IRS Publishes Notice Of Proposed Rulemaking Restricting 501(c)(3) Status Based On “Racial Nondiscrimination” Practices: What Private Schools Need To Know

Key Takeaways:

• New proposed regulation: On September 3, 2026, the Treasury Department and the IRS released a Notice of Proposed Rulemaking (REG-119986-25), providing that a private school is not “operated exclusively for exempt purposes”—and therefore does not qualify for tax-exempt status under Section 501(c)(3)—if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin.
• Broad scope: The proposed rule applies across admissions, educational policies, scholarships and loans, athletics, and all other school-administered or school-supported programs. It covers private primary and secondary schools, colleges, universities, and professional and trade schools, but excludes governmental entities and their instrumentalities. Treasury and the IRS estimate that up to 18,000 private schools and 750,000 students may be affected.
• Eliminates prior minority-preference safe harbor: The proposal would delete the provisions of Rev. Proc. 75-50 that permitted certain preferences favoring racial minority groups in admissions, facilities, programs, scholarships, and financial assistance, while leaving the remainder of Rev. Proc. 75-50 in place.
• Discrimination defined expansively: Race-based action for any purpose (including remedial or diversity-related objectives) would constitute impermissible discrimination under the proposed rule.
• Religion-based criteria preserved: The proposal would not preclude a private school from maintaining a religious mission or selecting students on the basis of religious affiliation or membership, provided the selection criteria are based solely on religion and not on shared ancestry or ethnic characteristics.
• Applicability date: If finalized as proposed, the regulations would apply to taxable years beginning after May 31, 2027.
• Comment deadline: Comments and requests for a public hearing are due 60 days after Federal Register publication. Based on the scheduled September 4, 2026 publication date, the expected deadline is November 3, 2026.

I. Background

On September 3, 2026, the Treasury Department and the IRS released a Notice of Proposed Rulemaking (REG-119986-25) (“NPRM”), titled “Racial Nondiscrimination in Private Schools,” announcing forthcoming regulations providing that a private school is not “operated exclusively for exempt purposes”—and therefore does not qualify for tax-exempt status under Section 501(c)(3)—if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin.

Federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code is available to organizations operated exclusively for charitable or educational purposes. The proposed regulations rely on the legal principle—rooted in the Supreme Court’s 1983 decision in Bob Jones University v. United States—that eligibility for tax exemption may be conditioned on compliance with “fundamental public policy.” The Treasury Department and IRS contend that this principle extends to the forms of race-conscious programming targeted by the proposed rule, though the application of the fundamental public policy doctrine in this context has not been tested in court.

II. Legal Foundations Cited By the NPRM

The NPRM cites a line of judicial and administrative authority that the Treasury Department and IRS characterize as supporting the rule, including most notably:

• Brown v. Board of Education, 347 U.S. 483 (1954): where the Supreme Court held that state-sanctioned racial segregation in public schools violates the Equal Protection Clause of the Fourteenth Amendment.
• Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), aff’d sub nom., Coit v. Green, 404 U.S. 997 (1971): where the court permanently enjoined the Treasury Department and IRS from recognizing as tax-exempt under Section 501(c)(3) any private school in Mississippi that failed to adopt and operate under a racially nondiscriminatory policy.
• Rev. Rul. 71-447, 1971-2 C.B. 230: where the IRS adopted the position that a private school maintaining racially discriminatory policies does not qualify for tax exemption under Section 501(c)(3).
• Bob Jones University v. United States, 461 U.S. 574 (1983): where the Supreme Court upheld the IRS’s revocation of tax-exempt status from schools that maintained overtly segregationist admissions policies, holding that “racial discrimination in education violates a most fundamental national public policy.” The proposed regulations rely on this holding as the doctrinal basis for the nondiscrimination requirement, though the Bob Jones decision involved policies that excluded or segregated students by race, a different factual context from the race-conscious diversity and financial aid programs that are the primary target of the proposed rule.
• Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023) (“SFFA”): where the Court held that Harvard’s and the University of North Carolina’s race-conscious admissions policies violated Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause, respectively. The proposed regulations treat SFFA as reinforcing the principle that race-based action in education is contrary to fundamental public policy. SFFA, however, addressed the constitutionality of university admissions programs under the Equal Protection Clause and Title VI and not the scope of the “fundamental public policy” doctrine for purposes of Section 501(c)(3) tax-exempt status. The proposed rule’s extension of SFFA’s reasoning to tax exemption, scholarships, financial aid, athletics, and other school programs, as well as its expansion to K-12 private schools, goes beyond the holding of the case.

III. The Proposed Rule: Treas. Reg. § 1.501(c)(3)-2 General Standard

Eligibility for exemption under Section 501(c)(3) requires an organization be “organized and operated exclusively” for exempt purposes, which, as relevant here, include charitable and educational purposes. According to the NPRM, the proposed regulations would provide that “private schools” cannot qualify as “operated exclusively for exempt purposes” if they “adopt, maintain, or enforce 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 supported program.” (emphases added).

Proposed Definition of Discrimination Excludes Actions Intended to Ameliorate Discrimination

According to the NPRM, the proposed regulations would define discrimination to include all race-based action. This definition would modify the existing IRS Revenue Procedure 75-50, which sets forth guidelines and recordkeeping requirements for determining whether private schools have racially nondiscriminatory policies for the purposes of section 501(c)(3). Currently, Rev. Proc. 75-50 provides that a school’s policy of favoring racial minority groups with respect to admissions, facilities, programs, financial assistance, scholarships, and loans does not constitute discrimination when the purpose and effect is to promote the school’s racially nondiscriminatory policy.

The proposed regulations would delete these provisions. According to Treasury and the IRS, the minority-preference provisions are “inconsistent with a uniform nondiscrimination standard” and “incompatible with the Supreme Court’s case law.” The remainder of Rev. Proc. 75-50 would remain in effect. The proposed regulation therefore specifies that policies or practices “that so discriminate for any purpose” are included, thereby encompassing race-based action regardless of whether it is characterized as remedial, diversity-enhancing, or otherwise benign in intent. This represents a significant departure from the framework under Rev. Proc. 75-50 that previously sheltered certain minority-preference programs.

Application to all “Private Schools”

The proposed regulations define “private school” as an organization that is described in Section 501(c)(3) and classified as an educational organization as described in Section 170(b)(1)(A)(ii). This includes any private primary or secondary school, college or university, or professional or trade school.

The NPRM recognizes that “[p]rivate primary and secondary schools were not directly affected by SFFA,” but the proposed rule nevertheless applies equally to private post-secondary and K-12 schools.

Preservation of Religion-Based Criteria

The proposal expressly provides that it “would not preclude a private school from maintaining a religious mission, curriculum, or program of observance, or from selecting students on the basis of religious affiliation or membership.” According to the NPRM, a “religiously based selection criterion does not become discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may also share ancestry or ethnic characteristics”—provided the criteria are “based solely on religion and not on shared ancestry or ethnic characteristics.”

Efforts to Eliminate Prejudice and Discrimination

The NPRM states that the proposed regulations would not prevent a school from taking actions or adopting policies intended to eliminate prejudice and discrimination so long as they are race-neutral. Treasury and the IRS identify in the NPRM examples of permissible race-neutral criteria that schools may use, including family income, geographic location, and first-generation status.

Treasury and the IRS recommend that scholarships, donors, and loan policies that had previously considered race, ethnicity, or national origin shift to prioritize alternative criteria like these. Interestingly, Treasury and the IRS assert that these race-neutral criteria may be correlated with race and ethnicity, resulting in a “limited” change to the recipient population.

IV. Applicability Date and Comment Period

The proposed regulations would apply to taxable years of private schools beginning after May 31, 2027. Treasury and the IRS have stated that they expect to finalize the regulations, with any necessary modifications, in advance of that date.

Written or electronic comments and requests for a public hearing must be received within 60 days of the date the proposed regulations are published in the Federal Register. The Notice of Proposed Rulemaking is scheduled for publication on September 4, 2026, making the expected comment deadline November 3, 2026.

Comments may be submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-119986-25). Paper submissions should be sent to CC:PA:01:PR (REG-119986-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. Treasury and the IRS will publish all comments submitted to the IRS’s public docket for public availability.

V. Areas of Legal Uncertainty

The proposed regulations raise a number of legal and practical questions that may be contested during the comment period, in any subsequent litigation, or by future administrations, including (but not limited to):

• Scope of “fundamental public policy.” The Bob Jones decision established that tax-exempt status may be denied when an organization’s practices conflict with “fundamental public policy.” However, that standard has been invoked sparingly since 1983, and its outer boundaries remain judicially undefined. The proposed regulations’ application of the fundamental public policy doctrine to programs designed to benefit racial minorities—as distinct from programs designed to exclude them—may face questions about whether the doctrine extends that far, particularly in light of the limited judicial precedent applying it outside the context of overtly segregationist policies.
• Scope of discriminatory policies and practices. The NPRM indicates the proposed regulations will have an expansive scope that covers “any policy or practice” a school “adopts, maintains, or enforces” that “discriminates on the basis of race, color, or national or ethnic origin.” How broadly that will apply remains a crucial question. For example, when does an action become a “policy or practice” that a school has “adopt[ed], maintain[ed], or enforce[d]”? In this rapidly evolving legal landscape, what actions rise to the level of discrimination sufficient to fail this requirement?
• Application of SFFA beyond admissions. The SFFA decision addressed the use of race in university admissions decisions under the Equal Protection Clause and Title VI. The proposed regulations would extend the nondiscrimination standard to scholarships, financial aid, athletic programs, and all school-administered programs, areas not directly addressed in SFFA. The extent to which courts will accept this extension remains to be seen.
• Proxy criteria and enforcement. The NPRM does not contain detailed guidance on how the IRS will evaluate whether facially neutral criteria function as proxies for race. The NPRM does not prescribe specific enforcement procedures, but revocation of exempt status would presumably follow the IRS’s existing examination and administrative review processes—potentially including Form 990 review, correspondence examinations, or field audits—with opportunities for administrative appeal and judicial review before any final determination takes effect.
• Interaction with state law. Many states have their own nondiscrimination requirements, scholarship rules, and gift instrument laws that may complicate compliance. Institutions operating across multiple jurisdictions will need to reconcile potentially conflicting obligations.
• Status as a proposed rule. The regulations remain in proposed form and are subject to the public comment period and potential modification before finalization. The final rule may differ from the proposal.

VI. Practical Considerations and Recommended Actions

Although the proposed regulation is only beginning notice and comment period, and will not go into effect until 2027, private schools and their counsel should begin evaluating the potential impact of the proposed regulations now. Recommended steps include:

• Inventory and review admissions policies. Examine all admissions criteria, application review processes, and recruitment practices for any express or proxy consideration of race, color, or national or ethnic origin.
• Audit scholarship and financial aid programs. Review all scholarship, loan, and financial assistance programs—including donor-restricted endowments—for race-based eligibility criteria. Where scholarship funds are subject to donor-imposed racial restrictions, evaluate the legal framework governing the gift instrument (including applicable state charitable trust law) and begin engaging donors or their heirs where modification may be required.
• Examine affinity and limited-access programs. Review mentoring programs, cultural organizations, identity-based student groups receiving institutional support, and any other programs that may limit participation or confer benefits on the basis of protected classifications.
• Review athletic programs. Although Treasury and the IRS have noted that inclusion in athletic programs is generally based on athletic ability, schools should confirm that no athletic scholarship, recruitment, or participation criteria contain race-based elements.
• Preserve records and governance approvals. Work with legal counsel to determine how best to document the rationale for all policy decisions, particularly any transition from race-conscious to race-neutral criteria and maintain records of board and committee deliberations, external counsel advice, and policy implementation steps. Contemporaneous records may be useful in the event of an IRS examination.
• Coordinate across disciplines. Compliance with the proposed regulations will intersect with federal and state civil rights law, employment law, education law, charitable trust law, and donor relations. Institutions should convene cross-functional teams (including tax, civil rights, education, employment, and general counsel) to ensure a coordinated response.
• Evaluate whether to submit comments. Affected institutions and industry groups should consider whether to submit comments during the public comment period to raise concerns, request clarification, or propose modifications. Institutions should be mindful that all comments will be made publicly available and cannot be edited or withdrawn once submitted.

VII. Looking Ahead

The proposed regulations represent a significant development in the intersection of tax-exempt status and nondiscrimination requirements for private educational institutions. While the rule is still in proposed form and subject to potential modification through the comment process, the direction of the proposal is clear: any race-based differentiation in school policies and programs—regardless of intent—may jeopardize an institution’s Section 501(c)(3) status if the final rule is adopted substantially as proposed.

We will continue to monitor this rulemaking and related developments. Please reach out to our team if we can help assess the potential impact on your institution.