Treasury and the IRS have proposed regulations that would make broad racial nondiscrimination a condition of federal tax-exempt status for private schools under Section 501(c)(3). The proposal, identified as REG-119986-25, would apply to admissions, scholarships, athletics, and other school-administered or school-supported programs if finalized, with proposed applicability for taxable years beginning after May 31, 2027.
The proposal is not final. Treasury and the IRS are taking comments through November 3, 2026, and a public hearing is scheduled for December 2, according to JD Supra’s summary of the rulemaking and The National Law Review’s review of the text and preamble.
What Changed
The proposed rule would add new Treasury Regulation Section 1.501(c)(3)-2. Under the draft language, a private school would not qualify under Section 501(c)(3) if it “adopts, maintains, or enforces any policy or practice” that discriminates based on race, color, or national or ethnic origin in educational policies, admissions, scholarships or loans, athletics, or other school-administered or school-supported programs.
The National Law Review reported that the proposal would also remove longstanding safe-harbor language in Rev. Proc. 75-50 that had allowed certain race-conscious admissions or financial-aid practices aimed at promoting a racially nondiscriminatory policy. If finalized as drafted, the proposal would prohibit consideration of race in scholarships and admissions regardless of purpose.
The proposed rule is aimed at private schools described in Section 501(c)(3) and classified as educational organizations under Section 170(b)(1)(A)(ii). Governmental units and their agencies or instrumentalities are excluded, so public colleges and universities are not directly covered by the proposed definition of a private school.
Who Is Affected
The most direct impact would fall on tax-exempt private educational institutions, including private colleges and universities. The proposal reaches beyond admissions and could affect scholarships, fellowships, grants, student programs and services, athletics, affinity-based programming and housing, and other institution-supported activities where eligibility or participation turns on race, color, or national or ethnic origin.
According to JD Supra, Treasury and the IRS estimate the proposal may affect about 18,000 private schools that currently qualify for tax-exempt status and about 750,000 students who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity.
The proposal also raises questions for donor-restricted scholarships and endowments. Both source articles said Treasury and the IRS acknowledged that schools may need to work with donors, heirs, or other representatives, and in some cases follow applicable state-law procedures, to modify gift restrictions that expressly use race-based eligibility criteria.
The draft rule does preserve some room for religious criteria. JD Supra and The National Law Review both said the preamble states a private school may maintain a religious mission, curriculum, or program of observance and may select students based on religious affiliation, so long as the criterion is based solely on religion and not on shared ancestry or ethnic characteristics.
The After-Tax Math
The proposal does not set a new tax rate or create a direct tax bill for families. The tax issue is institutional: whether a school remains exempt from federal income tax under Section 501(c)(3), and whether charitable contributions to it remain deductible.
If a school ultimately lost Section 501(c)(3) status after an IRS examination and determination process, The National Law Review said the consequences could include federal income-tax exposure for the institution, an effect on the deductibility of future charitable contributions, and questions under tax-exempt bond documents, grant agreements, financing arrangements, and disclosure obligations.
| Issue | What the proposal says | Why it matters after tax |
|---|---|---|
| School tax status | Private schools that violate the proposed nondiscrimination rule would not qualify under Section 501(c)(3) | Loss of exemption could expose the institution to federal income tax |
| Donor deductions | The National Law Review said loss of status could affect deductibility of future gifts | Large donors may need to confirm that contributions remain deductible |
| Restricted scholarships | Race-based donor restrictions may need to be modified under applicable law | Schools could face legal and administrative costs before any final rule takes effect |
| Student aid | No transition rule is described for ongoing race-based awards | Students and institutions could face funding gaps or redesign costs |
Example: a family considering a large charitable gift to a private school may want to watch whether the school’s tax-exempt status remains unaffected if the rule is finalized and later enforced. The articles do not quantify a dollar amount for donor deductions, but they do indicate that deductibility of future charitable contributions could be at stake if a school lost exemption.
What Schools and Donors May Need to Consider
The proposal leaves several practical questions unresolved. JD Supra said the draft does not define key terms such as “discriminates” and does not clarify whether the standard reaches only intentional discrimination or also facially neutral policies with disparate impact. It also does not clearly define what counts as a “school-supported program.”
The National Law Review said institutions may begin reviewing admissions, financial aid, scholarships, athletics, student affairs, and institution-supported programs for express race-based criteria or preferences. It also flagged donor-restricted scholarships, multi-year aid commitments, and arrangements involving affiliated or third-party organizations as areas that may require individualized analysis.
For donors and families, the practical issue is less about immediate tax filing changes and more about whether scholarships, gift restrictions, and future giving plans may need to be reworked if a final rule is adopted. Households with significant charitable commitments to private schools may find it worth discussing with a CPA, estate attorney, or financial planner how any school-specific changes could affect timing, documentation, and gift structure.
What to Watch Next
The nearest deadline is November 3, 2026, when written or electronic comments and requests to speak at the hearing are due. A public hearing is scheduled for December 2 at 10:00 a.m. Eastern time.
Beyond that, the main questions are whether Treasury and the IRS revise the text before finalizing it, whether any transition relief or safe harbors are added, and whether litigation follows. The National Law Review noted that the rules may face legal challenges and that any consequences would ordinarily follow an IRS examination and determination process rather than take effect automatically on the proposed applicability date.
For now, the headline tax point is straightforward: the administration has proposed using Section 501(c)(3) status as an additional enforcement lever for racial nondiscrimination at private schools, with potentially significant consequences for institutional taxes, charitable deductions, and scholarship design if the rule is finalized.
Sources
- First reported IRS, Treasury Release Proposed Regulations on Racial Nondiscrimination for Private Schools — JD Supra
- Potential Implications of Proposed IRS Rulemaking on Racial Nondiscrimination in Private Schools — The National Law Review
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