes Mar 16, 2015
It is amazing the amount of angst that nine seconds of video can create in this age of going viral.  I'm referring of course to the stories about the Oklahoma University members of Sigma Alpha Epsilon singing an extremely racist song.  There are of course a large number of angles from which to view this.  Probably the most important is the way it reflects on the persistence of racism.  The song includes a favorable reference to lynching, which is one of my interests as  an amateur historian.

The amateur choirmaster turned out to be the graduate of a Jesuit high school, a painful revelation to this graduate Xavier High School.  There are the issues about free speech, fraternities and what idiots we are when we are eighteen or nineteen.  One thing that did not cross my mind was that there was a tax angle.  Silly me.  Paul Caron, who as the Tax Prof is the undisputed dean of the tax blogosphere, highlighted a story about the tax angle to the tale of painfully recorded adolescent idiocy.

The Tax Professors Weigh In

The  Tax Prof featured a Slate article titled Subsidized Injustice - Racist fraternities and sororities should have their tax-exempt status revoked -  by law professors Daniel J. Herzig and Samuel D. Brunson. I count  Professor Brunson as part of my brain trust as we both share an interest in the intersection of taxation and religion.  He commented extensively on one of my Kent Hovind stories perhaps dashing the hope of some Hovindicators that the "enemy camp" might have found an indictment flaw that would free Doctor Dino. The gist of the article is that even thought there was swift reaction on the part of both the University

and the national office of ΣAE, the problem of racism in fraternities runs much deeper and requires a response from another institution - the Internal Revenue Service.

As tax law professors, we naturally see solutions through the prism of the tax law. Policymakers often use the tax law to provide both carrots and sticks, encouraging certain societally beneficial behavior while deterring behavior we deem detrimental. With apparently endemic discrimination bubbling to the surface of Greek organizations, the tax law may be able to help nudge these organizations to either integrate or clearly signal their discriminatory tendency.

Some Numbers

I suppose I should put aside my perhaps unconventional view that if fraternities are excluding members of minority groups, they may well be doing them a favor.  I would often tell my kids that they are probably not going to be able to do every smart thing I ever did, so if they insist on doing every stupid thing I ever did they will be starting out behind, because they will do some stupid things I didn't do.  Maybe I'm wrong, but I have yet to discern anything smart about fraternities, but of course they didn't have them at the College of the Holy Cross and we found other ways to be stupid.

So what can the Internal Revenue Service do about racist fraternities? It can revoke their exempt status. The professors cite the Bob Jones University case.  That university lost its exempt status for its racist policies even though, in its view, they were biblically sanctioned.  Sigma Alpha Epsilon Fraternity is exempt under 501(c)(7).  That means that it does not get tax deductible donations, but its profits are generally not subject to tax.  In its year ended  June 30, 2013 revenue exceeded expenses by over $1.2 million, so loss of exemption would be quite a blow.   There is also a companion 501(c)(3) which received, presumably tax-deductible, donations of around $2 million and had over $1 million in investment income.

Even fraternities that are not as well endowed as ΣAE and operate at a break-even would be hurt by losing exempt status.  501(c) status tends to give organizations an entirely undeserved credibility boost and can provide other benefits both tax and non tax under state and local law and in relation to the colleges

How can the tax law operate, then, to effect structural change? It can dangle the carrot of their tax exemption in front of them while, at the same time, threatening them with its loss if they do not eliminate discriminatory behavior. We would propose that the IRS begin sending letters to all Greek organizations putting them on notice that if they discriminate, their tax-exempt status will be revoked. They can retain their tax exemption if they demonstrate that they do not discriminate based on race. This provides Greek organizations with a choice. If they are willing to comply with the norms of society, then they can enjoy the benefit of their tax exemption. If they do not wish to conform, they can explicitly signal that desire by forgoing the public subsidy implicit in being exempt from taxation.

This Is A Really Bad Idea

The Internal Revenue Service has about 90,000 people working for it.  Around 20,000 or so are actual enforcement people.  Those revenue agents and revenue officers are mostly trained as accountants.  They are tasked with collecting over two trillion dollars.  There are signs that they don't have the resources do that job well enough.  TIGTA recently reported that the collections division which has over eleven million delinquent accounts in its inventory hesitates to take automated collection actions, since they are unable to handle the resulting phone calls.  In hundreds of thousands of cases, they know that alimony deductions do not match the income recorded by the recipients (You can guess which way that usually goes) but they can only investigate a small number of the discrepancies. 

 Nobody ever suggests that the Equal Employment Opportunity Commission or the Department of Education should pitch in and help collect taxes, but for some reason the IRS is seen as the Swiss army knife of social policy, ready to further shred its tattered reputation addressing issues that stump other institutions.

Thought leaders like Professor Brunson should really know better.  And actually I think he does.  I contacted him to give him a hard time and here is how he responded.

I'm not sure if I can legitimately debate you--I totally agree that this isn't the kind of thing that I really want the IRS to spend its resources on. Better would be the threat of IRS actions nudging frats out of their current inertia of only addressing racism when it becomes public. So my goal is self-regulation, under threat of IRS regulation.

Maybe ten or twenty years ago, I could buy that.  Since the Lois Lerner debacle though IRS addressing anything other than revenue issues, particularly in the tax exempt area is not going to end well.  Or if the Lois Lerner Teapartygate thing is any indication ever end at all.

Better To Be Lucky Than Good

On a final note, I can't help but be grateful that there were not ubiquitous video recording devices and the concept of images "going viral" when I was going to college.  Sharing with you the various things that I am grateful were not taped would be TMI.  I will mention that I graduated from college in 1974 when this Ray Stevens song was released.