Treasury and the IRS have proposed a new rule that would make racial nondiscrimination an explicit condition of federal tax-exempt status for private schools under Section 501(c)(3). The proposal, issued September 4 and discussed in a September 17 analysis by The National Law Review, would reach beyond admissions and into scholarships, loans, athletics, housing and other school-administered or school-supported programs.
The rule is not final. Written comments and requests for a public hearing are due by November 3, 2026, and Bloomberg Tax reported that the IRS has scheduled that hearing for December 2. If finalized as proposed, the rule would apply to taxable years beginning after May 31, 2027.
What Changed
The notice of proposed rulemaking would add Treasury Regulation Section 1.501(c)(3)-2 and provide that a covered private school does not qualify for Section 501(c)(3) status if it adopts, maintains or enforces a policy or practice that discriminates based on race, color, or national or ethnic origin.
According to the proposal described by The National Law Review and JD Supra, the prohibition would apply to educational policies, admissions, scholarship and loan programs, athletics, and other school-administered or school-supported programs. The proposal says discrimination would not be permitted “for any purpose,” meaning the IRS framework would not preserve prior room for some race-conscious policies that institutions may have understood to be allowed under older administrative guidance.
That is a notable shift because the proposal would also remove safe harbors in Revenue Procedure 75-50 that had long recognized limited circumstances in which private schools could use race-conscious policies to promote a racially nondiscriminatory policy as to students. The rest of Rev. Proc. 75-50 would remain in effect.
The legal backdrop matters. The proposal relies on long-established public-policy limits on tax exemption, including the Supreme Court’s 1983 decision in Bob Jones University v. United States. It also reflects the administration’s reading of the Court’s 2023 Students for Fair Admissions decision, which held that the admissions programs at issue unlawfully considered race.
Who Is Affected
The proposed rule would directly cover private educational institutions that are Section 501(c)(3) organizations and are classified as educational organizations under Section 170(b)(1)(A)(ii). JD Supra said that generally includes private primary and secondary schools, colleges and universities, and professional or trade schools.
Public colleges and universities are generally not directly covered because the proposed definition of “private school” excludes governmental units and their agencies and instrumentalities. Still, public institutions and affiliated foundations may pay attention because the proposal signals how the federal government is approaching race, color, and national or ethnic origin issues more broadly.
Private colleges and universities appear to face the broadest operational questions. The proposal could touch admissions policies, donor-restricted scholarships, fellowships, student affinity programming, athletics, housing, and programs run with or through affiliated entities. One unresolved issue is what exactly counts as a “school-supported” program. JD Supra noted that the rule does not clearly define how far that phrase extends to separately incorporated foundations, alumni groups, student organizations, outside scholarship providers or other affiliates.
The proposal also leaves open how existing multi-year awards would be treated. There is no express grandfathering for multi-year scholarships, fellowships, or donor-restricted gifts awarded before the proposed applicability date.
The After-Tax Math
This is a tax-law story because the consequence at issue is institutional: a school’s continued qualification for Section 501(c)(3) status. The proposal does not itself revoke any institution’s exemption, and any actual loss of status would ordinarily follow an IRS examination and determination process with administrative and judicial review rights. But if the IRS ultimately revoked exemption, the tax consequences could extend well beyond one scholarship or program.
| Potential consequence if exemption were lost | Why it matters after tax |
|---|---|
| Federal income-tax exposure | The institution could lose its federal income-tax exemption under Section 501(c)(3). |
| Charitable contribution deductibility | Future gifts to the institution could be affected because donors generally look to Section 501(c)(3) status when claiming deductions. |
| Tax-exempt financing | Schools that borrow through tax-exempt bond structures could face questions under bond documents and financing arrangements. |
| Grant and disclosure obligations | Grant agreements, pending transactions and continuing disclosure obligations may depend on continued exempt status. |
Example: assume a private university relies on deductible alumni gifts and also has outstanding tax-exempt bond financing. If the IRS were to revoke the school’s exemption after a future examination, the school could face federal tax exposure while also confronting pressure on fundraising and financing terms. The proposal does not quantify those costs, and it does not explain whether an isolated violation could produce institution-level consequences of that scale.
For affluent families, that after-tax effect is indirect but real. Families making large charitable gifts to private schools, funding donor-restricted scholarships, or evaluating planned gifts may want to watch whether institutions need to amend gift terms or scholarship criteria to preserve deductibility and institutional tax status.
Moves to Discuss With Advisors
The proposal is not a final rule, so institutions may be cautious about making major changes before the comment process ends. Even so, both The National Law Review and JD Supra said affected organizations may begin reviewing policies and programs that explicitly use race, color, or national or ethnic origin as eligibility criteria or preferences.
Areas that may warrant review include:
- Admissions, financial-aid and scholarship criteria
- Donor-restricted funds and scholarship agreements
- Athletic and student-affairs programs
- Affinity-based programming and housing
- Programs operated with affiliated foundations or outside entities
- Tax-exempt bond documents, grant agreements and related disclosure obligations
For donors and families, the practical issue is narrower but important: gifts with race-based restrictions may require individualized analysis under the gift instrument and applicable state law if institutions seek to modify those terms. Households considering major gifts may find it worth discussing with counsel, a CPA or a financial planner how any proposed institutional changes could affect timing, structure or deductibility.
What to Watch Next
The immediate dates are clear. Comments and hearing requests are due November 3, 2026, and Bloomberg Tax reported that the public hearing is set for December 2. Treasury and the IRS may revise the proposal before issuing final regulations, and any final rule could face legal challenges.
Three questions look especially important. First, whether Treasury adds transition relief for multi-year awards and legacy donor restrictions. Second, whether final rules define “school-supported” more clearly for foundations and affiliates. Third, whether the government creates any materiality threshold or cure process before a single program can threaten institution-level tax exemption.
Until then, the proposal stands as a reminder that tax exemption under Section 501(c)(3) is not only about filing status. For private schools, it can shape fundraising, scholarship design, financing flexibility and the tax treatment of charitable support.
Sources
- First reported Potential Implications of Proposed IRS Rulemaking on Racial Nondiscrimination in Private Schools — The National Law Review
- IRS Published Hearing Notice on Proposed Racial Nondiscrimination Regulations for Private Schools — Bloomberg Tax
- Treasury and IRS Propose New Section 501(c)(3) Racial Nondiscrimination Rules for Private Schools — JD Supra
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
