IRS Proposes Broad Nondiscrimination Rule for Tax-Exempt Schools
Proposed regulations would condition a private school's 501(c)(3) status on complying with a broad ban on race-conscious policies, extending the SFFA v. Harvard ruling to all school programs.
On September 3, the U.S. Treasury and IRS proposed regulations that would apply and significantly broaden the Supreme Court's 2023 ruling in Students for Fair Admissions v. Harvard. The proposal conditions a private school's 501(c)(3) tax-exempt status on its adherence to a strict racial nondiscrimination standard across all operations, including admissions, scholarships, and athletics.
This development is critical for tax-exempt educational institutions, as the proposed rule prohibits any policy that considers race, color, or national origin, even for remedial or diversity-related objectives. The government seeks to define any such consideration as a violation of "fundamental public policy," which underpins tax-exempt status. This could force many private primary schools, secondary schools, colleges, and universities to overhaul existing diversity, equity, and inclusion initiatives to avoid jeopardizing their tax exemption.
The rules are not yet final and face a public comment period and likely legal challenges. If finalized as drafted, they would apply to tax years beginning after May 31, 2027. Counsel for affected institutions should monitor the rulemaking process.