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On September 3, 2026, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released proposed regulations that would deny or allow revocation of tax exemption under section 501(c)(3) of the Internal Revenue Code (Code) to any private school that adopts, maintains, or enforces a policy or practice discriminating on the basis of race, color, or national or ethnic origin, including any affirmative action policies of the sort the Supreme Court held unconstitutional in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023) (SFFA). The Treasury press release accompanying the proposal states that it delivers on the administration’s executive orders addressing discrimination in education. Despite its focus solely on schools, the proposed regulations could also impact donors that fund scholarships and certain academic programs and be used as a stepping stone to applying the administration’s definition of discrimination against other tax-exempt organizations.
The proposed regulations, which were published in the Federal Register on September 4, 2026, are a notice of proposed rulemaking and do not have immediate operative effect. If finalized as proposed, the rule would apply to taxable years beginning on or after May 31, 2027. Comments and requests for a public hearing are due November 3, 2026 (60 days after its publication in the Federal Register).
Background
Under longstanding precedent, eligibility for tax-exempt status under Code section 501(c)(3) is conditioned on satisfying a common law charitable standard that requires an organization to serve a public purpose and to operate consistently with established public policy. In Bob Jones University v. United States, 461 U.S. 574 (1983), the Supreme Court held that a private school practicing racial discrimination could not qualify as tax-exempt because such discrimination violates a fundamental public policy against racial discrimination in education.
At the same time, in revenue rulings and guidance, the IRS had made clear that affirmative action programs that were intended to redress historic discrimination among certain minorities did not run afoul of the public purpose doctrine. Most notably, Revenue Procedure 75-50 provides guidelines for determining whether private schools have racially nondiscriminatory policies as to students. The proposed regulations would update the nondiscrimination standard by introducing a new Treasury regulation that incorporates the Supreme Court’s SFFA decision and deletes the provisions of Revenue Procedure 75-50 that permitted schools to maintain programs favoring racial minority groups to further a school’s nondiscrimination policy.
The Proposed Regulations
The proposed rule would add Treasury Regulation § 1.501(c)(3)-2, providing that a private school is not operated exclusively for exempt purposes, and therefore does not qualify for tax-exempt status under Code 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” in any of the following areas:
- The administration of any educational policy
- Admissions policies
- Scholarship and loan programs
- Athletic programs
- Any “other school-administered or school-supported program”
Covered “private schools” include private primary, secondary, preparatory, and high schools, professional or trade school, colleges and universities. Governmental units, instrumentalities of governmental units, and schools owned or operated by such governmental entities are excluded.
The preamble of the proposed rule preserves the ability of private schools to maintain a religious mission, curriculum, or program of religious observance and provides that religious schools may continue to select students on the basis of genuine religious affiliation or membership. This accommodation is not reflected in the text of proposed § 1.501(c)(3)-2. Therefore, it is relevant in interpreting the regulations, but it is not binding legal authority.
In the preamble to the proposed regulations, Treasury also states that schools may continue to use alternative criteria (such as income, geographic location, and first-generation status) to expand educational opportunity. This carve-out is not included in the proposed regulations themselves and is directly contrary to guidance issued by the U.S. Department of Justice (DOJ) on July 25, 2025, which stated that facially neutral criteria (e.g., “cultural competence,” “lived experience,” geographic targeting) that function as proxies for race and other protected characteristics violate federal law if designed or applied with the intention of advantaging or disadvantaging individuals based on protected characteristics. This leaves open to doubt the extent to which schools and donors can rely on these types of alternative criteria in formulating scholarship, academic programs, and other activities.
Key Takeaways
The proposed regulations are a notice of proposed rulemaking and do not currently change existing law or impose new requirements on private schools, and, even if finalized, the rule would apply only to taxable years beginning on or after May 31, 2027. The preamble to the proposed regulations state that they no more than update IRS regulations and guidance to conform to the Supreme Court’s decision in SFFA. The proposed regulations, however, can be read as having much broader impact. As it is with the SFFA decision itself, the real question will be how broadly IRS chooses to interpret that decision in applying it to post-SFFA admissions programs and what, if any, authority the decision carries outside of the admissions context.
For postsecondary institutions, the proposed regulations extend exposure to scholarship and loan programs, including donor-restricted endowed funds with race-based eligibility criteria, as well as other policies and programs. For private K-12 schools, who were not bound by SFFA, both admissions and aid are now measured against a standard drawn from a decision that did not apply to them, in addition to the broader applications included in the proposed regulations.
The preamble contemplates that schools can substitute geographic, income, or first-generation criteria for race-based eligibility, and concludes that donors could achieve substantially similar outcomes on that basis. The DOJ’s July 2025 guidance on diversity, equity and inclusion (DEI) programs takes a different view of the same criteria. As we discussed when the guidance issued, DOJ reads “nondiscrimination” expansively, treating facially neutral standards, including first-generation status and residence in an underserved geographic area, as potentially unlawful where they are chosen as substitutes for a protected characteristic. That guidance is non-binding and does not govern the IRS’ administration of § 501(c)(3), but the two documents point in opposite directions on the same criteria.
The preamble also expressly cites recent executive orders, including Executive Order 14173 (January 21, 2025, directing plans to deter illegal discrimination including in higher education) and Executive Order 14280 (April 23, 2025, directing action to prevent racial discrimination in school discipline), as evidence of Executive Branch commitment to eliminating racial discrimination. The proposed regulations’ reliance on these recently released executive orders as evidence of fundamental public policy is notable and may be a significant warning sign that the administration will rely on such recent executive orders in taking enforcement actions against tax-exempt organizations.
The operative rule in the proposed regulations is confined to private educational organizations described in Code section 170(b)(1)(A)(ii). However, the analysis noted in the preamble could potentially be invoked in future guidance extending beyond schools to other categories of Code section 501(c)(3) organizations and beyond racial discrimination.
Looking Ahead
Given the proposed regulations will not be final until May 2027, the most important next step is for tax-exempt organizations, not just schools, to consider filing comments with Treasury and the IRS to clarify the many questions left open by the current draft. The possibility that these regulations could be expanded to other tax-exempt organizations and the ability of the IRS to revoke section 501(c)(3) status based on the final regulations make the review and comment process critically important to the tax-exempt sector.
With extensive experience developing comment letters on proposed rules, Arnold & Porter regularly assists clients in preparing comments on proposed agency actions. The team can help educational institutions and other affected organizations assess the proposed regulations, develop and submit comments, and review admissions, scholarship, athletics, and other school-supported policies and donor-restrictions. The team will monitor submitted public comments, finalization of the regulations, and any litigation or enforcement developments affecting tax-exempt organizations.
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