On September 4, 2026, the Treasury Department and the Internal Revenue Service published proposed regulations (the “Proposed Regulations”) that would remove a private school’s tax-exempt status beginning in June 2027 if it uses any race-based criteria in its policies and practices. The Proposed Regulations can be found here.
New Non-Discrimination Requirement
The Proposed Regulations provide that a 501(c)(3) educational institution―including any private college or university as well as any independent primary or secondary school or professional or trade school―will be unable to maintain its 501(c)(3) tax-exempt status if the school “adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program . . . for any purpose.” The inclusion of “other … programs” and “any purpose,” as well as the lengthy preamble to the Proposed Regulations, suggest there is no activity or aspect of school operations that will escape the broad reach of this new and vaguely-articulated prohibition. No other explanation of the import of this new regulatory standard, or its application in practice, is set forth in the Proposed Regulations, nor are any examples provided to indicate how the regulators would enforce it.
Schools losing their 501(c)(3) tax-exempt status would owe federal income tax on their income, and donors to such schools would not be able to deduct those donations on their federal income tax returns. In addition, the loss of 501(c)(3) status would subject all of the interest on such a school’s outstanding tax-exempt bonds in the hands of bond investors to federal income taxation, with immediate effect.
The Proposed Regulations do not address non-racial criteria such as religion, economic status, or gender, and the preamble states that the new requirement would not preclude a private school’s religious mission or the use of other socioeconomic factors (e.g., income, geography, or first-generation student status) in school policies.
The Proposed Regulations, which address the status of “private schools” as organizations described in Section 501(c)(3) of the Code, would not apply to governmental units, their agencies and instrumentalities or to other organizations owned and operated by an agency of instrumentality of a governmental unit.
Implementation Timeline
Unusually for proposed regulations, which typically take effect after an unspecified interval, when final regulations are issued (in some cases well more than a year after their initial release in proposed form), the Treasury and the IRS have stated they anticipate that these Proposed Regulations will apply for taxable years beginning after May 31, 2027 (by which time final regulations are expected to be published). Due to this unusually explicit and apparently accelerated timeline, private schools should consider the potential impacts the new standard set forth in the Proposed Regulations would have on their policies and operations if they were to take effect next June.
The preceding is a brief overview of the Proposed Regulations. Please note that the Proposed Regulations are not yet finalized and may be substantially modified after the IRS considers public comments, which are required to be submitted by November 3, 2026. Following the closure of the comment period, Treasury and the IRS likely will conduct a public hearing regarding the Proposed Regulations. Our Tax and Public Finance Groups stand ready to answer questions about the Proposed Regulations and to assist with the development of commentary and testimony on this new and potentially far-reaching regulatory proposal.