Proposed Regulations Threaten Tax-Exempt Status for Private Schools and Colleges That Provide Race-Conscious Support

The Department of the Treasury and the IRS recently issued proposed regulations that would end federal tax-exempt status for private schools deemed to have engaged in racial discrimination. Relying on the “fundamental public policy” doctrine outlined in the Supreme Court’s decision in Bob Jones University v. U.S., 461 U.S. 574 (1983) (involving revocation of tax-exempt status for a school that prohibited interracial dating), the proposed regulations (“Proposed Regulations”) state that a private school would no longer qualify for tax-exempt status under Internal Revenue Code section 501(c)(3) if it has any policy or practice that discriminates on the basis of race, color, or national or ethnic origin. The proposed rules would apply to admissions, educational policies, scholarships and loans, athletics, and any school-administered or supported program at any tax-exempt private primary school, secondary school, college, university, professional school, or trade school. If finalized, the Proposed Regulations would apply to private schools’ taxable years beginning on or after May 31, 2027. Comments on the Proposed Regulations are due by November 3, 2026.

Past IRS Recognition of Remedial Race-Conscious Practices

Historically, the IRS has recognized that activities intended to remediate past racial discrimination (affirmative action in admissions, managing scholarships with preferences for minorities, programs intended to support minorities, etc.) were permissible, and did not constitute racial discrimination, so long as the purpose and effect of those programs was to promote nondiscrimination on the whole. This remediation principle was codified in IRS Revenue Procedure 75-50 (as modified by Rev. Proc. 2019-22), which states that a “policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance will not constitute discrimination on the basis of race when the purpose and effect is to promote the establishment and maintenance of that school’s racially nondiscriminatory policy as to students.”

This recognition of a remedial exception to nondiscrimination has long been reflected in IRS guidance, including Treasury Regulations and IRS rulings connected with scholarship programs intended to provide a boost to racial minorities who were historically disadvantaged, and unlike Title VI of the Civil Rights Act of 1964 (“Title VI”), which prohibits racial discrimination in federally funded programs, Internal Revenue Code section 501(c)(3) does not include a statutory prohibition against racial discrimination.

Trump Administration Initiatives

In the wake of the Supreme Court’s decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023) (which rejected a similar remedial exception with respect to university admissions policies, except in very limited circumstances) and the Trump administration’s Executive Orders prohibiting diversity, equity, and inclusion initiatives and “equity ideology” (including Executive Orders 14173 and 14280, both cited in the preamble to the Proposed Regulations), various federal agencies, including the Education Department and the Department of Justice (“DOJ”), have attempted to shut down diversity initiatives in colleges and universities. Examples include the DOJ’s so-called “Bondi Memo” from July 2025, which purported to apply the principles of Students for Fair Admissions to all activities of a college, and more recently, certain publicly reported investigations of colleges for scholarship funds and programs intended to benefit racial minorities.

The Proposed Regulations represent the first public attempt by the Department of the Treasury and the IRS to implement the Trump administration’s vision of racial discrimination as reflected in the administration’s Executive Orders. According to the IRS in the accompanying press release, the Proposed Regulations are “delivering on President Trump’s Executive Orders ending discrimination and restoring merit-based opportunity.”

Effect of Proposed Regulations

Consistent with those other federal initiatives, and with the administration’s Executive Orders, the Proposed Regulations would modify the Treasury Regulations interpreting Internal Revenue Code section 501(c)(3) to specify that a private school will not be exempt under section 501(c)(3) if it adopts, maintains or enforces any racially discriminatory practice with respect to admissions, financial aid, athletics, or other school-administered or school-supported programs, regardless of the purpose behind such practices (i.e., whether or not the purpose was to address historic discrimination or current racial disparities). The preamble to the Proposed Regulations further notes that Revenue Procedure 75-50 (and presumably other IRS guidance consistent with it) will be updated to remove the language allowing schools to have policies that favor racial minority groups with respect to admissions, programs, and financial assistance.

Use of Race-Neutral Criteria

As the Supreme Court suggested in Students for Fair Admissions v. Harvard, and as the preamble to the Proposed Regulations asserts (by way of taking the position that the inability to continue to accept from donors and administer funds with racial preferences should not be unduly costly or problematic for colleges), schools may continue to expand educational opportunities for disadvantaged students through the use of criteria such as family income, geographic location, or first-generation status as long as admissions or financial aid decisions are not made on the basis of race, color, or national or ethnic origin. It should be noted that the DOJ, by way of the Bondi Memo, expressly disfavored many of these criteria, treating them as common “proxies” for race, and accordingly this recognition by the Department of the Treasury and the IRS that such criteria may be permissible should be taken with caution, and applied in a way that is not intended as a proxy for prohibited criteria.

At the state level, recent cases attempting to remediate racial restrictions or preferences in funds subject to donor restrictions by replacing those restrictions with these sorts of race-neutral criteria have demonstrated that the exercise is much more difficult than the Department of the Treasury acknowledges in its preamble. For example, in the case of In re Ezra L. Totton Scholarship, 2026 WL 1614078 (Iowa June 5, 2026), the Iowa Supreme Court rejected a university’s attempt to replace “Black” as a scholarship criterion with “first-generation,” noting that, while it had become impracticable to maintain the race-based restriction, there was no evidence in the record indicating that the change to “first-generation” was consistent with the donor’s intended purposes. The Massachusetts Attorney General has taken a practical approach with colleges and universities with respect to scholarship funds, acknowledging the threat of federal action against schools attempting to balance their promises to donors with active DOJ prosecution and other legal threats against schools, and instituting a notice-and-response mechanism whereby the Attorney General acknowledges that in certain cases colleges are continuing to deploy scholarship funds with problematic restrictions in a manner that permits them both to continue to utilize those funds to benefit students and to sign required federal certifications related to the Executive Orders. However, many states have taken a different approach to attempts by colleges to modify restrictions along the lines of what the Department of the Treasury recommends. On August 20, 2025, for example, ten blue state Attorneys General issued a letter to entities holding charitable scholarship funds, rejecting the idea that the Student for Fair Admissions case prohibits use of scholarship funds with race-based criteria and effectively making clear that they would strongly resist attempts by colleges to make modifications to such provisions.

Effective Date

If the Proposed Regulations are finalized, the Department of the Treasury and the IRS would expect all impacted private schools to adjust their admissions and scholarship and loan criteria effective for fiscal years beginning after May 31, 2027 in order to retain tax-exempt status. Consistent with Executive Order 14173 (which expressly ordered federal agencies to identify and bring compliance actions against charitable organizations and others engaged in “illegal DEI” and similar activities), once the Proposed Regulations are finalized, we anticipate that the IRS will engage in compliance initiatives or audits with respect to many of the private schools impacted by the regulations to determine whether they continue to engage in such practices, and will attempt to revoke 501(c)(3) status for those that do.

Steps Private Schools Should Take Now

Although the preamble to the Proposed Regulations positions this change as a natural clarification of long-standing fundamental public policy against racial discrimination, the Proposed Regulations in fact represent a dramatic change in Department of the Treasury and IRS guidance on racial discrimination in schools.

As noted above, the Proposed Regulations are expressly aligned with the Trump administration’s imperatives as outlined in its Executive Orders, and are consistent with similar initiatives by the Education Department and by the DOJ to eliminate racial preferences and DEI activities in schools. Private schools have already been under pressure from the Trump administration to modify scholarship funds with donor restrictions based on race, color, or national or ethnic origin as a result of Title VI complaints and DOJ actions, as well as the Education Department’s February 2025 Dear Colleague Letter (subsequently vacated and permanently invalidated by a federal court), which suggested that the Supreme Court’s holding in Students for Fair Admissions applied not only to admissions, but also to scholarships and other funds and programs. The Proposed Regulations appear to be intended to complement the existing pressure on private schools by threatening their tax-exempt status as well.

We recommend that private schools take the following steps as the Proposed Regulations enter the public comment period:

• Inventory programs, policies, and practices that relate to race, color, or national or ethnic origin.
• Evaluate whether these programs, policies, and practices and messaging about them comply with the Proposed Regulations.
• Assess the degree of risk that each such program, policy, or practice poses.
• Identify any funds subject to donor restrictions based on race, color, or national or ethnic origin, evaluate whether those restrictions comply with the Proposed Regulations and, if not, what options may be available to modify them.
  • Where donor consent to modification of a fund is not available or practical, and where schools do not have the power to modify the terms of a fund unilaterally, consider the availability and practicality of a court action, which may differ significantly from state to state. Where court action is legally or practically unavailable, consider suspending (at least temporarily) grants from the fund.
  • Some schools have attempted to address Title VI concerns regarding scholarship funds by transferring those funds to outside organizations, such as community foundations or other scholarship funds, that are not directly subject to Title VI. Schools attempting to rely on that strategy to avoid either Title VI concerns or risk of loss of tax-exempt status must ensure that they are not coordinating with the organizations holding those funds and granting those scholarships, as such coordination violates Title VI, and may continue to subject these schools to risk of loss of tax-exempt status under the Proposed Regulations.
• Review and, if necessary, modify policies on accepting gifts or bequests with restrictions based on race, color, or national or ethnic origin.
• Consult with experienced counsel.

While the Proposed Regulations are currently just limited to private schools, in light of the Trump administration’s positions and activities regarding racial discrimination and DEI, we expect future guidance and IRS compliance initiatives ultimately could apply this particular perspective on racial discrimination to a broader array of racial equity initiatives by tax-exempt organizations.