IRS Proposes Sweeping Nondiscrimination Rules Impacting Tax-Exempt Private Schools

The U.S. Department of the Treasury and IRS on September 4, 2026, published Proposed Regulations (REG-119986-25) that would codify the position that a private school cannot be tax-exempt under Section 501(c)(3) of the Internal Revenue Code if it discriminates on the basis of race, color, or national or ethnic origin. The Proposed Regulations would apply to tax-exempt private primary and secondary schools, colleges, universities, professional schools and trade schools for taxable years beginning after May 31, 2027.

Published in the Federal Register on September 4, 2026, the Proposed Regulations provide that all forms of racial discrimination in a private school's policies are contrary to U.S. public policy and preclude tax exemption. Under the Proposed Regulations, all race-conscious admissions or scholarship programs, even those framed as remedial or diversity-related, would be treated the same as prohibited discrimination.

What's New

The Proposed Regulations add a new Treas. Reg. Section 1.501(c)(3)-2 and draw upon the holding of Rev. Rul. 71-447 (1971) and U.S. Supreme Court's decision in Bob Jones University v. United States, 461 U.S. 574 (1983), that a private school maintaining racially discriminatory policies is ineligible for tax-exempt status under Section 501(c)(3). The preamble to the Proposed Regulations traces the doctrinal lineage from Brown v. Board of Education (1954), through Green v. Connally (1971), to Bob Jones University (1983) and the Court's more recent decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023).

The Proposed Regulations also would modify Revenue Procedure 75-50, as modified by Revenue Procedure 2019-22 (Rev. Proc. 75-50), which, since 1975, has provided safe harbors under which race-conscious admissions, scholarship and financial assistance programs have not jeopardized a school's tax-exempt status under Section 501(c)(3), provided that the programs' purpose and effect are to promote the establishment and maintenance of that school's racially nondiscriminatory policy as to students.

Key Provisions

The proposed regulatory text is concise but sweeping. Proposed Treas. Reg. Section 1.501(c)(3)-2(b) provides that a "private school is not operated exclusively for exempt purposes if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program or other school-administered or school-supported program." The Proposed Regulations further emphasize that discrimination on the basis of race, color, or national or ethnic origin includes any discrimination on the basis of race, color, or national or ethnic origin "for any purpose."

The term "private school" as proposed would broadly encompass private primary and secondary schools, colleges, professional or trade schools, and universities, regardless of whether the school receives any federal funding. Governmental units (including an Indian Tribal government) and their agencies or instrumentalities are excluded from the proposed definition of a "private school."

Modifications to Rev. Proc. 75-50

If finalized as drafted, the Proposed Regulations would modify Rev. Proc. 75-50 by removing the safe harbor for race-conscious policies with respect to admissions, facilities and programs and financial assistance and the separate safe harbor for scholarships and loans made pursuant to financial assistance programs favoring members of a racial minority group. The remainder of Rev. Proc. 75-50 would remain in effect.

Preamble to the Proposed Regulations

The lengthy preamble to the Proposed Regulations provides some helpful background information, although it is not binding and does not have the force of a regulation. For example, the preamble notes that a private school may continue to maintain a religious mission, curriculum or program of observance and may select students on the basis of religious affiliation or membership and further provides that a religiously based selection criterion does not constitute discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may also share ancestry or ethnic characteristics, so long as the criterion is based solely on religion.

The preamble also indicates that the Proposed Regulations are not intended to disturb a private school's ability to take actions or adopt policies intended to "eliminate prejudice and discrimination," which remains a charitable activity under existing Treas. Reg. Section 1.501(c)(3)-1(d)(2), provided that such actions or policies must not discriminate on the basis of race, color, or national or ethnic origin.

For scholarships that are endowed by a donor whose letter of intent expressly stated that eligibility relies on race-based criteria, the preamble provides that schools may need to work with the donors or the donors' heirs to find an alternative set of eligibility criteria for scholarship recipients. In addition, for scholarships and loans offered by private schools that are not endowed by a donor with the express intent of restricting eligibility based on race, ethnicity or national origin, the preamble notes that private schools would have the latitude to revise eligibility criteria to conform to the Proposed Regulation's definition of "racial nondiscrimination." The preamble suggests that schools adopt an alternate means for allocating these scholarships and loans such as using geographic or income-based criteria in lieu of a racial or ethnic criterion to determine scholarship eligibility.

The Treasury Department press release accompanying the Proposed Regulations states more broadly that the Proposed Regulations would allow schools to continue to expand educational opportunity to assist disadvantaged students through the use of race-neutral criteria, including family income, geographic location, first-generation status, individual hardship, military family status or academic achievement when awarding admission or financial assistance, as long as such determinations are not made and benefits are not conferred on the basis of race, color, or national or ethnic origin. However, that language in the press release does not appear in either the preamble or Proposed Regulations, and neither the preamble nor the press release carries the legal binding effect of any final regulations.

Practical Implications for Private Schools

The Proposed Regulations would apply to tax-exempt private primary and secondary schools, colleges, universities, professional schools, and trade schools, including, importantly, schools that receive no federal funds. The Treasury Department and IRS estimate the proposed rule may affect approximately 18,000 private schools that currently qualify for tax-exempt status and roughly 750,000 students who may qualify for scholarships allocated on the basis of racial, ethnic or national identity.

Private schools should review their admissions policies, scholarship and financial aid programs, athletic programs and other school-administered programs to identify any policies or practices that use race, color, or national or ethnic origin as a criterion. Schools with race-based scholarships endowed by a donor should seek legal counsel as they may need to work with such donors or the donors' heirs to find an alternative set of eligibility criteria for scholarship recipients and navigate next steps with respect to scholarships awarded.

In addition, schools should consider submitting comments during the comment period to raise concerns about the scope or application of the Proposed Regulations.

Next Steps

The Proposed Regulations represent a significant codification of the position that racial discrimination in education "for any purpose" is incompatible with tax-exempt status under Section 501(c)(3). Although the final regulations are yet to be published, private schools should use the period before the proposed effective date to work with legal counsel and undergo an internal review process and make any necessary changes to come into compliance with the regulations when they become final.

Schools and other stakeholders should consider participating in the rulemaking process by submitting public comments. Public comments are due by November 3, 2026.

For more information or questions on the Proposed Regulations or counsel on preparing comments, please contact the authors.

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