Treasury And IRS Propose Rules That Could Revoke Tax-Exempt Status Of Colleges, Universities And Private Independent Schools Engaging In Race-Based Practice

On Sept. 3, 2026, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released proposed regulations that would deny or revoke tax-exempt status under Internal Revenue Code (Code) Section 501(c)(3) for private educational institutions that offer targeted support to students based on race, color or national or ethnic origin. The proposal would apply broadly to all private educational institutions including elementary and secondary schools, colleges and universities, professional schools and trade schools. Estimates state that approximately 18,000 educational institutions could be affected. The proposal represents a significant development in the Trump administration's effort to extend the Supreme Court's 2023 ruling in Students for Fair Admissions v. Harvard (SFFA) beyond admissions decisions and into the federal tax-exemption framework. 

If finalized, the regulations would apply to taxable years beginning on or after May 31, 2027. Based on the preamble, it appears this means that a school with a tax year beginning on July 1st, for example, would need to be in full compliance with the new regulations by July 1, 2027 (i.e., by the start of the school’s first tax year beginning after May 31, 2027). Accordingly, a school with a tax year beginning on January 1st would need to be in full compliance by Jan. 1, 2028.

Federal tax exemption under Code Section 501(c)(3) is generally available only to organizations that are both “organized” and “operated” for exempt purposes, including educational purposes. In Bob Jones University v. United States, the Supreme Court upheld the IRS's revocation of a private university's tax-exempt status on the grounds that its policies promoting segregation violated fundamental public policy and therefore were not “charitable” within the meaning of Code Section 501(c)(3). For many decades after that decision, the IRS took the position that certain race-conscious measures would not be treated as violating public policy when their purpose and effect were to promote the establishment and maintenance of a school's racially nondiscriminatory policy as to students. The proposed regulations reverse that principle by declaring that any policy or practice that benefits a student based on race, color or national or ethnic origin violates fundamental public policy, making the institution noncharitable and ineligible for tax exemption. 

Although the preamble to the proposed regulations is lengthy, the operative provisions themselves are concise. They provide that “[a] private school is not operated 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 the administration of any educational policy, admissions policy, scholarship or loan program, athletic program or other school-administered or school-supported program. For purposes of [the proposed regulations], discrimination on the basis of race, color or national or ethnic origin includes any discrimination on the basis of race, color or national or ethnic origin for any purpose.”

While it is logical to consider compliance strategies through the lens of existing laws already regulating this subject matter (e.g. Title VI of the Civil Rights Act of 1964), and practices acceptable to the regulators charged with carrying them out, the proposed regulations in fact present something new and different: a rule established under the Internal Revenue Code that will be enforced by the Internal Revenue Service through its own auditors and attorneys. While the proposed regulations have connective tissue to existing laws in that they in theory reflect the “public policy” embodied in those laws, it remains to be seen whether the compliance approaches acceptable under current law will be treated as effective by the IRS. It is also hard to predict exactly what will unfold when tax auditors, who may have little to no exposure to education as an industry, begin interfacing with and evaluating practices that are unique to education.

Practical Takeaways

The proposed regulations may provide some assurances around questions that educational institutions have been wrestling with since SFFA, while leaving other questions still unresolved. 

• Increasingly popular race-neutral alternatives for scholarships or other programming, such as being a “first generation” student or having a particular socioeconomic status, are likely viable. The Treasury Department emphasized that educational institutions may continue efforts to increase educational opportunity through race-neutral criteria. Those criteria, according to the preamble, include family income, geographic location, first-generation student status, individual hardship, military-family status and academic achievement. The preamble specifically indicates that programs focused on income, geographic, or first-generation factors may continue. The preamble goes so far as to acknowledge that the potential aid recipients may ultimately be “similar to, but do not precisely coincide with” the same population of students who would have received aid without this change in rule.
• Religious institutions can continue to make admissions decisions based on religious affiliation or membership. The preamble to the proposed regulations indicates that religious institutions may continue to maintain religious missions, curricula, and programs of religious observance. Religious schools may also continue to consider bona fide religious affiliation or membership in admissions decisions, so long as those decisions are not based on “shared ancestry” or “ethnic characteristics” – even though the members of the religious community may share those characteristics.
• The regulations do not speak to the viability of a “pool and match” approach. Neither the preamble nor the proposed regulations directly address the methodology commonly known as “pool and match,” under which an institution of higher education first identifies a group of students eligible for scholarships without regard to demographic characteristics and then matches available scholarships to eligible students. This approach is specifically permitted by regulations under Title IX, but Title VI is silent on the practice. The only “pool” reference in the preamble is to recipients, not the total pool of funds, made in the context of a remark that the awardees may change under the proposed regulations while the aggregate amounts awarded would likely not be impacted. But in any event, the regulatory scheme proposed by Treasury is not directly tied to the legality of scholarships under other laws; rather, the language does not apparently contemplate any types of exceptions that would assess discriminatory impact (or lack thereof), whether via “pool and match” or otherwise. Indeed, the preamble comments that the proposed regulations may affect the charitable-giving behavior of donors who wish to provide scholarships using race, ethnicity, or national origin as eligibility criteria: “While the proposed rule does prevent these donors from granting scholarships based on race, ethnicity or national origin, these donors retain the ability to fund other scholarships” using neutral criteria (emphasis supplied).

The preamble also comments that the proposed regulations may affect the charitable-giving behavior of donors who wish to provide scholarships using race, ethnicity, or national origin as eligibility criteria. “While the proposed rule does prevent these donors from granting scholarships based on race, ethnicity or national origin, these donors retain the ability to fund other scholarships” using neutral criteria (emphasis supplied). No exceptions appear to be contemplated, using “pool and match” or otherwise.

• The ability to accept restricted scholarships administered by other tax-exempt or taxable organizations is also doubtful. Some organizations have considered whether it might be possible to accept scholarships from third parties that themselves grant awards based on race, without engaging in unlawful discrimination themselves. The wording of the proposed regulations makes this doubtful, at least if there is any involvement by an institution. For example, if a third party provided a scholarship to a student at a specific school who met a race-based eligibility requirement, the school would likely still need to engage in a “practice” that “discriminates” in violation of the proposed regulation, such as by identifying students who meet the racial restriction or informing students about the scholarship's availability. If schools are not, however, involved in administering, advertising or otherwise facilitating the scholarship in any way, such third parties would likely stand on similar footing to any other payor that facilitates payment on behalf of students.
• The regulations apply broadly. While a significant focus of the preamble is on scholarships and other aid, the proposed regulations apply broadly to all institutional programming. Bond has written about these types of programs in the past.

Next Steps

As a notice of proposed rulemaking, comments will be open until Nov. 3, 2026. Institutions that do not wish to comment directly may wish to work with associations and organizations to compile comments on their behalf. Even if the regulations are not meaningfully changed, the notice and comment process is an opportunity to lodge concerns or seek points of clarification which the Treasury Department would need to respond to in its final rulemaking.

In advance of the regulations' implementation, institutions should review admissions policies, scholarship and grant programs, financial-aid criteria, recruitment and outreach initiatives, student-support programs, athletic and extracurricular programs, institutional policies and training materials and governance and compliance processes relating to nondiscrimination requirements. Institutions with programming or scholarships restricted based on race, color or national or ethnic origin should develop and implement plans to modify those restrictions to acceptable race-neutral alternatives before the proposed regulations are finalized.

An enforcement plan has not yet been released, but it will almost certainly involve an IRS audit process. Any institution losing its tax-exempt status could face enormous financial repercussions, including tax liabilities and a loss of charitable deductions for donors.

The proposed regulations represent a potentially significant expansion of federal tax law’s role in regulating educational policies historically in the province of Title VI. Institutions should monitor the rulemaking process, assess existing programs and policies against the proposal, and begin identifying neutral alternatives where current restrictions may present compliance risk.

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.