In September 2025, the Internal Revenue Service (IRS), jointly with the Department of the Treasury, issued its Priority Guidance Plan (“Plan”) for the 2025-2026 fiscal year. In this Plan, the IRS signaled its intent to issue “[g]uidance on the application of the fundamental public policy against racial discrimination, including consideration of recent case law, in determining the eligibility of private schools for recognition of tax-exempt status under Section 501(c)(3).”

The IRS has followed through on this planned policy initiative. On September 3, 2026, the IRS issued proposed regulations that would update the nondiscrimination requirements for tax-exempt educational organizations, including private K-12 schools, colleges, and professional or trade schools. If approved, these proposed regulations would take effect on May 31, 2027.

The proposed rule would make clear that any policy or practice that discriminates on the basis of race, color, or national or ethnic origin, for any purpose, is ineligible for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. In proposing these changes, the IRS has cited its desire to align policies with Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023), in which the Supreme Court concluded that race-based admissions policies violate the Equal Protection Clause and Title VI regardless of remedial or diversity-related intent.

The consequences of losing tax-exempt status extend beyond the loss of the income tax exemption itself. Tax-exempt status under Section 501(c)(3) also enables donors to claim charitable contribution deductions, supports access to tax-exempt bond financing, and often serves as a prerequisite for state and local tax exemptions, including property tax exemptions.

Current Rules and Proposed Changes

Tax-exempt educational organizations have long been prohibited from discriminating on the basis of race, color, or national origin. Rev. Rul. 71-447 (1971). While rarely enforced, the Supreme Court affirmed in Bob Jones University v. United States, 461 U.S. 574 (1983), that institutions engaging in racial discrimination are ineligible for tax-exempt status because such discrimination violates fundamental public policy.

Since 1975, schools have been required to adopt and publicize a racially nondiscriminatory policy and to maintain records demonstrating nondiscriminatory practices across admissions, scholarships, athletics, and other programs. Existing rules provided “safe harbors” permitting race-conscious decision-making if the purpose and effect was to promote the school’s nondiscriminatory policy. The proposed regulations would eliminate these safe harbors. As a result, tax-exempt educational organizations should consider the following:

• Identify and carefully review any policy, practice, or program that favors applicants, students, employees, alumni, or others participating in school programs on the basis of race, color, or national origin. Even policies adopted to promote diversity or remediate past discrimination may place the school’s tax-exempt status at risk.
• Race-neutral criteria (including family income, geography, first-generation status, and academic achievement) remain permissible for admissions and financial aid decisions and other policies.
• Identify whether the school administers any donor-established scholarship funds with race-based or nationality-based eligibility criteria and consider whether such scholarships may run afoul of the proposed regulations. In some cases, schools may need to work with those donors (or their successors) to revise the criteria consistent with the Uniform Prudent Management of Institutional Funds Act adopted by the applicable jurisdiction for such funds. Where donors are no longer available, modification of such restrictions may require court approval or involvement of the state Attorney General, depending on the governing jurisdiction.

What You Should Do Now

Tax-exempt schools are encouraged to consult with legal counsel regarding the impact these proposed rules may have on admissions policies and practices, scholarship programs, and other student-facing programs. Public comment through the rule-making process is available through the expected deadline of November 3, 2026. If you have questions, please reach out to a member of our team.