What's Happening?
The U.S. Treasury Department and the Internal Revenue Service (IRS) have proposed new regulations that would revoke the tax-exempt status under section 501(c)(3) for any private school that considers race, color, or national or ethnic origin in any of
its programs or policies. This includes admissions, scholarships, loans, athletics, diversity, equity, and inclusion (DEI) programming, and third-party partnerships. The proposed rule, published in the Federal Register on September 4, 2026, states that such consideration, regardless of intent or whether it serves remedial or diversity objectives, constitutes discrimination. Treasury Secretary Scott Bessent commented that 'branding race-based preferences as equitable, inclusive, or diversity-enhancing' does not alter their discriminatory nature. The regulations would apply to private schools at all levels, including colleges and universities. Comments on the proposal are due by November 3, 2026, and if finalized, the rules would take effect for taxable years beginning after May 31, 2027.
Why It's Important?
This proposed rule marks a significant shift in federal policy regarding race-conscious programs in private education. The denial of tax-exempt status would have substantial financial implications for affected institutions, subjecting their net income to federal taxes and eliminating the tax deductibility of contributions. This could impact approximately 18,000 private elementary, secondary, and post-secondary schools and 750,000 students who might qualify for scholarships based on racial, ethnic, or national identity. The move follows the U.S. Supreme Court's ruling in *Students for Fair Admissions v. Harvard/UNC*, which found race-conscious admissions practices unlawful under Title VI and the Equal Protection Clause, though that ruling did not directly address federal tax exemption or private scholarships. The new regulations aim to align tax policy with the principle that racial discrimination in education is contrary to fundamental national public policy, as established in cases like *Bob Jones University v. United States*.
What's Next?
Private schools will need to assess all policies, programs, and funds that currently consider race, color, or national or ethnic origin, including donor-restricted funds and third-party partnerships, to ensure compliance if the regulations are finalized. The comment period for the proposed rule closes on November 3, 2026. The Treasury Department expects to finalize the regulations before May 31, 2027. Legal challenges are anticipated once the rule is finalized, potentially focusing on whether the 'fundamental public policy' test under section 501(c)(3) can be applied to exclude schools with narrow race-conscious efforts, and whether the IRS has adequately justified its departure from longstanding agency guidance that previously permitted certain race-conscious aid programs. Schools may need to make compliance decisions for the 2027-2028 academic year before the legal uncertainties are fully resolved.
Beyond the Headlines
The proposed regulations raise deeper questions about the role of race in educational policy and the interpretation of non-discrimination. By explicitly stating that any consideration of race, even for remedial or diversity purposes, constitutes discrimination, the rule challenges the long-held view by some institutions that such policies are necessary to address historical inequities or foster diverse learning environments. The rule's broad scope, encompassing 'school-administered' and 'school-supported' programs, could lead to complex legal and operational challenges for schools, particularly concerning existing donor agreements and partnerships. The shift also highlights the ongoing tension between promoting diversity and ensuring equal treatment under the law, with potential long-term implications for how educational institutions approach equity and inclusion initiatives without using race as a direct factor.
