On September 4, 2026, the U.S. Department of the Treasury and Internal Revenue Service issued proposed regulations that would expressly condition a private school’s federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code on compliance with a broad prohibition against discrimination based on race, color, or national or ethnic origin. The proposal is not yet final, but affected schools should begin evaluating their policies and programs now.
Who Would Be Affected?
The proposed regulations would apply to tax-exempt (i.e., 501(c)(3) status) private elementary and secondary schools, colleges, universities, professional schools, and trade schools. Public schools and other governmental entities would not be covered by this particular rule. If finalized as proposed, the regulations would apply to taxable years beginning after May 31, 2027.
What Would Change?
The proposal would add an express regulatory rule that a private school is not eligible for Section 501(c)(3) status if it adopts, maintains, or enforces a policy or practice that discriminates based on race, color, or national or ethnic origin. The prohibition would apply “for any purpose,” including remedial or diversity-related purposes, and would extend beyond admissions to educational policies, scholarships and loans, athletics, and other school-administered or school-supported programs.
The proposal also would remove existing IRS guidance under Revenue Procedure 75-50 that has permitted certain policies favoring racial minority groups when designed to promote nondiscrimination. A school could continue efforts to prevent prejudice and discrimination, but those efforts could not use race, color, or national or ethnic origin as an eligibility, selection, or participation criterion.
Why This Matters for Private Schools
Noncompliance could result in loss of the school’s federal tax-exempt status, affecting both the school’s own tax obligations and its ability to receive tax-deductible charitable contributions. Areas likely to require particular attention include:
- admissions and enrollment practices;
- scholarships, grants, loans, and other financial aid, including donor-restricted and endowed funds;
- athletics, mentoring, pipeline, affinity, summer, and student-support programs;
- application essays, recommendations, geographic targeting, diversity statements, and other selection factors; and
- programs using facially race-neutral criteria—such as income, geography, first-generation status, socioeconomic status, or adversity—if those criteria are selected or administered as substitutes for race.
Under the proposal, religiously affiliated schools may continue to use selection criteria based solely on religion. A religious criterion does not become prohibited racial or ethnic discrimination merely because members of the religious community share ancestry or ethnic characteristics.
The loss of 501(c)(3) status could have major tax consequences including, but not limited to, substantial income tax consequences, loss of donor deductibility for charitable donations, and the loss of tax exempt status on a school’s tax exempt bonds (thereby substantially increasing the cost of its indebtedness).
Recommended Next Steps
1. Inventory affected policies and programs. Identify every admission, scholarship, financial-aid, athletic, academic, and student-support program that expressly or indirectly considers race, color, or national or ethnic origin.
2. Review donor restrictions. Locate restricted gifts and endowed funds with race- or ethnicity-based eligibility terms. Determine whether donor consent, amendment, or court approval may be required before changing those terms.
3. Evaluate race-neutral criteria carefully. Confirm that criteria such as income, geography, first-generation status, or hardship serve documented educational or financial objectives independent of racial outcomes.
4. Update governance and records. Make sure board policies, program descriptions, donor agreements, application materials, selection procedures, and actual practices are consistent and accurately documented.
Keep in mind, this proposal is not yet final and will most likely face challenges as the administrative process unfolds.
How Ahlers & Cooney Can Help
Ahlers & Cooney’s education attorneys can help private schools and other education clients assess how the proposed rules may affect existing policies, scholarships, donor restrictions, student programs, and governance practices. We can also assist with policy revisions, donor communications, gift-modification strategies, board guidance, and comments on the proposed regulations. Schools should consult counsel before changing restricted gifts or discontinuing programs.
This article is only a summary of the proposed IRS regulations addressing racial nondiscrimination by tax-exempt private schools. If you have questions about how the proposed regulations may affect your school or would like advice concerning this topic, please contact your Ahlers & Cooney higher education law attorney or visit the Firm’s website at www.ahlerslaw.com.
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Our Client Alerts are intended to provide occasional general comments on new developments in Federal and State law and regulations which we believe might be of interest to our clients. The Client Alerts should not be considered opinions of Ahlers & Cooney, P.C., and are not intended to provide legal advice. Readers should not under any circumstance act upon the information in this publication without seeking specific professional counsel. Please note that AI tools may not accurately interpret or apply the legal information contained in this alert; reliance on such tools is not a substitute for professional legal advice. Ahlers & Cooney will be pleased to provide additional details regarding any article upon request. Additional copies of this Client Alert may be obtained by contacting any attorney in the Firm or by visiting the Firm's website at www.ahlerslaw.com.
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