On September 3, 2026, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations under Section 501(c)(3) that could materially affect private education in the United States. The proposal would apply a broad nondiscrimination standard based on race, color and national or ethnic origin, with significant implications for private schools, colleges and universities seeking or maintaining tax-exempt status under Section 501(c)(3).
Historical Context and Legal Foundations
The proposed regulations build on a long-standing legal and policy framework governing racial nondiscrimination by private entities claiming tax-exempt status. Central to that framework is the Supreme Court’s decision in Bob Jones University v. United States, 461 U.S. 574 (1983), which held that private schools that practice racial discrimination are not “charitable” and are ineligible for Section 501(c)(3) exemption because such discrimination is contrary to established fundamental public policy. The IRS has implemented this principle through Revenue Ruling 71-447 and Revenue Procedure 75-50. Revenue Ruling 71-447 requires a racially nondiscriminatory policy toward students, while Revenue Procedure 75-50 sets publicity and recordkeeping guidelines and provides that a policy favoring racial minority groups in admissions, programs, and financial aid is not discrimination where its purpose and effect are to promote the school’s nondiscriminatory policy.
More recently, in Students for Fair Admissions, Inc. v. President and Fellows of HarvardCollege, 600 U.S. 181 (2023), the Supreme Court held that the race-conscious admissions programs at Harvard and the University of North Carolina violated Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause of the Fourteenth Amendment. Although the decision concerned higher education, it has contributed to efforts to extend nondiscrimination principles more broadly into private primary and secondary education.
Together, these authorities form the backdrop for proposed regulations that would tie Section 501(c)(3) status to a nondiscrimination standard covering race, color and national or ethnic origin across private education, without regard to a policy’s stated purpose or remedial objective.
Proposed Regulation
The proposed regulations would apply to private educational organizations described in Section 501(c)(3)—including private elementary and secondary schools, colleges, universities and professional and trade schools—but not public institutions. A private school could lose its federal tax-exempt status under Section 501(c)(3) if it adopts or enforces policies or practices that discriminate based on race, color, or national or ethnic origin, including in admissions, scholarships, financial aid, athletics or other school-supported or school-administered programs such as pipeline, mentoring, summer and other student-support initiatives.
The proposal specifically addresses scholarships and financial aid conditioned on race, color or national or ethnic origin, and its preamble encourages schools to review those restrictions and work with donors to replace race-based criteria with race-neutral alternatives such as income, geographic location or first-generation status. It cautions, however, that proxies may be scrutinized if they function as stand-ins for race.
Religious schools may continue to admit or prefer students based on religious affiliation or observance, and such selection is not treated as racial discrimination so long as it is not a pretext for selection based on race, color or national or ethnic origin.
The proposed regulations would implement the Bob Jones University principle by treating racial discrimination, regardless of intent or remedial purpose, as contrary to public policy. They would also eliminate existing IRS guidance permitting race-conscious policies aimed at promoting diversity, making clear that the prohibition applies “for any purpose.”
The proposal could have significant implications for schools and donors, but those consequences would arise only if the proposed regulations are finalized. A private school could then lose its federal tax-exempt status under Section 501(c)(3), which would end the deductibility of contributions to the school and could jeopardize state tax exemptions—such as sales and property tax exemptions—that depend on federal status.
What Schools Should Do Now
- Conduct a comprehensive policy review by inventorying all policies, programs and practices that consider race, color or national or ethnic origin in admissions, scholarships, athletics and other programs. Identify race-based restrictions on donor-restricted or endowed scholarships, and review application and selection processes for indirect consideration of those factors, including through essays or diversity statements.
- Engage with donors and legal counsel to seek donor consent to modify race-based restrictions and, where donors are unavailable or unwilling, evaluate court-approved modification under applicable state law (e.g., cy pres or equitable deviation, or other applicable laws regarding endowment management and expenditure), with the state attorney general’s involvement as required.
- Evaluate race-neutral alternatives, including criteria such as income, geographic location, first-generation status or other indicators of disadvantage. Document the educational or social objectives behind those criteria to help show that they are genuinely race-neutral and not proxies for race.
- Update documentation and governance practices so that policies, program descriptions and donor agreements accurately reflect current practices, and maintain records explaining each policy’s rationale and alignment with institutional objectives.
- Prepare for compliance and enforcement by briefing the board and leadership, assigning responsibility for compliance, monitoring the rulemaking and considering whether to submit comments. Assess how a potential loss of Section 501(c)(3) status could affect fundraising.
The proposed regulations would establish a uniform standard that could materially affect how private schools structure diversity and inclusion initiatives. Schools should anticipate scrutiny of explicit racial classifications, indirect proxies and the objectives underlying their policies.
Conclusion
The proposed regulations under Section 501(c)(3) mark a notable development in the federal government’s approach to racial nondiscrimination in private education. If finalized, they could impose significant compliance obligations on schools whose admissions, financial aid or other programs consider race, color or national or ethnic origin.
Private schools and higher education institutions should act now by reviewing their policies, engaging with donors and documenting their objectives. Proactive planning will help them adapt to the regulatory landscape and preserve both their tax-exempt status and their ability to serve diverse student populations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]
