On September 4, 2026, the Treasury Department and the Internal Revenue Service (IRS) published in the Federal Register proposed regulations that would establish an explicit nondiscrimination requirement for private schools as a condition of federal income tax exemption under Section 501(c)(3) of the Internal Revenue Code (Code). According to the preamble, the proposed regulations would codify what the IRS characterizes as a longstanding principle, rooted in Bob Jones University v. United States and IRS Revenue Ruling 71–447, that a private school that engages in racial discrimination does not qualify for tax-exempt status. Notably, the proposed regulations appear to go beyond existing law by providing that all forms of racial discrimination in education are contrary to a fundamental public policy of the United States and preclude exemption, regardless of intent, legality or purpose. Further, the proposed regulations are silent as to the standards and processes the IRS will employ to review and determine compliance with the requirement and to revoke tax-exempt status. Comments on the proposed regulations are due by November 3, 2026; if finalized, the proposed regulations would apply to private schools in taxable years that begin after May 31, 2027.
This advisory describes key aspects of the Notice of Proposed Rulemaking (NPRM) on the proposed regulations and identifies practical steps for institutions to consider as they evaluate the NPRM’s implications.
Federal public policy of nondiscrimination
The NPRM’s preamble traces what the IRS characterizes as an unbroken line of legal authority establishing that racial discrimination in education violates a fundamental public policy of the United States. The IRS cites Brown v. Board of Education, Title VI of the Civil Rights Act of 1964 (Title VI), Runyon v. McCrary, Green v. Connally, and Bob Jones University v. United States as establishing that schools that engage in racial discrimination are ineligible for tax-exempt status under Section 501(c)(3) of the Code.
The IRS places particular emphasis on the Supreme Court’s 2023 decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (SFFA), 600 U.S. 181 (2023), as the most recent articulation of federal nondiscrimination principles. In SFFA, the Supreme Court reiterated the well-known standard under the Constitution and Title VI that racial classifications must be narrowly tailored to address compelling state interests in order to satisfy strict scrutiny. The Court faulted the admissions policies at issue because it found that they “lack[ed] sufficiently focused and measurable objectives warranting the use of race, unavoidably employ[ed] race in a negative manner, involve[d] racial stereotyping, and lack[ed] meaningful end points.”
The proposed regulations, however, go further than existing law, including SFFA. In SFFA, the Supreme Court held that the particular race-conscious admissions programs before it could not survive strict scrutiny. The Court did not hold that consideration of race is categorically impermissible in all educational contexts for all purposes. The proposed regulations, by contrast, take the position that discrimination on the basis of race, color, or national or ethnic origin “for any purpose” is contrary to a fundamental public policy and bars tax-exempt status. In the NPRM’s preamble, the IRS underscores its apparent position that “any” discrimination is discrimination for purposes of federal tax-exempt status, seemingly regardless of whether such discrimination was lawful or even intentional: “These proposed regulations would provide 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 a school’s exemption from Federal income tax under section 501(c)(3).”
Key regulatory provisions
Proposed § 1.501(c)(3)–2: The nondiscrimination requirement
The NPRM would add new Treasury Regulation § 1.501(c)(3)–2, which would provide that a “private school” is not “operated exclusively for exempt purposes” and thus not covered by 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 the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program.” The proposed regulations specify that 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,” which, based on the NPRM’s preamble, seems intended to preclude race-conscious policies that purport to serve remedial, diversity, or other objectives (emphasis added). The broad term “school-administered or school-supported program” is undefined.
The proposed regulations define “private school” to include an organization described in Section 501(c)(3) and classified as an educational organization under Section 170(b)(1)(A)(ii) — including private primary and secondary schools, colleges, professional or trade schools, and universities. The definition excludes governmental units, an agency or instrumentality of a governmental unit, and organizations owned or operated by an agency or instrumentality of a governmental unit; it does not clarify application to a government agency that has obtained tax-exempt status under Section 501(c)(3).
Modifications to Revenue Procedure 75–50
The NPRM would also rescind key portions of Rev. Proc. 75–50 (as modified by Rev. Proc. 2019–22) that have allowed private schools to administer race-conscious programs to promote diversity and other policy objectives. Specifically, if finalized, the rule would delete the second sentence of Section 3.02, which currently provides that a policy favoring racial minority groups with respect to admissions, facilities, programs, and financial assistance does not constitute discrimination when the purpose and effect is to promote the school’s racially nondiscriminatory policy. The rule would also delete the third and fourth sentences of Section 4.05, which currently provide that scholarships and loans favoring members of racial minority groups, when designed to promote a school’s racially nondiscriminatory policy, will not adversely affect the school’s exempt status. The remainder of Rev. Proc. 75–50 (as modified) would remain in effect.
The removal of these provisions is significant, particularly for schools that are not subject to Title VI (i.e., that do not receive federal financial assistance), as schools may have relied on Rev. Proc 75-50 when implementing race-conscious scholarship programs, admissions initiatives, and other efforts designed to promote nondiscrimination and diversity.
In the NPRM’s preamble, the IRS states that the proposed regulations would not disturb a private school’s continued ability to take actions or adopt policies intended to eliminate prejudice and discrimination under existing § 1.501(c)(3)–1(d)(2), so long as those purposes are achieved by means other than policies that discriminate on the basis of race, color, or national or ethnic origin. [Siobhan: How do we make section reference into words? No one will know what that section is.]
Clarification related to religious private schools
In the NPRM’s preamble, the IRS a application of the proposed regulations to religious private schools. According to the IRS, the proposed regulations 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. The IRS takes the position that a religiously based selection criterion does not become discrimination on the basis of race, color, or national or ethnic origin simply because members of the relevant religious community may also share ancestry or ethnic characteristics, provided the selection criterion is based solely on religion.
IRS Analysis of Anticipated Effects
The NPRM includes the Treasury Department and IRS’s analysis of the implications of the proposed regulations.
Admissions policies. The IRS anticipates that postsecondary schools have largely already adjusted their admissions policies to comply with SFFA and that many private K–12 schools may have done the same.
Scholarship and financial aid programs. The IRS expects the most significant operational effects to fall on scholarship and loan programs that currently use race-based eligibility criteria. The IRS addresses donor-restricted endowments and asserts that where a race-based scholarship was endowed by a donor whose letter of intent explicitly stated that eligibility relies on race-based criteria, schools may need to work with the donor to establish alternative eligibility criteria, a process that will entail administrative and legal costs. Relying on Integrated Postsecondary Education Data System (IPEDS) data, the IRS posits that no more than 16 percent of total scholarship dollars fall into this category. For the majority of scholarships and loans that are not endowed with race-specific restrictions, the IRS takes the position that private schools would have the latitude to revise eligibility criteria without significant compliance costs.
Compliance costs. The IRS predicts modest overall compliance costs, particularly for institutions that have already adjusted their policies in the wake of SFFA. That said, the IRS acknowledges that it does not have the information or tools to assess precisely the extent of compliance costs, and some schools may choose higher-cost options to meet other institutional objectives.
Public Hearing
On September 16, 2026, the Treasury Department and the IRS published a public hearing notice in the Federal Register announcing that the IRS will hold a public hearing on the NPRM on December 2, 2026, at 10:00 a.m. Eastern Time via teleconference. The notice states that, by November 3, 2026, individuals who desire to speak must submit an outline of the topics to be discussed and the time to be devoted to each topic. The IRS will select speakers based on submissions [is this edit accurate?], and each speaker will be allotted 10 minutes. If no outlines are received, the IRS will cancel the hearing.
Selected compliance considerations
Institutions may want to consider the following practical steps:
Review all policies and programs: Institutions may want to conduct a comprehensive review of educational policy, admissions policies, scholarship or loan programs, athletic programs, and other school-administered or school-supported programs and assess in relation to the proposed regulations.
Review endowments: Institutions may want to review donor-restricted endowments to identify scholarships or funds with race-based eligibility requirements and assess whether revised criteria, donor negotiations, or other modifications may be indicated.
Review religious programs: Institutions with religious missions may want to review any religious selection criteria to assess whether they are based solely on religious affiliation or membership and not on shared ancestry or ethnic characteristics.
Engage with regulators: Institutions may want to submit public comments and/or submit speaker outlines by the November 3, 2026 deadline to address concerns regarding the NPRM’s scope, implementation timeline, process, or other matters.
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.
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