Trump Administration Seeks End to Tax-Exempt Status for Private Schools Offering Race-Based Support to Students

On September 3, 2026, the U.S. Department of Treasury (the Treasury), through the Internal Revenue Service (IRS), proposed new regulations that aim to revoke the federal tax-exempt status of educational institutions that use race, color, or national origin in their policies and practices. Proposed under Internal Revenue Code Section 501(c)(3), the regulations would apply to any private institution that adopts, maintains, or enforces race- or national origin-based policies across its operations, including admissions, scholarships, loans, athletics, and other programs. The proposed regulations would apply to all tax-exempt private schools, including grade schools, colleges and universities, and professional/trade schools.

The proposed rule would add subsection 1.501(c)(3)-2 to the existing regulations. Under Section 501(c)(3), organizations that operate exclusively for “charitable . . . or educational purposes” are generally exempt from federal income tax. The new section would provide that a private school is not “operated exclusively for exempt purposes” if it 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. Critically, the proposed rule specifies that discrimination on the basis of race, color, or national origin includes such considerations as race, color, or national origin for any purpose. This means that even policies defended as serving remedial or diversity-related objectives would be treated as disqualifying.

In the preamble to the proposed regulations, the Treasury states that the proposed rule builds on a longstanding federal policy against racial discrimination in education. In 1971, the IRS issued Revenue Ruling 71-447, which held that private schools cannot qualify for federal income tax exemption unless they maintain a racially nondiscriminatory policy as to students. The Supreme Court upheld that interpretation in Bob Jones University v. United States, 461 U.S. 574 (1983), holding that racially discriminatory schools are ineligible for tax-exempt status because racial discrimination in education violates a fundamental public policy of the U.S. The IRS now contends that, in light of the Supreme Court’s 2023 decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023), all forms of race-based considerations in education—regardless of intent or purpose—constitute impermissible discrimination.

If finalized as proposed, the regulations would also modify Revenue Procedure 75-50, which currently provides that policies favoring racial minority groups with respect to admissions, facilities, programs, and financial assistance do not constitute discrimination when designed to promote a school’s racially nondiscriminatory policy. The proposed rule would delete these provisions, effectively eliminating the ability of schools to use race-conscious measures, even for the purpose of furthering nondiscrimination. The rule would also remove the provision stating that scholarships and loans favoring members of one or more racial minority groups would not adversely affect a school’s exempt status.

Notably, the proposed regulations would not preclude a private school from maintaining a religious mission, curriculum, or program of observance, or from selecting students on the basis of religious affiliation or membership. The IRS clarifies that a religiously based selection criterion does not constitute discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may also share ancestry or ethnic characteristics, so long as the selection criterion is based solely on religion. Schools would also continue to be permitted to adopt policies intended to eliminate prejudice and discrimination, consistent with existing regulations, provided they achieve these purposes through non-race-based means.

If finalized, the regulations could have a dramatic effect on the operations of many private schools. The loss of tax-exempt status would mean that contributions to schools by individuals are not deductible as charitable contributions and also could affect the ability of schools to obtain grants from private foundations and other grant-makers. Additionally, loss of recognition under Section 501(c)(3) could jeopardize the tax-exempt status of bonds issued by the schools. Finally, many state and local tax exemptions—e.g., real property tax exemptions and sales tax exemptions—require federal tax-exempt status. Therefore, the effects could go well beyond just the federal tax exemption. 

The proposed regulations would apply to taxable years of private schools beginning after May 31, 2027. The Treasury and the IRS have stated that this applicability date will allow any private schools that may need to amend their existing policies time to do so before the regulations take effect. The Treasury Department estimates that approximately 18,000 private elementary, secondary, and post-secondary schools and roughly 750,000 students who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity could be affected. The IRS is accepting public comments until November 3, 2026.

Private institutions with federal tax-exempt status should review their existing policies to assess any risk to their exempt status under the proposed rule. In particular, schools should examine admissions policies, scholarship and loan programs, and other school-administered programs for any race- or national origin-based criteria. Attorneys on Ballard Spahr’s Education Team and in the Exempt Organizations Group advise schools and universities on a wide range of education law and tax-exempt status issues.

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