On September 4, 2026, the US Department of the Treasury and Internal Revenue Service (IRS) published in the Federal Register a proposed regulation addressing racial nondiscrimination by tax-exempt private schools. The proposed new regulation under Section 501(c)(3) of the Internal Revenue Code would provide that a private school that discriminates based on race, color, or national or ethnic origin is not eligible for tax-exempt status.
The proposal is significant for both independent primary and secondary schools, as well as private colleges and universities, and represents yet another development in the federal government’s scrutiny of DEI practices.
For independent schools, the proposal extends the federal government’s post-Students for Fair Admissions vs. Harvard (SFFA) approach beyond higher education admissions.[1] Although SFFA addressed race-conscious admissions at colleges and universities, the proposed regulations would apply the IRS’s nondiscrimination standard to private primary and secondary schools, as well as colleges and universities, and would expressly reach not only admissions but also educational policies, scholarships and loans, athletics, and other school-administered or school-supported programs.
Proposed regulations would apply to private schools
The proposed regulations define “private school” broadly to include organizations described in Section 170(b)(1)(A)(ii), including private elementary and secondary schools, colleges, universities, professional schools, and trade schools. Governmental units and instrumentalities of governments are excluded from the definition. Accordingly, the proposal would apply to private colleges and universities and independent schools, but not public colleges and universities.
Under the proposal, a private school would not qualify for Section 501(c)(3) exemption if it adopts, maintains, or enforces a policy or practice that discriminates based on race, color, or national or ethnic origin in admissions, educational policies, scholarships or loans, athletics, or other school-administered or school-supported programs.
Proposal builds on Bob Jones
The proposed regulations are grounded in the Supreme Court’s decision in Bob Jones University v. United States, which established that an organization engaged in racial discrimination contrary to fundamental public policy is not entitled to Section 501(c)(3) tax-exempt status.[2] The IRS currently implements that principle through Rev. Rul. 71-447 and Rev. Proc. 75-50.
The proposed regulations would move that framework into regulatory text. The proposal also would make explicit that all racial discrimination is contrary to fundamental public policy, regardless of intent, including discrimination undertaken for remedial or diversity-related purposes. The proposal states that discrimination based on race, color, or national or ethnic origin is prohibited “for any purpose.”
Importantly, the proposal would remove provisions of Rev. Proc. 75-50 that contemplate certain policies designed to promote nondiscrimination in admissions, scholarships, and other matters, which have the impact of favoring racial minorities. Under the existing guidance, for example, certain policies favoring racial minority groups did not constitute discrimination where their purpose and effect was to promote a school’s racially nondiscriminatory policy. The proposed regulations would eliminate those provisions.
Particular implications for donor-restricted gifts
The proposal specifically identifies scholarships and loans among the policies subject to the nondiscrimination requirement. Treasury and the IRS acknowledge that, after the Supreme Court’s decision in Students for Fair Admissions v. Harvard, post-secondary institutions have already made changes to their admissions practices. The agencies therefore anticipate that the principal economic effects of the proposal for postsecondary institutions will arise from changes to scholarship and loan policies.
Institutions will therefore need to review race- or ethnicity-based scholarships, grants, and other financial-aid programs, to the extent they have not already, particularly where eligibility is expressly limited based on race or national or ethnic origin.
The proposal also recognizes potential issues involving donor-restricted or endowed scholarships. Institutions may need to work with donors or their successors to identify alternative eligibility criteria where an existing restriction is based on race. In some cases, court action may be necessary. The IRS specifically contemplates that schools and donors may use alternative criteria such as income, geography, or first-generation student status. The agencies state that these criteria have a weaker relationship to race and a stronger relationship to other indicators of disadvantage.
Notwithstanding these suggested alternative criteria, the proposed regulations should also be read in concert with other federal directives, including the DOJ’s July 29, 2025, “Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination.” That guidance applies to entities receiving federal financial assistance and warns that ostensibly race-neutral criteria may constitute unlawful proxies for race that are selected because they correlate with, replicate, or substitute for protected characteristics, or that are implemented with an intent to advantage or disadvantage individuals based on those characteristics.
Importantly, the DOJ guidance specifically identifies first-generation status, socioeconomic status, and geographic diversity as criteria that can raise concerns when used as proxies for race. It gives as an example a scholarship program that targets “first-generation students” where the criterion was selected to increase participation by particular racial groups.
Pipeline and diversity programs
The proposed rule’s prohibition on race-based discrimination in all other school-administered or school-supported programs extends beyond admissions and financial aid to potentially include pipeline programs, mentoring initiatives, summer programs, and other programming designed to support students from a specific racial or ethnic background.
However, the proposed rule specifically states that it does not prohibit schools from taking actions or adopting policies intended to eliminate prejudice and discrimination, consistent with existing Section 1.501(c)(3)-1(d)(2), provided that the school achieves these purposes by means other than race-based discrimination.
Proposal’s treatment of religious schools
The proposal preserves an important distinction for religious institutions. A religious school’s policies concerning its religious mission, curriculum, religious observance, or selection based on religious affiliation would remain permissible where the relevant criterion is religion. The proposed regulations expressly provide that a religiously based selection criterion does not become discrimination based on race, color, or national or ethnic origin merely because members of the relevant religious community may share ancestry or ethnic characteristics, as long as the selection criterion is based solely on religion.
The proposal also would preserve the ability of organizations to take actions intended to eliminate prejudice and discrimination, provided those objectives are pursued through means that do not discriminate based on race, color, or national or ethnic origin.
IRS enforcement of the proposed rule
The proposed regulations do not establish a new standalone civil rights enforcement regime. Rather, the consequence of noncompliance would be loss of Section 501(c)(3) tax-exempt status.
The IRS would be able to apply the proposed regulatory standard through its existing tax administration and exemption processes. Private schools already are subject to IRS nondiscrimination requirements and related recordkeeping and certification obligations. Current IRS guidance requires private schools to maintain a racially nondiscriminatory policy, publish that policy, and certify compliance annually through Form 990 or Form 5578, as applicable.
If finalized, the proposed regulations would provide the IRS with an express regulatory basis for determining that a private school’s policies or practices are inconsistent with Section 501(c)(3) eligibility.
What schools should do now
The proposed regulations would apply to taxable years beginning after May 31, 2027, if finalized as proposed, giving institutions time to evaluate their policies.
To the extent they have not already done so, private colleges, universities, and independent schools may wish to begin by doing the following.
- Inventory race-conscious policies and programs: Identify admissions, scholarships, financial aid, athletics, and other programs that use race, color, or national or ethnic origin as an eligibility or participation criterion or that target students based on their race or ethnicity.
- Review scholarship restrictions: Pay particular attention to donor-restricted and endowed scholarships that expressly condition eligibility on race or ethnicity, and consider whether donor consent or other legal mechanisms may be necessary to modify restrictions. It may be useful to begin engaging with donors or their heirs sooner rather than later to negotiate alternative criteria, as necessary. Where a donor is deceased or is unwilling to change the terms of their gift, note that judicial action through a cy-pres petition may be necessary.
- Separately evaluate race-neutral criteria: Review programs using income, geography, first-generation status, socioeconomic status, “lived experience,” adversity, or similar criteria. Institutions receiving federal funds should assess not only whether these criteria are facially neutral, but also whether their design, implementation, or stated objectives could lead the Department of Justice or another agency to view them as proxies for race.
- Document legitimate program objectives: Maintain contemporaneous documentation explaining why eligibility criteria were selected and how they relate to legitimate educational, financial, or institutional objectives independent of racial composition or demographic outcomes.
- Review application and selection processes: Consider whether admissions, scholarship, fellowship, internship, and other competitive-selection processes incorporate essays, recommendations, geographic targeting, diversity statements, or other factors that could be viewed as indirect means of considering race.
- Review documentation and governance processes: Ensure that institutional policies, program descriptions, donor agreements, and related documentation accurately reflect the criteria the institution actually applies.
Looking ahead
The proposed regulations represent yet another significant development in the federal government’s approach to race-conscious policies at private educational institutions. The underlying tax-exemption principle derives from Bob Jones and longstanding IRS guidance, but the proposal would both expand and make the standard more explicit, eliminate existing race-conscious exceptions, and apply the framework expressly to a broad range of school-administered or school-supported programs.
In addition, the consequences of noncompliance are severe: loss of the institution’s tax-exempt status under Section 501(c)(3). This would affect not only the school’s own tax obligations, but also its ability to receive tax-deductible contributions.
Institutions should expect continued increased scrutiny not only of explicit racial classifications, but also of the objectives, implementation, and documentation underlying race-neutral policies and programs.
- The Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard remains the principal legal backdrop for the administration’s current approach. SFFA held that Harvard and UNC’s race-conscious admissions programs violated Title VI and, in UNC’s case, the Equal Protection Clause. The Court rejected the use of race in admissions as employed by those institutions, emphasizing that race-based classifications must satisfy demanding constitutional standards.
The IRS proposal expressly invokes SFFA as part of the basis for eliminating the existing IRS provisions permitting certain race-conscious policies at private schools. The proposal, however, goes beyond SFFA in an important respect: it would establish a categorical tax-exemption rule applicable to all aspects of private school programming, admissions, athletics, and scholarships, rather than simply addressing race-conscious admissions.
[Back to reference] - Notably, the IRS has invoked this principle only sparingly since 1983, and the limits of the doctrine remain largely undefined by the courts. It is therefore an open question whether the “fundamental public policy” doctrine extends to programs designed to benefit racial minorities, rather than to exclude them, particularly given that the existing case law has focused largely on overtly discriminatory or segregationist practices.
[Back to reference]