On September 3, 2026, the US Department of the Treasury and the Internal Revenue Service (the “IRS”) proposed a significant change to the rules governing tax-exempt private schools, including primary, secondary, and post-secondary institutions. Under the Proposed Regulations, a school could lose its tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (the “Code”) if it “adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin,” regardless of the purpose behind such policy or practice, and even when the school’s objective is to promote diversity or remedy past racial discrimination.
What the Proposed Regulations Would Change
Historically, the IRS has taken the position that a private school cannot qualify under Section 501(c)(3) of the Code unless it operates on a racially nondiscriminatory basis. Revenue Procedure 75-50 established the related policy, publicity, certification, and recordkeeping requirements for tax-exempt private schools. In Bob Jones University v. United States, the Supreme Court in 1983 upheld the revocation of tax-exempt status for schools that maintained racially discriminatory policies. The Court concluded that racial discrimination in education violates a fundamental national public policy and is inconsistent with the charitable principles underlying Sections 170 and 501(c)(3) of the Code. Subsequent IRS guidance, however, permitted certain preferences for racial minority groups in order to promote a school’s nondiscriminatory policy. Those protections can extend to admissions, facilities, school programs, athletic programs, scholarships, loans, financial assistance, and other programs administered or supported by the school. The Proposed Regulations would eliminate those protections.
The Treasury Department and the IRS rely in part on the Supreme Court’s 2023 decision in Fair Admissions, Inc. v. President and Fellows of Harvard College, which invalidated the race-conscious admissions programs used by Harvard College and the University of North Carolina. Specifically, the Proposed Regulations would add a new Treasury Regulations Section 1.501(c)(3)-2, under which a private school would not be considered operated exclusively for exempt purposes if it adopts, maintains, or enforces any policy or practice that discriminates based on race, color, or national or ethnic origin.
Scope of the Proposed Regulations
The Proposed Regulations would apply to private, nonprofit elementary and secondary schools, colleges, universities, and professional and trade schools that are described in Section 501(c)(3) of the Code and classified as educational organizations under Section 170(b)(1)(A)(ii) of the Code. It would not apply to governmental units, government agencies or instrumentalities, or organizations owned or operated by them. Religious schools would be covered, but they could continue to maintain a religious mission, curriculum, and program of observance. They could also select students based on genuine religious affiliation or membership. A religious criterion would not become an ethnic criterion merely because members of the religious community share ancestry or ethnic characteristics, provided the religious criterion is based on religion rather than ancestry or ethnicity.
Unresolved Questions
The use of race-neutral criteria – such as family income, geographic location, first-generation status, individual hardship, military status and academic achievement – as alternatives to race-based criteria is expressly contemplated and encouraged by the Proposed Regulations. A key unresolved issue, however, is when the IRS may conclude that a facially race-neutral criterion is being used as a proxy for race, color, or national or ethnic origin. The Proposed Regulations also leave open questions about the scope of the term “policy or practice,” including how broadly that concept may be applied and how the federal requirements would interact with state nondiscrimination laws that impose separate or potentially contradictory compliance obligations.
Timing and Recommended Next Steps
Comments on the Proposed Regulations and requests for a public hearing are due November 3, 2026. Treasury and the IRS expect to finalize the regulations before May 31, 2027. If finalized as proposed, the Proposed Regulations would apply to taxable years beginning after May 31, 2027, which for many schools would mean the 2028 fiscal year. Court challenges to enforcement, however, are likely.
Although immediate changes are not required, private schools would be wise to begin identifying policies and programs that expressly or indirectly consider race, ethnicity, or national origin. Admissions standards, scholarships, restricted endowments, gift instruments, vendor-administered programs, athletic policies, targeted recruitment, and arrangements with affiliated organizations deserve particular attention, especially where changes may require donor or judicial consent. An early review will give schools time to address complex program structures and donor restrictions before any final regulations take effect.
For any questions about the topic in this Alert, please contact the authors (Jason Navarino at [email protected] and Joel Horowitz at [email protected]), or your McCarter attorney. To learn more about how we advise tax-exempt organizations and nonprofits, visit our Tax Exempt & Nonprofit Entities practice page.