The U.S. Treasury Department and Internal Revenue Service have issued proposed regulations that would provide that a private school is not eligible for, or may lose, federal tax-exempt status under Internal Revenue Code Section 501(c)(3) if it discriminates on the basis of race, color, or national or ethnic origin.
The proposed rules would apply broadly to a school’s admissions, educational policies, scholarships, loans, athletics, and other school-administered programs. The proposed regulations can be found here.
The proposal has the potential to affect approximately 18,000 private educational institutions nationwide, including private elementary and secondary schools, colleges, universities, professional schools, and trade schools that qualify as educational organizations under Internal Revenue Code Section 170(b)(1)(A)(ii). Government-operated educational institutions would not be subject to the proposed regulations.
Importantly, the proposal would not prohibit schools from maintaining a religious mission or selecting students based on religious affiliation, provided those criteria are based solely on religion and not shared ancestry or ethnic characteristics. Schools could also continue to provide financial assistance using race-neutral factors such as family income, geographic location, first-generation status, hardship, military family status, or academic achievement.
In addition, Treasury and the Internal Revenue Service intend to remove portions of existing guidance that permit certain race-based preferences designed to promote diversity, concluding that those provisions are inconsistent with a uniform nondiscrimination standard. The proposal is intended to reflect principles established in certain Supreme Court decisions addressing racial discrimination and educational admissions policies.
If finalized, the regulations would apply to tax years beginning after May 31, 2027, providing affected schools time to review and revise policies as necessary.
