Section of Taxation Publications
  VOL. 56
NO. 3
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Application of Religiously Restrictive Secular-Use Provisions in Tax-Exempt Revenue Bond Financing: Steele v. Industrial Development Board of Metropolitan Government Nashville
Darin Schultz


In Steele v. Industrial Development Board of Metropolitan Government Nashville, the Sixth Circuit Court of Appeals considered whether the issuance of tax-exempt revenue bonds to benefit a pervasively sectarian institution violates the Establishment Clause. The majority held that the benefit conferred on the religious university, in the form of lower required interest payments on tax-exempt bonds, was indirect and incidental; thus, the majority deemed it unnecessary to consider the university’s pervasively sectarian nature. The dissent argued that the pervasively sectarian university received an impermissible direct benefit from the bond offering. The opinions in Steele II are significant because they trace divergences in Establishment Clause jurisprudence regarding governmental aid to pervasively sectarian institutions. Specifically, Steele highlights the fact that the characterization of governmental aid as direct or indirect is important in determining the range of uses to which religious institutions may constitutionally apply aid proceeds. Moreover, Steele brings to light the critical interplay between the characterization of bond financing as direct or indirect aid and the potential application of well-crafted, secular-use provisions.

Part I of this Note describes the facts of the Steele case, outlines pertinent taxation and Establishment Clause law, and provides relevant procedural history. Part II discusses the majority and dissenting opinions in Steele II. Finally, Part III suggests that the Sixth Circuit’s holding regarding the indirect nature of the aid in question has significant ramifications for the necessity and enforceability of religiously restrictive, secular-use provisions often contained in bond financing agreements of this type. Specifically, the Note suggests that if tax-exempt revenue bond financing is deemed an indirect benefit, the relevant parties should be permitted to spend these funds in whatever fashion they see fit and, accordingly, should not be required to draft secular-use provisions into such financing agreements. This Note also addresses the important role that restrictive-use provisions can likely play for pervasively sectarian institutions in the event other courts follow the dissent’s lead in Steele II and determine that tax-exempt revenue bond financing is a form of direct aid. In particular, the Note argues that the Supreme Court appears to have backed away from its historical prohibition against pervasively sectarian institutions receiving direct governmental aid, on the condition that adequate secular-use provisions are drafted as a component of these deals. As such, it becomes clear that both the direct and indirect scenarios have tremendous ramifications for drafting tax-exempt revenue bond financing agreements.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


If you are an ABA member, you can receive The Tax Lawyer and the Section NewsQuarterly, both quarterly publications, when you join the Section of Taxation. Anyone can subscribe to The Tax Lawyer by contacting the ABA Service Center.