Key Takeaways
- On Sept. 3, 2026, Treasury and the IRS issued proposed regulations that would end tax-exempt status for private schools that discriminate on the basis of race, color, or national or ethnic origin in admissions, scholarships, athletics or other programs.
- The proposed regulations would apply to private primary and secondary schools, colleges, universities, and professional and trade schools, but not to public schools.
- The proposed regulations prohibit discrimination “for any purpose,” which would eliminate current exceptions allowing race-based scholarships and programs designed to promote diversity.
- If finalized, the new rules will take effect for tax years beginning after May 31, 2027, so private schools should promptly review their admissions, scholarship and other programs for race-based criteria.
On Sept. 3, 2026, the Department of the Treasury and the Internal Revenue Service issued proposed Treasury Regulations that would apply a new racial nondiscrimination requirement to private schools. If finalized, the proposed regulations would end federal tax-exempt status under Internal Revenue Code Section 501(c)(3) for a private school that discriminates on the basis of race, color, or national or ethnic origin in the administration of its educational, admissions, scholarship, athletic or other programs and policies. The proposed regulations would apply to private primary and secondary schools, private colleges and universities, and private professional and trade schools classified as educational organizations. The proposed regulations would not apply to public schools and schools operated by governmental units. Comments are due by Nov. 3, 2026.
Background
Section 501(c)(3) provides an exemption from federal income tax for organizations organized and operated exclusively for exempt purposes. Educational organizations, a subcategory of exempt organizations, are defined under Section 170 and its corresponding Treasury Regulations as organizations whose primary function is the presentation of formal instruction and which normally maintain a regular faculty and curriculum and have a regularly enrolled body of pupils or students in attendance at the place where their educational activities are regularly carried on.
Applying and interpreting public policy against racial discrimination in education, the IRS issued Revenue Ruling 71-447, 1971-2 C.B. 230, holding that a private school without a racially nondiscriminatory policy as to students is not “charitable” within the meaning of Sections 501(c)(3) and 170 and accordingly does not qualify as an organization exempt from federal income tax. A racially nondiscriminatory policy is defined to mean that the school admits students of any race to all the rights, privileges, programs and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.
The IRS provided additional guidance with respect to racially nondiscriminatory policies in Revenue Procedure 75-50, 1975-2 C.B. 587, and reiterated in IRS Publication 557, Tax-Exempt Status for Your Organization, the latter of which was last revised in January 2025. The guidance requires a private school to:
- Include in its charter or bylaws that it has a racially nondiscriminatory policy as to students;
- Include a statement of its racially nondiscriminatory policy as to students in all its brochures and catalogues dealing with student admissions, programs and scholarships;
- Include a reference to its racially nondiscriminatory policy in other written advertising that it uses as a means of informing prospective students of its programs;
- Except in certain circumstances, make its racially nondiscriminatory policy known to all segments of the general community served by the school by either publishing a notice of its racially nondiscriminatory policy in a newspaper of general circulation or using broadcast media to publicize its racially nondiscriminatory policy, in each case, to reach the general community the school serves;
- Be able to show that all programs and facilities are operated in a racially nondiscriminatory manner;
- Offer all scholarships or other comparable benefits procurable for use at any given school on a racially nondiscriminatory basis; and
- Certify each year on its Form 990 series return that it has satisfied all such requirements.
Notably, with respect to a private school’s scholarships and programs, Revenue Procedure 75-50 and IRS Publication 557 provide that scholarships and loans made pursuant to financial assistance programs favoring members of one or more racial minority groups that are designed to promote a school’s racially nondiscriminatory policy will not adversely affect the school’s exempt status. Also, financial assistance programs favoring members of one or more racial groups that do not significantly derogate from the school’s racially nondiscriminatory policy similarly will not adversely affect the school’s exempt status.
Proposed Regulations
Under the proposed regulations, a private school must satisfy the new “nondiscrimination requirement” to be an organization described in Section 501(c)(3). Such “nondiscrimination requirement” would provide that a private school is not operated exclusively for exempt purposes (and is therefore not eligible for exemption under Section 501(c)(3)) 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 and loan program, athletic program, or other school-administered or school-supported program.” Critically, the proposed regulations make clear that policies or practices that discriminate on the basis of race, color, or national or ethnic origin include those that discriminate for any purpose.
The proposed regulations would not prevent a private school from maintaining a religious mission, curriculum or program of religious observance. The explanation of the proposed regulations indicates that religious schools may continue to select students based on genuine religious affiliation or membership, consistent with existing federal law, provided that the selection criteria are based solely on religion and not on shared ancestry or ethnic characteristics.
If the proposed regulations are finalized as proposed, Revenue Procedure 75-50 would be modified to remove language that provides that (i) a private school may favor racial minority groups in admissions, facilities or programs when the purpose and effect are to establish or maintain a racially nondiscriminatory policy and (ii) certain financial assistance programs favoring one or more racial minority groups will not adversely affect a private school’s tax-exempt status. This is because Treasury and the IRS have concluded that such language is inconsistent with a uniform nondiscrimination standard and is incompatible with the U.S. Supreme Court’s evolving case law. Other provisions of Revenue Procedure 75-50 (and IRS Publication 557 with respect to private schools) would remain in effect.
The proposed regulations would apply to taxable years of private schools beginning after May 31, 2027. Treasury and the IRS indicated that they expect the proposed regulations to be finalized (subject to modifications based on any comments received) in advance of that date.
Practical Implications for Private Schools
Private schools should promptly review their existing admissions, scholarship, loan, athletic, and other programs and policies to identify any provisions that use race, color, or national or ethnic origin as eligibility criteria. Private schools that currently maintain race-based scholarship programs should consider modifying such programs. In addition, private schools should also consider modifying scholarship programs funded by donors with race-based restrictions using the applicable provisions of the Uniform Prudent Management of Institutional Funds Act or similar law.
In addition to limiting the types of programs and scholarships private schools may administer, the proposed regulations will also likely negatively impact charitable contributions to such scholarships and programs. Notably, the proposed regulations indicate that Treasury and the IRS expect that private schools may continue certain programs and scholarships “using alternative criteria, such as income, geography, or first-generation student status” because the “use of these alternative criteria results in a weaker relationship with race and ethnicity and a stronger relationship with other indicators of disadvantage such as income.” This is an interesting position and may be inconsistent with guidance, interpreting Title VI of the Civil Rights Act of 1964, issued by the second Trump administration, including the U.S. Attorney General’s Memorandum dated July 29, 2025, which prohibits the use of proxies for race by organizations receiving federal funding.
For questions or assistance, contact a member of McGuireWoods’ Nonprofit & Tax-Exempt Organizations or Education Industry teams.