Loss of Tax-Exempt Status Proposed for Race-based Policies at Private Schools

The Department of Treasury and the Internal Revenue Service (IRS) issued proposed regulations that would strip federal tax-exempt status for any private school, including private colleges and universities, that engage in race discrimination, regardless of intent.

Under the proposed rule, a private school would not qualify for federal tax-exempt status under section 501(c)(3) if it “adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin.” The rule would apply across admissions, educational policies, scholarships and loans, athletics, and any other school-administered or school-supported program.

Treasury and the IRS estimate that the proposal may affect as many as 18,000 private educational institutions, including tax-exempt private primary and secondary schools, colleges, universities, professional schools, and trade schools. Although all educational institutions that receive federal funding are prohibited under Title VI of the Civil Rights Act from discriminating on the basis of race, color, or national origin, the proposed regulations would not impact public schools or colleges.

The proposal would also eliminate current provisions of IRS guidance that permit schools to provide racial preferences in admissions, facilities, programs, and scholarships under a policy that deemed such preferences to be nondiscriminatory when used to benefit racial minorities. Treasury and the IRS have concluded that these provisions are inconsistent with nondiscrimination standards and are incompatible with the Supreme Court’s rulings, including Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard.

Although Treasury did not explain how the proposed regulations would be enforced, it is likely to rely on existing compliance mechanisms, such as IRS-led audits or compliance checks, which could ultimately be challenged in court.

In the preamble to the proposed regulations, the IRS indicates that both schools and donors could continue to assist disadvantaged students using race-neutral criteria such as family income, geographic location, first-generation status, individual hardship, military family status, or academic achievement when awarding admission or financial assistance, as long benefits are not awarded based on race, color, or national or ethnic origin. In addition, the proposal would not prevent a private school from maintaining a religious mission, curriculum, or program of religious observance. Consistent with existing federal law, religious schools could continue to select students based on genuine religious affiliation or membership.

While colleges and universities are already required to adhere to current discrimination rules, the proposal could bring unwelcome impacts and challenges. Like the endowment tax on nonprofit private colleges and universities, the proposed regulations would create another punitive measure impacting only one sector of higher education. In addition, it is unclear what activities would constitute a “school-supported program” or who – the agency or a federal court – would determine whether discrimination has occurred. The final rule, if implemented, could also have a negative impact on charitable giving by donors and alumni.

There is a 60-day public comment period that ends on November 3, 2026. Instructions for commenting can be found in the proposed rule. The final regulations would apply to taxable years beginning on or after May 31, 2027.

For more information, please contact:
Karin Johns