Earlier today the Department of the Treasury and the IRS issued a much anticipated proposed regulation addressing discrimination and tax-exempt status. The regulatory text itself is brief and worth reproducing in full:
§ 1.501(c)(3)-2 Racial nondiscrimination requirement for private schools.
(a) In general. A private school (as defined in paragraph (c) of this section) must be operated exclusively for one or more exempt purposes (as defined in § 1.501(c)-3)1(d)) to be an organization described in section 501(c)(3) of the Internal Revenue Code (Code). A private school that fails to satisfy the nondiscrimination requirement of paragraph (b) of this section is not an organization described in section 501(c)(3) with respect to any taxable year of the private school described in paragraph (d) of this section.
(b) Nondiscrimination requirement. 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 any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program. For purposes of this section, 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.
(c) Private school defined. For purposes of this section, the term private school means an organization described in section 501(c)(3) (determined without regard to the nondiscrimination requirement of paragraph (b) of this section) and classified as an educational organization described in section 170(b)(1)(A)(ii) of the Code. The term private school does not include a governmental unit, an agency or instrumentality of a governmental unit, or an organization that is owned or operated by an agency or instrumentality of a governmental unit. For purposes of this definition, the term governmental unit means the United States, a State, an Indian Tribal government (within the meaning of section 7701(a)(40) of the Code), the District of Columbia, a possession of the United States, or a political subdivision of any of the foregoing.
(d) Applicability date. This section applies with respect to the taxable year of any private school beginning after May 31, 2027.
Several initial observations:
- The activities reached by the proposed regulation are very broad (any school-administered or school-supported program), there is explicitly no permitted purpose that would allow the prohibited discrimination, and implicitly there is no de minimis or insubstantial level of discriminatory activity permitted.
- The organizations reached by the proposed regulation are, in contrast, limited to private, non-governmental schools. But the placement (under section 501(c)(3)) and structure of the regulation would appear to permit expansion to other tax-exempt charities relatively easily.
- The preamble to the proposed regulation argues that the prohibited discrimination is based on fundamental public policy, but the argument in favor of this conclusion is not completely convincing in that it does not establish that the asserted policy is the longstanding position of all three federal government branches, as the Supreme Court implied was necessary in its Bob Jones University decision.
- Interestingly, the economic effects section of the preamble suggests that donors (but not schools, at least explicitly) could continue to donate using “alternative criteria, such as income, geography, or first-generation student status.” That position appears to contradict previous administration pronouncements relating to racial discrimination.
It is relatively easy to predict there will be a flood of comments on the proposed regulation, litigation challenging any final regulation (including likely pre-enforcement challenges based on alleged First Amendment chilling effects), and years before a final resolution. What is more difficult to predict is how many, perhaps most, schools will react to the issuance of the proposed regulation by significantly changing their activities. The preamble appears to anticipate such a preemptive reaction, noting in a footnote that while the Supreme Court’s Students for Fair Admissions decision did not apply to K-12 schools (many of which are also not reached by Title VI because they do not receive federal financial assistance), “following SFFA, several prominent advisors to private primary and secondary schools anticipated that this decision would ultimately come to apply to K-12 schools as well, and advised schools to adapt their admissions processes accordingly.”
For comments submitted by Alex Reid before issuance of the proposed regulation, see this Nonprofit Law Blog post. For a recent article on the topic of the proposed regulation, see Garrett Pratt, Who Defines Public Policy for Charitable Organizations? For press coverage: ABC News; N.Y. Times (subscription required); Washington Post (subscription required).