The U.S. Department of the Treasury and the IRS have issued proposed regulations that would clarify racial discrimination by a private school can jeopardize the school’s federal tax-exempt status under Section 501(c)(3).
Under the proposal, a tax-exempt private school could not adopt, maintain, or enforce policies or practices that discriminate based on race, color, or national or ethnic origin, regardless of the purpose behind those policies. The proposed standard would extend to admissions, educational policies, scholarships and loans, athletics, and other school-administered or school-supported programs.
Importantly, these regulations are proposed and not yet final. As currently drafted, they would apply to taxable years of private schools beginning after May 31, 2027.
For private schools and other educational institutions with Section 501(c)(3) status, now is an appropriate time to understand the proposal and identify policies, scholarships, donor restrictions, and programs that may warrant review.
What Do the Proposed IRS Regulations Change?
Federal tax law has long conditioned a private school’s Section 501(c)(3) tax-exempt status on compliance with the federal public policy against racial discrimination in education. The proposed regulations would establish that standard expressly in Treasury regulations and clarify its application following more recent Supreme Court decisions.
Specifically, proposed Treasury Regulation §1.501(c)(3)-2 would provide that a private school is not operated exclusively for exempt purposes if it adopts, maintains, or enforces a policy or practice that discriminates based on race, color, or national or ethnic origin in administering:
- Educational policies
- Admissions policies
- Scholarship and loan programs
- Athletic programs
- Other school-administered or school-supported programs
Significantly, the proposed rule states that prohibited discrimination includes discrimination based on race, color, or national or ethnic origin for any purpose. The proposal therefore would apply even where a race-based policy is intended to advance remedial or diversity-related objectives.
Treasury and the IRS describe the proposal as providing a uniform nondiscrimination standard consistent with federal public policy and Supreme Court precedent, including Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard.
Which Private Schools Would Be Affected?
The proposed regulations use a broad definition of “private school.” They would cover Section 501(c)(3) educational organizations described in Section 170(b)(1)(A)(ii), including private:
- Primary and secondary schools
- Colleges and universities
- Professional schools
- Trade schools
Governmental units and certain government-owned or government-operated organizations would not fall within the proposed definition. Schools that are affiliated with a church and therefore exempt under Section 170(b)(1)(A)(i) would also not be considered a private school under these proposed regulations.
Treasury and the IRS estimate that the proposed regulations could affect as many as 18,000 private elementary, secondary, and post-secondary schools that currently qualify for tax-exempt status.
Why Scholarship and Financial Aid Programs May Require Particular Attention
One of the most significant practical considerations for schools may be the treatment of scholarships, loans, and other financial assistance.
Existing IRS guidance in Revenue Procedure 75-50 contains provisions allowing certain programs favoring racial minority groups when designed to promote a school’s racially nondiscriminatory policy. If the regulations are finalized as proposed, Treasury and the IRS intend to remove portions of that guidance that they view as incompatible with the new standard.
That could make reviewing existing scholarship eligibility requirements particularly important.
The proposed regulations’ economic analysis acknowledges that some schools may have donor-restricted or endowed scholarships for which eligibility expressly depends on race, ethnicity, or national origin. Treasury and the IRS note that these types of scholarships would not meet the nondiscrimination standard under the proposed regulations and addressing these arrangements could involve working with donors or donors’ heirs to identify alternative eligibility criteria.
Schools should therefore consider reviewing not only internally established financial aid programs, but also relevant gift agreements, endowment restrictions, scholarship criteria, and other donor documentation with appropriate legal and tax advisors.
Can Schools Still Use Race-Neutral Criteria to Support Educational Opportunity?
Yes. The proposal does not prevent schools from pursuing programs intended to expand educational opportunity or address disadvantage, provided they do so without discriminating based on race, color, or national or ethnic origin.
Treasury and the IRS specifically discuss alternatives such as income, geography, and first-generation student status in the proposed regulations. The IRS announcement also identifies individual hardship, military family status, and academic achievement as examples of race-neutral criteria that schools could use for admissions or financial assistance.
This distinction may be particularly important for schools reviewing scholarship and financial aid programs designed to serve historically disadvantaged student populations.
What About Religious Schools?
The proposed regulations expressly state that they would not prevent a private school from maintaining a religious mission, curriculum, or program of religious observance.
A school could also select students based on religious affiliation or membership. According to the proposal, a genuinely religious selection criterion does not become discrimination based on race, color, or national or ethnic origin merely because members of the religious community may share ancestry or ethnic characteristics, provided the criterion is based solely on religion rather than shared ancestry or ethnic characteristics.
When Would the New Rules Take Effect?
The regulations are currently proposed. Treasury and the IRS expect to finalize them, with any changes resulting from the rulemaking process, before May 31, 2027.
As proposed, the regulations would apply to taxable years of private schools beginning after May 31, 2027. The proposed delayed applicability date is intended to provide schools time to amend admissions, scholarship, or other policies before the regulations become applicable.
The Federal Register notice is scheduled for publication on September 4, 2026, and provides a 60-day period for written or electronic comments and requests for a public hearing.
What Should Tax-Exempt Private Schools Consider Doing Now?
Because the regulations are not yet final, schools should avoid treating the proposal as a completed change in law. However, the time before the proposed applicability date provides an opportunity to assess potential exposure and prepare for possible changes.
Private schools may want to work with their tax and legal advisors to review admissions and enrollment policies, scholarship and financial aid eligibility criteria, donor-restricted scholarship and endowment agreements, athletic and extracurricular programs, and other school-supported programs that could involve race, color, or national or ethnic origin.
Schools may also want to identify programs that could potentially transition to race-neutral eligibility criteria if the regulations are finalized substantially as proposed.
For schools with complex donor restrictions, beginning that review early could be especially valuable because modifying existing arrangements may require additional legal analysis or coordination with donors or other parties.
Frequently Asked Questions
Are the new IRS private school nondiscrimination regulations final?
- No. Treasury and the IRS issued proposed regulations in September 2026. The regulations remain subject to the federal rulemaking process and could change before they are finalized.
Could a private school lose its 501(c)(3) status under the proposed regulations?
- Yes. If finalized as proposed, a private school that adopts, maintains, or enforces a policy or practice that discriminates based on race, color, or national or ethnic origin would not qualify as an organization described in Section 501(c)(3) for an applicable taxable year.
Would the rules apply only to college admissions?
- No. The proposal is broader. It covers private primary and secondary schools, colleges, universities, professional schools, and trade schools and applies to admissions, educational policies, scholarships and loans, athletics, and other school-administered or school-supported programs.
Could a private school continue offering scholarships intended to help disadvantaged students?
- The proposal would permit schools to use race-neutral eligibility criteria. Treasury and the IRS identify alternatives such as income, geography, and first-generation student status, among other criteria. Schools should review the specific structure of existing or proposed scholarship programs with their advisors.
What happens to existing donor-restricted scholarships based on race or ethnicity?
- The proposed regulations acknowledge that schools with donor-restricted or endowed scholarships containing race-based eligibility criteria may face legal and administrative considerations in revising those arrangements. The appropriate course of action will depend on the terms and legal circumstances of the particular gift or endowment, so schools should consult their tax and legal advisors.
When would the proposed regulations apply?
- If finalized as proposed, the regulatory text provides that the rules would apply to taxable years of private schools beginning after May 31, 2027.
Preparing for Potential Changes
The proposed regulations represent an important development for tax-exempt private educational institutions, particularly those with admissions, scholarship, financial aid, or other programs that use race, color, or national or ethnic origin as a criterion.
Although the rules are not yet final, reviewing affected policies now can help schools understand where changes may be needed and provide additional time to address complex issues, including donor-restricted scholarship funds.
If your private school or educational institution has questions about how the proposed regulations could affect its tax-exempt status or existing programs, contact Maxwell Locke & Ritter. Our nonprofit and tax professionals can work with your organization and its legal counsel to evaluate potential tax considerations and prepare for regulatory changes.
Key Takeaways
- These regulations are proposed, not final. Treasury and the IRS issued the proposed rules in September 2026, and they could change through the rulemaking process.
- Tax-exempt status could be at risk. If finalized as proposed, a private school could lose its Section 501(c)(3) qualification for an applicable taxable year if it discriminates based on race, color, or national or ethnic origin in covered policies or programs.
- The proposal reaches beyond admissions. It would apply to educational and admissions policies, scholarships and loans, athletics, and other school-administered or school-supported programs.
- Race-based scholarships may require particular attention. Schools may need to review scholarship eligibility criteria and donor-restricted or endowed funds that use race, ethnicity, or national origin as a criterion.
- Race-neutral alternatives remain available. The proposal discusses criteria such as income, geography, and first-generation student status as alternatives schools could consider.
- Schools have time to prepare. If finalized as proposed, the regulations would apply to taxable years beginning after May 31, 2027, giving schools an opportunity to review potentially affected policies and programs.
