Introduction
On September 4, 2026, the U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) published proposed regulations (the “Proposed Regulations”) that would revoke the tax-exempt status of a private school if it adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin in administering an educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program. This rule would apply to discrimination intended to serve remedial or diversity-related objectives.
The preamble to the Proposed Regulations contains both a detailed policy explanation of the rule, as well as a variety of explanations of the intent of the rule itself. In particular, the preamble’s explanations include important commentary about the treatment of religious schools and about the treatment of dedicated endowments, and, in respect of each of these, forward planning should be considered by those affected. However, the rule itself is terse and broad, and leaves substantial latitude for IRS interpretation and enforcement authority, and as such all potentially affected private schools and their affiliated entities should begin considering the effect of the proposed rule on their structure and operations. The Proposed Regulations would apply to taxable years beginning after May 31, 2027 (which, as a practical matter, means those private schools that operate on a typical June 30 taxable year will be affected beginning with the 2027-2028 school year).
The Proposed Regulations
Basic Statutory and Regulatory Provisions
Section 501(c)(3)[1] generally defines entities organized and operated exclusively for charitable, educational, and certain other specified purposes as being generally exempt from U.S. federal income tax. Section 170 provides a deduction for donations to these entities. Existing Treasury Regulation section 1.501(c)(3)-1 states that the term “charitable” is used in its generally accepted legal sense and includes the promotion of social welfare by organizations formed to eliminate prejudice and discrimination, and that “educational” organizations can include colleges, universities, and professional or trade schools.
On its face, the provisions to be added by the Proposed Regulations are terse yet broad: “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.”[2] The real heart of the Proposed Regulations, however, is in the extensive discussion of the history of the charitable purpose requirement, the policy of the United States regarding racial discrimination in education, the application of various tax-exempt requirements in the area of race, color, or national or ethnic origin discrimination, the special analyses, and the economic effects and expected compliance costs contained in the Preamble.
The History of the Requirements for Tax-Exemption and the Policy of the United States against Racial Discrimination in Education
The history of the “charitable” or “educational” purpose requirement in section 501(c)(3) and the regulations is long and detailed, and much of it is recapitulated in the preamble to the Proposed Regulations. The discussion in the preamble begins with the Supreme Court’s decisions in Brown v. Board of Education, the enactment of Title VI of the Civil Rights Act of 1964, and the Court’s decision in Runyon v. McCrary, which held that 42 U.S.C. § 1981 prohibits private schools from discriminating against applicants on the basis of race. It continues through later cases,[3] IRS publications,[4] and focuses on the most recent Supreme Court developments—in particular, Students for Fair Admissions, Inc. v. President and Fellows of Harvard College.
The preamble notes that prior guidance (in particular, Rev. Proc. 75-50) and some earlier cases (such as Bakke and Grutter) may have allowed some policies favoring racial minority groups, at least as long as such policies promote, or do not significantly derogate from, the school’s racially nondiscriminatory policy. However, the preamble does note that that the Court had been viewing race-based distinctions with more scrutiny, culminating in Students for Fair Admissions, where the Court held that admissions decisions based on race must survive the “exacting nature of the strict scrutiny standard.”
Explanation of the Proposed Regulations
The preamble then bluntly states the point of the Proposed Regulations: “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).” As such, private schools could not engage in such policies, even if such policies could meet the exceptions available under Rev. Proc. 75-50. The preamble notes the inconsistency and does state that once the Proposed Regulations become final, Rev. Proc. 75-50 would be modified to eliminate any exception for policies favoring racial minority groups “that promote, or do not significantly derogate from, the school’s racially nondiscriminatory policy.”
The preamble does go on to note that private schools would still be permitted to maintain a religious mission, curriculum, or other such program, or to select students based on religious affiliation of membership—presuming that any such selection criteria is based solely on religion and not on shared ancestry or ethnic characteristics.[5] The preamble also emphasizes that policies or actions to eliminate prejudice or discrimination would still be permitted, provided that such policies or actions not discriminate on the basis of race, color, or national or ethnic origin.
Special Analyses
The “special analyses” section of the preamble is unusually substantive. For post-secondary schools, the Treasury and IRS expect limited economic effects or compliance costs with respect to their admissions programs, as they believe such schools to already have changed such programs in response to the Supreme Court’s decision in Students for Fair Admissions. The Treasury and IRS do expect primary and secondary schools to adjust their admissions criteria in response to the Proposed Regulations, although they disclaim having any specific high-level estimates of the costs.
With respect to financial aid policies for private schools at all levels, the Treasury and IRS identify three potential areas of interest: (1) legal and administrative costs of compliance, (2) changes in the population receiving financial aid, and (3) charitable donor behavior.
For compliance costs, the preamble notes that race-based scholarships that were endowed by a donor could create particular complications, and that schools might have to work with donors (or donors’ heirs) to adjust the scholarship eligibility criteria. The preamble does not address in any way the significant legal complexities potentially involved in adjusting the terms of an endowment established by a will, nor does it provide any guidance as to how a private school would be expected to deal with a donor or “heirs” that does not wish to amend the terms of the endowment. No sense of the magnitude of any costs is available, although the preamble asserts (without much analysis or evidence) that most loans should not be covered, and most scholarship programs do grant enough latitude to the administering private school to adjust eligibility criteria to something not forbidden by the Proposed Regulations.
With respect to changes in the recipient population, the Treasury and IRS do not expect the aggregate amount of scholarships and loans, or the aggregate number of recipients, to change. They also anticipate that alternative eligibility criteria may produce a recipient population with socioeconomic characteristics similar to, but not identical to, the population that would have received assistance under race-based criteria (although, again, not much analysis or evidence is provided).
With respect to charitable donor behavior, the Treasury and IRS expect that donors would use non-race-based criteria to provide scholarships in a similar fashion as to pre-existing programs. Alternatively, donors could create scholarship programs outside of private schools that could achieve substantially similar outcomes—although the preamble does not provide much guidance as to how a donor could coordinate such a program with a private school in a way as to be compatible with the preamble’s understanding of the Proposed Regulations.
Analysis
While the Proposed Regulations themselves are fairly short, the preamble is filled with important discussions, nuances, exceptions, expected applications, and various other considerations that should greatly influence how one reads the Proposed Regulations and at least to some extent how the Treasury and IRS might apply the regulations if they are finalized in a substantially similar form. As such, the preamble is likely to inform forward planning by potentially affected schools and their advisers. Importantly, however, the preamble does not form part of the rule itself, and it cannot be discounted that the rule will be interpreted and applied by the IRS (and, potentially, the courts) in additional and broader ways than the Preamble implies.
The takeaway from the preamble is that the current administration believes that race-based determinations by educational institutions are almost always strictly forbidden. While past publications by the IRS (such as Rev. Proc. 75-50) allowed, potentially, for some race-based determinations—and while this was arguably consistent with earlier Supreme Court decisions such as Bakke and Grutter—the current posture of the Treasury and IRS is that Students for Fair Admissions has effectively eliminated this exception.
A natural read of the preamble and the Proposed Regulations is that the administration will now use audits, examinations, and IRS action generally to continue its crackdown on diversity programs in the educational system (and the administration is expanding the reach of its reading of Students for Fair Admissions to primary and secondary private schools, even though the Supreme Court has so far not taken up any cases on similar questions relating to primary or secondary schools).[6] Any private schools should be highly aware of the potential for IRS review, and recognize that any admissions, scholarship, or other related programs they administer could now be subject to investigation by the IRS.
The Treasury and IRS would also be entitled under the rule to examine scholarship programs closely and could take direction from the discussion in the preamble relating to donors, charitable contributions, and financial aid. The preamble asserts that pre-existing scholarship programs (at least those administered by the private school itself) must either be amended to remove race (or other forbidden) considerations or perhaps ended if the terms of the grant or program prove too difficult to amend. While the preamble does not try to quantify such costs and considers reasonable alternatives to be easily available, it is far from clear that this will be true across the board.
Under the preamble, the Proposed Regulations state that they provide a “clear, enforceable standard,” but enforcement of the Proposed Regulations may pose challenges administratively. The Proposed Regulations are intended to be effective for taxable years beginning after May 31, 2027. This gives the IRS a limited window of time to develop the necessary audit guides and techniques and train examination teams under the Proposed Regulations; however, the subjects of the Proposed Regulations (race composition and admissions data) are quite complex and require different skill sets than many IRS examining agents may possess.
Any challenge to the Proposed Regulations (or the final version thereof) must make it past several jurisdictional issues, and thus private schools might be faced with a limited ability to challenge the rule outside of the standard audit procedure. That said, there have been many criticisms of the Proposed Regulations,[7] and it is possible that valid legal challenges will be raised.
Given the possibility that the Proposed Regulations may be subject to challenge only during the course of an audit, early preparation for an IRS examination under the Proposed Regulations is critical. Private schools should review all of their admissions, financial aid, scholastic, and other programs with the Proposed Regulations in mind. Specifically, private schools may want to evaluate what contemporaneous documentation they prepare and retain in connection with admission decisions, and they may want to consider whether to use third-party experts like economists, statisticians or social scientists proactively, before an IRS examination occurs, to fully prepare for any defenses they plan to raise.
[1] All “Section” references are to the Internal Revenue Code of 1986, as amended.
[2] Prop. Reg. Section 1.501(c)(3)-2(b).
[3] Bob Jones Univ. v. United States, 461 U.S. 574 (1983); Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971).
[4] Rev. Rul. 71-447, 1971-2 C.B. 230; Rev. Proc. 75-50, 1975-2 C.B. 587.
[5] The proposed regulations state explicitly, “for the avoidance of doubt, the proposed regulations would not preclude a private school from maintaining a religious mission, curriculum, or program of observance, or form selecting students on the basis of religious affiliation or membership.” Racial Nondiscrimination in Private Schools, 91 Fed. Reg. 56,811, 56,815 (Sept. 4, 2026) (to be codified at 26 C.F.R. pt. 1).
[6] The Supreme Court has denied certiorari petitions on two cases concerning the extension of Students for Fair Admissions to secondary (albeit public) schools. See Coalition for TJ v. Fairfax County School Board, 601 U.S. ___ (2024); Boston Parent Coalition for Academic Excellence Corp v. The School Committee for the City of Boston, 145 S. Ct. 15 (2024).
[7] For example, law professor Phil Hackney from the University of Pittsburgh stated in the New York Times that it is unclear whether courts will agree with the definition of a “fundamental public policy” in the regulations. See Andrew Duehren & Michael C. Bender, Schools Giving Aid to Minority Students Could Lose Tax Exemptions Under Trump’s New Rules, N.Y. Times (Sept. 3, 2026), https://www.nytimes.com/2026/09/03/business/economy/trump-irs-college-nonprofits.html.Brian Galle, a law professor at UC Berkley told the LA times that “this rule is obviously illegal”, further emphasizing that the proposal will only have effect if the impacted parties “are afraid to stand up for themselves in court.” Howard Blume et al., Trump Targets Private School Tax-Exempt Status over Race-Based Aid: California Takes Notice, L.A. Times (Sept. 3, 2026, 4:36 PM), https://www.latimes.com/world-nation/story/2026-09-03/trump-tax-exempt-status-schools-race. Additionally, as many as forty public comments have already been made to date, including a request for a hearing by the Legal Defense Fund.