Key Takeaways
- U.S. Department of the Treasury and the Internal Revenue Service propose regulations to tax any K-12 private school, college or university that uses race for any reason in any program or policy regardless of the impact, positive or negative, on the school, its student body or the general public.
- Schools and their funders should assess their exposure now. If finalized as proposed, the rule would apply to taxable years beginning after May 31, 2027. Schools should review affected programs and donor restrictions. Grantmakers and donors should assess the potential effects on school-funded initiatives and restricted gifts.
- Interested parties should submit comments as soon as possible. Schools, donors and other stakeholders should explain how the proposal would affect their programs and identify practical costs and legal questions, including its treatment of scholarships designed to expand educational opportunity.
Regulations proposed Sept. 4 would revoke the tax-exempt status of any private elementary, secondary or postsecondary school that “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.” Neither the school’s intent regarding its use of race in a policy or program nor the impact of such use, positive or negative, on students is relevant under the proposed rule – the mere use of race is a sufficient basis for loss of tax-exempt status. If finalized in their current form, the regulations would be effective for tax years beginning after May 31, 2027.
The proposal could affect approximately 18,000 private elementary, secondary and postsecondary schools and roughly 750,000 students who Treasury and the IRS estimate may qualify for scholarships awarded on the basis of race, ethnicity or national identity. The proposed regulations also may affect donors who contribute to scholarship funds administered by private schools that currently use race-based eligibility criteria.
The proposal does not directly apply to foundations, donor-advised funds or other nonschool tax-exempt organizations; however, if finalized in its current form, the proposal would impact the programmatic work of grantmaking organizations that fund diversity, equity and inclusion programs at private schools.
Affected schools and stakeholders should consider telling Treasury and the IRS, through timely written comments, exactly how the proposal would affect their admissions, scholarships, donor restrictions, student programs, operations and charitable mission if finalized. A specific account of a program’s purpose, operation and likely consequences can help Treasury evaluate the proposal against real-world circumstances.
BakerHostetler can help assess an organization’s particular exposure and options, develop and submit a comment addressing the issues that matter to it, and prepare testimony if a public hearing is scheduled.
Detailed Analysis
The proposed regulations provide 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 admissions, educational policies, scholarship or loan programs, athletic programs, or other school-administered or school-supported activities. If finalized, the regulations would make a noncompliant school ineligible for exemption under Section 501(c)(3) for taxable years to which the regulations apply, potentially resulting in revocation of its recognition of exemption. The proposal excludes governmental units, their agencies and instrumentalities, and organizations owned or operated by those agencies or instrumentalities.
The proposed regulations would significantly narrow the existing IRS guidance governing private school tax exemption. Since 1975, Revenue Procedure 75-50 has expressly permitted schools to adopt policies favoring racial minority groups in admissions, facilities, programs and financial assistance, as well as certain scholarships, loans and other programs, provided that the purpose and effect of those programs is to further the school’s racial nondiscrimination policy. The proposed regulations would eliminate the specified permissive language and adopt a substantially broader view of prohibited discrimination.
Treasury and the IRS propose that any use of race, color or national or ethnic origin in admissions, scholarships, financial assistance or other school-administered or school-supported programs constitutes impermissible discrimination – regardless of the intent or impact. The proposed regulations conclude that all forms of racial discrimination in education are contrary to a fundamental public policy of the United States, including efforts to promote diversity, expand educational opportunity or remedy past discrimination.
The proposal, however, raises numerous significant legal and administrative law questions. For example, critics may argue that Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023), only addressed race-conscious college admissions policies and did not directly address scholarship or financial aid eligibility criteria or tax exemption under Section 501(c)(3). The proposed regulations nevertheless extend the principles of Students for Fair Admissions beyond admissions into virtually every aspect of a private school’s operations. Whether Treasury has adequately explained that extension is likely to become a central issue in any legal challenge to the final regulations.
In Bob Jones University v. United States, 461 U.S. 574 (1983), the Supreme Court held that a school policy segregating students by race is contrary to fundamental public policy. Yet the proposed regulations seek to extend the reasoning in that case to prohibit school policies that desegregate students by race. Critics might challenge the proposal’s use of the same legal reasoning in Bob Jones University to reach the opposite legal result. The proposed regulations postulate that any use of race, regardless of purpose or effect, is inconsistent with eligibility for tax exemption. Opponents of the proposal are likely to argue that Bob Jones addressed invidious discrimination and racial exclusion, not race-conscious programs designed to expand educational opportunity or further established nondiscrimination objectives.
The proposed regulations also create tension with Treasury’s long-standing interpretation of the term “charitable” under Section 501(c)(3). Existing Treasury regulations provide that charitable purposes include the promotion of social welfare through activities designed “to eliminate prejudice and discrimination.” Questions therefore may arise regarding how programs intended to advance those objectives can be reconciled with a regulatory framework that treats any race-conscious scholarship or educational program as grounds for loss of tax-exempt status.
The Supreme Court majority opinion expressly stated in Students for Fair Admissions that “as all parties agree, nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise.” 600 U.S. 181 at 230. For example, a school with a documented history of racial exclusion may consider an applicant’s particular account of its effects and the qualities the applicant developed. Yet the proposed regulations would ban the use of race “for any purpose.”
Impact
The proposed regulations would not affect the ability of religious schools to maintain religious missions, curricula or admissions criteria based on religious affiliation. Treasury and the IRS specifically note that a school’s reliance on religious criteria does not constitute prohibited discrimination merely because members of a particular faith share common ancestry or ethnic characteristics, provided the selection criteria are based on religion rather than race, color or national or ethnic origin. This explanation appears only in the preamble, however, and not as an express exception in the proposed regulatory text.
Schools should assess how criteria are designed and applied, review donor-restricted endowments and gift instruments with donors and counsel and consider whether any restriction requires donor consent or a legal process before alteration. The proposed regulations acknowledge potential costs of changing endowed scholarships while stating that they lack data to quantify those costs.
More importantly, schools should evaluate the potential impact of loss or denial of Section 501(c)(3) status, and possible consequences for donors, resulting from the proposed regulations. While the proposed regulations neither create a criminal offense nor provide that merely continuing a prohibited policy constitutes criminal tax fraud, if the final regulations apply and a school knowingly continues a covered practice while willfully making a materially false statement in a return or other document signed under penalties of perjury or willfully attempting to evade tax otherwise due, the school and responsible persons could face investigation and potentially indictment under existing criminal tax statutes, depending on proof of every statutory element and the facts of the filing.[1]
If finalized, the regulations would apply to taxable years beginning after May 31, 2027. In the meantime, private schools, colleges, universities and scholarship administrators should review admissions policies, scholarship programs, financial aid arrangements and other student-related initiatives that incorporate race-based criteria and monitor developments as Treasury considers public comments. Schools should also review school-supported programs, athletic and extracurricular programs, donor agreements, publicity and recordkeeping practices, and the accuracy of tax exemption-related filings and retain counsel before changing restricted gifts or making representations about compliance.
Schools, donors and other stakeholders should seriously consider submitting timely, specific written comments. Treasury and the IRS invite comments on all aspects of the proposed regulations and consider relevant matters presented before adopting a final rule. Under the Administrative Procedure Act, the agencies must consider relevant submitted material and explain the basis and purpose of the final rule.[2] Well-organized issue-by-issue comments can help the IRS catalog and evaluate concerns about (1) the reach of the proposed rule beyond admissions, (2) genuinely race-neutral criteria, (3) the impact of religious affiliation, (4) the burden of changing restricted gifts, (5) the proposed rule’s limitation to schools rather than independent grantmakers and (6) its applicability date, among other issues.
Comments and requests for a public hearing are due by Nov. 3. A telephonic hearing is scheduled for Dec. 2.
[1] For the changed enforcement structure, see BakerHostetler, “After Seven Decades in the Hands of the Tax Division, the Authority to Prosecute and Investigate Tax Crimes Has Shifted to the Head of the Recently Created 500 Attorney Fraud Division – Stay Tuned!” (Aug. 31, 2026), describing the transfer of federal criminal tax oversight to the Department of Justice’s Fraud Division and its stated nonprofit enforcement focus.
[2] See 5 U.S.C. § 553(c).
