On September 3, 2026, the Treasury Department and the IRS proposed regulations (REG-119986-25, proposed regulations) that would make private schools ineligible for tax exemption under IRC Section 501(c)(3) if they adopt, maintain, or enforce any policy or practice that discriminates based on race, color, or national or ethnic origin, regardless of the policy's purpose.

The proposed regulations would establish a clear nondiscrimination standard applicable to admissions, scholarships and loans, athletics, educational policies, and other school-administered or school-supported programs. Existing guidance in Revenue Procedure 75-50 that permits certain preferences favoring racial minority groups when designed to promote a school's racially nondiscriminatory policy would also be removed.

Notably, the proposed regulations do not prohibit organizations from pursuing activities intended to eliminate prejudice or discrimination. Rather, Treasury and the IRS state that those objectives must be pursued through means that do not involve race-based decision making.

The proposed rules would apply to tax years beginning after May 31, 2027.

Background

IRC Section 501(c)(3) describes organizations organized and operated exclusively for charitable, educational and certain other exempt purposes. Organizations meeting those requirements generally are exempt from federal income tax under IRC Section 501(a). IRC Section 170 generally permits deductions for qualifying charitable contributions to organizations described in IRC Section 170(c)(2), which substantially parallels the requirements of IRC Section 501(c)(3).

Under Treasury Regulation Section 1.501(c)(3)-1, an organization must satisfy both an organizational test and an operational test to qualify under IRC Section 501(c)(3). The term "charitable" includes activities promoting social welfare through efforts to eliminate prejudice and discrimination. An educational organization may include a primary or secondary school, college, university, or professional or trade school with a regularly scheduled curriculum, regular faculty, and regularly enrolled student body. The term may also include federal, state, and other public-supported schools that otherwise come within the definition.

Federal tax law has long treated racial nondiscrimination as a condition of tax-exempt status for private schools. In Revenue Ruling 71-447, the IRS concluded that a private school without a racially nondiscriminatory policy as to students does not qualify for federal income tax exemption. The ruling defines such a policy as one under which the school admits students of any race to all rights, privileges, programs and activities generally available to students and does not discriminate based on race in administering educational policies, admissions, scholarships and loans, athletics, or other school-administered programs.

Revenue Procedure 75-50, as modified by Revenue Procedure 2019-22, provides guidelines and recordkeeping requirements for determining whether private schools applying for or maintaining recognition under IRC Section 501(c)(3) operate on a racially nondiscriminatory basis. It clarifies that racial discrimination includes discrimination based on color or national or ethnic origin. The revenue procedure currently provides that certain policies favoring racial minority groups in admissions, facilities, programs and financial assistance do not constitute prohibited discrimination when their purpose and effect are to establish or maintain a school's racially nondiscriminatory policy. It similarly permits certain financial assistance programs favoring one or more racial minority groups.

The Supreme Court upheld the federal tax principle underlying Revenue Ruling 71-447 in Bob Jones University v. United States, 461 U.S. 574 (1983). The Court concluded that entitlement to exemption under IRC Section 501(c)(3) depends on satisfying the common-law standard of charity, which requires an organization to serve a public purpose and not operate contrary to established public policy. Because racial discrimination in education violates a fundamental national public policy, the Court held that racially discriminatory educational institutions cannot be treated as conferring the public benefit necessary for exemption under IRC Sections 501(c)(3) and 170.

More recently, the Supreme Court held in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023), that the race-based admissions policies at issue violated Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause of the Fourteenth Amendment, respectively. The Court concluded that the policies lacked sufficiently focused and measurable objectives, used race negatively, involved racial stereotyping and lacked meaningful endpoints. It also reiterated that remedying societal discrimination does not constitute a compelling interest justifying race-based state action. Treasury and the IRS cite this case as support for their position that race-conscious educational policies, including those adopted for diversity or remedial purposes, may constitute impermissible discrimination for purposes of IRC Section 501(c)(3) tax-exemption analysis.

Proposed regulations

General nondiscrimination standard

Proposed Treasury Regulation Section 1.501(c)(3)-2 would provide that a private school is not operated exclusively for exempt purposes if it adopts, maintains or enforces any policy or practice that discriminates based on race, color, or national or ethnic origin. The prohibition would apply to:

• Educational policies
• Admissions policies
• Scholarship programs
• Loan programs
• Athletic programs
• School-administered programs
• School-supported programs

The proposed rule would apply regardless of the purpose underlying the discrimination. Accordingly, the tax-exemption standard would not distinguish between policies intended to disadvantage a racial group and policies intended to promote diversity, address historical discrimination or achieve another remedial objective. A private school engaging in either type of race-based policy or practice would fail the proposed operational requirement for exemption under IRC Section 501(c)(3).

The proposed regulations would incorporate into regulatory text the longstanding conclusion of Revenue Ruling 71-447 that a private school engaging in racial discrimination does not qualify for exemption. They also would clarify that this principle applies consistently to discrimination based on race, color, or national or ethnic origin throughout the administration of a private school's policies and programs.

Definition of private school

For purposes of the proposed regulations, a private school would be defined as an organization that is described in IRC Section 501(c)(3) and classified as an educational organization under IRC Section 170(b)(1)(A)(ii). The definition would encompass private:

• Primary schools
• Secondary schools
• Colleges
• Universities
• Professional schools
• Trade schools

The definition would exclude a governmental unit, an agency or instrumentality of a governmental unit, and an organization owned or operated by that agency or instrumentality. A governmental unit for this purpose would include the United States, a state, an Indian Tribal government within the meaning of IRC Section 7701(a)(40), the District of Columbia, a US possession, or a political subdivision of any of those governmental units.

Race-based scholarships and financial assistance

The proposed regulations would directly affect scholarship and loan programs that use race, color, or national or ethnic origin in determining eligibility, selection, award amounts or other aspects of program administration. If the regulations are finalized as proposed, a private school could not maintain exemption under IRC Section 501(c)(3) if it adopts, maintains, enforces, administers, or supports such a program, even if the program is intended to increase educational opportunities for historically underrepresented groups or to advance a racially nondiscriminatory educational environment.

Effect on Revenue Procedure 75-50

If the regulations are finalized as proposed, Treasury and the IRS would modify Revenue Procedure 75-50, as previously modified by Revenue Procedure 2019-22, by removing provisions considered incompatible with the new standard. Provisions that currently allow certain policies or financial assistance programs favoring racial minority groups when designed to promote or maintain a school's racially nondiscriminatory policy would be removed from Revenue Procedure 75-50. Their removal would mean that a school policy's remedial or diversity-related purpose would not prevent it from constituting discrimination under the proposed, amended tax-exemption standard under IRC Section 501(c)(3). Other provisions of Revenue Procedure 75-50 would remain in effect.

Religious criteria and anti-prejudice activities

The proposed regulations would not prohibit a private school from maintaining a religious mission, curriculum or program of observance. They also would not prevent a school from selecting students based on religious affiliation or membership. A religious selection criterion would not be treated as discrimination based on race, color, or national or ethnic origin merely because members of the religious community share ancestry or ethnic characteristics, provided the criterion is based solely on religion rather than on the shared ancestry or ethnic characteristics.

The proposed regulations likewise would not prevent an organization, including a private school, from adopting policies or taking other actions intended to eliminate prejudice and discrimination, consistent with Treasury Regulation Section 1.501(c)(3)-1(d)(2). Those activities would need to be carried out by means that do not discriminate based on race, color, or national or ethnic origin.

Applicability date and transition period

The proposed regulations would apply to tax years of private schools beginning after May 31, 2027. Treasury and the IRS expect to finalize the regulations, with any changes resulting from timely comments, before that date. The delayed applicability date is intended to allow schools to amend admissions, scholarships and other affected policies before the first tax year to which the final regulations are expected to apply.

The proposed applicability rule is based on the beginning of the school's tax year, rather than the date on which a particular admission, scholarship or other decision is made. If this applicability rule is included in final regulations, then schools with fiscal tax years would need to identify their first tax year beginning after May 31, 2027, and coordinate any policy changes to take effect by that date.

Comments on the proposed regulations are due by November 3, 2026. A public hearing has been scheduled for December 2, 2026, at 10:00 a.m. ET.

Implications

If finalized, the proposed regulations would significantly curtail the ability of private schools to adopt and implement race-conscious policies without jeopardizing their tax-exempt status under IRC Section 501(c)(3). The loss of a school's IRC Section 501(c)(3) tax-exempt status would also forfeit the ability of donors to deduct charitable contributions to private schools from their taxable income. Such schools may be able to qualify for tax exemption as social welfare organizations under Section 501(c)(4) but wouldn't be able to receive tax-deductible charitable contributions.

Although federal tax law has long required private schools to operate on a racially nondiscriminatory basis, the proposed regulations would establish a uniform standard under which any form of discrimination based on race, color, national or ethnic origin would be considered inconsistent with qualification for exemption, regardless of the policy's purpose or intended objective. As a result, race-based policies adopted for diversity, equity, inclusion, or remedial purposes could jeopardize qualification under IRC Section 501(c)(3).

Schools that currently offer donor-restricted endowed scholarships with race-based criteria would no longer be able to use such criteria without potentially jeopardizing their tax exemption under IRC Section 501(c)(3). Schools holding endowments for scholarships with race-based restrictions should consider (1) working with donors or their heirs to modify the terms of the endowment, (2) seeking judicial modification of the endowment terms, or (3) holding the funds without making race-based awards.

The ultimate scope and application of the proposed regulations will remain uncertain until finalized. Treasury and the IRS have requested comments on all aspects of the proposed regulations, and revisions likely will be made before they are finalized. Comments on the proposed regulations also may provide Treasury and the IRS with an opportunity to address practical questions regarding administration, implementation and interaction of the proposed rules with existing scholarship and financial assistance programs and arrangements that do not comply with the proposed regulations.

The proposed applicability date for the regulations to go into effect is tax years beginning after May 31, 2027, which provides affected stakeholders time to monitor future developments, evaluate comments submitted during the rulemaking process, and assess the potential effects of the final regulations, once issued. Organizations currently relying on existing guidance, including Revenue Procedure 75-50, generally may continue to do so until changes are reflected in final regulations or other published guidance.

The proposed regulations do not prohibit schools from maintaining religious missions or using religious affiliation as an admissions criterion, provided such criteria are based solely on religion and not on race, color, national or ethnic origin. Likewise, schools may continue to pursue programs aimed at reducing prejudice and discrimination, but Treasury and the IRS have indicated that those objectives must be pursued through means that do not involve race-based decision making.