Proposed IRS Regulations on Affirmative Action, DEI Threaten 501(c)(3) Status for Private Schools

Institutions that receive federal funds or favorable tax treatment have long been required, as a condition of that benefit, to comply with anti-discrimination laws. What it means to comply with anti-discrimination laws, however, has changed dramatically since the Supreme Court’s affirmative action decision in Students for Fair Admission, Inc. v. President and Fellows of Harvard College and a series of executive branch actions under the Trump administration. Last year, for example, Bracewell wrote about a July 29, 2025 Attorney General Memorandum warning that affirmative action initiatives and Diversity, Equity and Inclusion (DEI) programs constitute unlawful race- and sex-based discrimination that could lead to loss of federal funds.

The Treasury Department has now expanded the potential consequences for private schools engaging in affirmative action or DEI initiatives, with proposed regulations that would strip private educational institutions of their Section 501(c)(3) status if those schools perpetuate what the federal government now considers to be race-based discrimination.

The IRS Addresses Affirmative Action: No Section 501(c)(3) Status for Schools Participating in Unlawful Race-Based Discrimination

Private schools must now consider whether their current practices could jeopardize their Section 501(c)(3) status because of recently released, proposed Treasury regulations relating to racial nondiscrimination. 

On September 4, 2026, the Department of the Treasury and Internal Revenue Service (IRS) released proposed regulations (the Proposed Regulations) under Section 501(c)(3) of the Internal Revenue Code (the Code) stating that “a private school is not operated exclusively 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 educational policies, admissions, scholarships, loans, athletics, or other school-administered or school-supported programs,” even if its actions are intended to serve remedial or diversity-related objectives (i.e., affirmative action).

“Private schools” are defined broadly to include not only higher educational institutions, but any Section 501(c)(3) organization that is described in Section 170(b)(1)(A) of the Code – which would include private elementary, junior high, and high schools, professional or trade schools, colleges and universities. Private schools generally do not include governmental units or agencies and instrumentalities of governmental units, such as public colleges and universities. 

If finalized in their current form, the Proposed Regulations would apply to the taxable year of any private school beginning after May 31, 2027. Failure to adhere to the Proposed Regulations could result in the catastrophic loss of Section 501(c)(3) status. 

Overview of Proposed Regulations

Since the 1970s, IRS rulings have provided that a private school cannot qualify for exempt status under Section 501(c)(3) of the Code unless it has a “racially nondiscriminatory policy as to students” – meaning that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. 

The IRS’s position was confirmed by the United States Supreme Court in Bob Jones University v. United States, where the court stated that “[a]n unbroken line of cases following Brown v. Board of Education establishes beyond doubt this Court’s view that racial discrimination in education violates a most fundamental national public policy, as well as rights of individuals,” specifying that “[t]he right of a student not to be segregated on racial grounds in schools . . . is indeed so fundamental and pervasive that it is embraced in the concept of due process of law.” 461 U.S. 574, 593 (1983).

The IRS also issued Revenue Procedure 75-50 (modified by Revenue Procedure 2019-22) to set forth guidelines and recordkeeping requirements for determining whether private schools that apply for Section 501(c)(3) status or are presently recognized as exempt from tax under Section 501(c)(3), have racially nondiscriminatory policies as to students. Revenue Procedure 75-50 states that a “policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance will not constitute discrimination on the basis of race when the purpose and effect is to promote the establishment and maintenance of that school’s racially nondiscriminatory policy as to students.” Similarly, it states that “scholarships and loans that are made pursuant to financial assistance programs favoring members of one or more racial minority groups that are designed to promote a school’s racially nondiscriminatory policy will not adversely affect the school’s exempt status. Financial assistance programs favoring members of one or more racial groups that do not significantly derogate from the school’s racially nondiscriminatory policy similarly will not adversely affect the school’s exempt status.”

Over time, the Supreme Court reviewed several cases regarding whether affirmative action programs – that is, admissions policies considering race as one factor among others to increase the enrollment of racial minority students in their programs – violate Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause of the Fourteenth Amendment. The position of the Court has shifted over the years, most recently with its 2023 decision in Students for Fair Administration, Inc. where the Court held unconstitutional the admissions policies of Harvard and the University of North Carolina because their raced-based admissions lacked “sufficiently focused and measurable objectives warranting the use of race, unavoidably employ race in a negative manner, involve racial stereotyping, and lack meaningful end points.” 600 U.S. 181, 230 (2023).

According to its preamble, the Proposed Regulations are intended to advance Students for Fair Admission, Inc.’s holding by providing that “all forms of racial discrimination in education, regardless of the intent behind or the legality of such discrimination (for example, where such discrimination is defended as serving remedial or diversity-related objectives), are against a fundamental public policy of the United States and thus preclude as school’s exemption” under Section 501(c)(3) of the Code. 

Thus, the Proposed Regulations could impact, among other things, admissions criteria, scholarships, recruiting activities, and pipeline and DEI initiatives currently maintained by schools if they are based on race, color, or national or ethnic origin. The Proposed Regulations would also make corresponding revisions to Revenue Procedure 75-50 to align with this new standard.

Special Rule for Religious Schools

As it relates to religious aspects of private schools, the Proposed Regulations would not preclude “maintaining a religious mission, curriculum, or program of observance, or from selecting students on the basis of religious affiliation or membership.” The Proposed Regulations explain that “use of 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 (so long as the selection criteria is based solely on religion and not on share ancestry or ethnic characteristics).”

Other Factors Can Still Be Considered

The Proposed Regulations state that they would not disturb the continued availability of a private school “to take actions or adopt policies intended to eliminate prejudice and discrimination” as long as the school “achieves these purposes by means other than actions or policies that discriminate on the basis of race, color, or national or ethnic origin.” These other factors could include income, geography, or first-generation student status.

What to Do Next?

The Proposed Regulations would apply to tax years beginning after May 31, 2027. Thus, now is the time for private schools to consider what actions should be taken (if any) to ensure compliance with the Proposed Regulations should they be finalized as currently drafted. This could include:

• Analyzing whether any aspects of the school’s operations consider race, color, or national or ethnic origin in the administration of educational policies, admissions, scholarships, loans, athletics, or other school-administered or school-supported programs. To the extent that such programs do exist, consider next steps to comply with the Proposed Regulations.

• Reviewing whether any restricted gift agreements with donors impose obligations on the school that are not consistent with the Proposed Regulations (for example, an endowment fund dedicated to providing scholarships to students of a particular race). While the Proposed Regulations do not have a legal effect on these gift agreements, the school’s adherence to the restrictions could run afoul of the Proposed Regulations. In such a case, the school may have to consider approaching donors to see if the agreement can be amended and, in certain cases, a court order may be required. Note that schools and their advancement offices should be considering the potential implementation of the Proposed Regulations for any future gift agreements too.

• Considering whether alternative criteria could be incorporated into the school’s operations, such as using geographic, income-based, or first-generation student status in lieu of a racial or ethnic criterion to determine eligibility (though note that each of these should be carefully crafted to protect against an argument from the government that they are de facto race-based).

• Preparing for revised IRS Form 990 reporting, as the Proposed Regulations would modify Revenue Procedure 75-50 (as modified by Revenue Procedure 2019-22), by removing the ability of private schools to favor racial minority groups with respect to admissions, facilities and programs, and financial assistance.