Treasury proposes tax-exemption rule for private schools using race-based policies
The Treasury Department and the Internal Revenue Service are proposing a new tax-exemption standard that could affect private schools using race, color, or national or ethnic origin in admissions, scholarships, athletics or other school-supported policies.
The proposal was published in the Federal Register on September 4, 2026, after the IRS announced it on September 3. It is a notice of proposed rulemaking, not a final rule, and it does not immediately change any school’s tax status.
Schools, colleges, scholarship administrators, donors and other members of the public have until November 3, 2026, to submit comments or request a public hearing.
What the proposed rule would change
The proposed regulations would add a specific nondiscrimination standard to the rules governing organizations recognized under section 501(c)(3) of the Internal Revenue Code. Under the proposal, a private elementary, secondary or postsecondary school could fail to qualify for federal income-tax exemption if it discriminates on the basis of race, color, or national or ethnic origin in the administration of its policies.
The covered policies would include education, admissions, scholarships and loans, athletics, and other programs administered or supported by a school. The proposal says race-based policies intended to address societal discrimination would also be treated as discrimination under the proposed standard.
The rule concerns federal tax exemption and related charitable deductions. It would not automatically prohibit a private school from operating.
If finalized, the proposed regulations would apply to taxable years beginning after May 31, 2027. That date is not certain: It depends on Treasury and the IRS issuing final regulations and could change during the rulemaking process.
How many schools and students could be affected?
Treasury and the IRS estimate that the proposal could affect as many as 18,000 private elementary, secondary and postsecondary schools that currently qualify for tax-exempt status. The agencies also estimate that approximately 750,000 students at those schools may qualify for scholarships allocated using racial, ethnic or national-identity criteria.
Those figures are agency estimates. They do not establish how many schools currently use race-based policies or how many would ultimately be found ineligible for tax exemption.
The agencies say the proposal could also affect taxpayers who donate to scholarship funds administered by private schools when race, ethnicity or national origin is part of the eligibility standard.
What it could mean for donors and scholarships
Donations to a school that loses its section 501(c)(3) status generally could lose the federal charitable-deduction treatment associated with gifts to qualifying organizations. The proposal would not prevent donors from supporting scholarships that use race-neutral eligibility criteria.
The Federal Register notice says schools could use factors such as family income, geographic location, individual hardship, first-generation status, military-family status and academic achievement. Treasury and the IRS expect many schools could revise scholarship criteria rather than end the aid programs.
Endowed scholarships may present more complicated questions. If a donor’s agreement expressly limits eligibility by race, ethnicity or national origin, a school may need to work with the donor or the donor’s heirs to identify an alternative standard. The agencies say race- or ethnicity-restricted endowments represent no more than 16 percent of total scholarship dollars, based on the information cited in the proposal.
Higher-education groups and legal observers have warned that the rule could create uncertainty for minority-serving institutions, including historically Black colleges and universities and tribal colleges, as well as for donor-funded aid programs. Those concerns are attributed positions and possible implementation issues, not findings that any named institution has violated the proposed standard.
What would remain allowed?
The proposal would not ban schools from pursuing anti-discrimination or educational-opportunity goals through policies that do not use race, color, or national or ethnic origin as decision criteria.
Religious schools could retain genuine religious missions, religious curricula and programs of observance. They could also select students based on religious affiliation or membership, provided the criterion is religion rather than shared ancestry or ethnicity.
The proposal therefore does not equate every diversity, inclusion or minority-serving program with unlawful discrimination. Its proposed standard focuses on policies that use race, color, or national or ethnic origin as criteria in covered school activities.
Why Treasury and the IRS say they are acting
Treasury and the IRS point to a legal history that includes Brown v. Board of Education, federal civil-rights laws, the 1971 decision in Green v. Connally, the Supreme Court’s 1983 ruling in Bob Jones University v. United States and the 2023 decision in Students for Fair Admissions v. President and Fellows of Harvard College.
In Bob Jones, the Supreme Court upheld the IRS’s revocation of tax-exempt status from schools that maintained racially discriminatory policies. The proposed regulations would update the tax rules to state more explicitly that covered race-, color- or national-origin-based discrimination is inconsistent with the public-policy requirement for section 501(c)(3) exemption.
The administration says the proposal would create a uniform standard and remove older guidance that allowed some race-related preferences in admissions, programs, scholarships and financial assistance. Higher-education organizations and legal observers have raised questions about the agencies’ authority, the interpretation of precedent and how the rule would be enforced. Those are potential challenges, not court rulings.
What happens next
Written comments and requests for a public hearing must be received by November 3, 2026. Treasury and the IRS may revise the proposal before issuing a final rule, or they may decline to finalize it.
If regulations are finalized as proposed, the standard would apply to taxable years beginning after May 31, 2027. The practical effects would then depend on the final language, IRS enforcement, how schools revise admissions and scholarship policies, and whether lawsuits challenge the agencies’ interpretation.
Sources
- Federal Register: Racial Nondiscrimination in Private Schools
- IRS: Treasury, IRS Move to End Tax-Exempt Status for Discriminatory Practices in Private Schools
- Associated Press: Trump administration rule would end tax exemption for colleges that keep DEI
- Education Week: Trump Extends Anti-DEI Push to Private Schools
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