IRS Proposal Targets Tax Exemption for Race-Based School Programs
Private educational institutions face the loss of their 501(c)(3) status under proposed Treasury rules that prohibit using race as a factor in any school program, reversing longstanding IRS guidance.
The U.S. Treasury and IRS have issued proposed regulations that would strip 501(c)(3) tax-exempt status from any private educational institution—from K-12 to universities—that uses race, color, or national or ethnic origin in its programs. This proposal marks a major policy shift by explicitly prohibiting discrimination "for any purpose," thereby eliminating longstanding exceptions under IRS Revenue Procedure 75-50 that permitted race-based scholarships and other programs designed to promote diversity. The move is intended to align tax policy with recent Supreme Court decisions limiting affirmative action. For private schools and universities, the financial and operational stakes are high, as the loss of tax-exempt status would be catastrophic. The rules also impact donor relations, as institutions may need to modify existing race-restricted charitable gifts. Counsel should advise affected clients to immediately audit all admissions, scholarship, and other programs for race-based criteria. Comments on the proposed regulations are due by Nov. 3, 2026. The rules, if finalized, would apply to tax years beginning after May 31, 2027.