Alert
09.23.26
On September 4, 2026, the Department of the Treasury (Treasury) and Internal Revenue Service (IRS) published a proposed rule, Racial Nondiscrimination in Private Schools, that would codify and revise the federal tax-law nondiscrimination requirements for private schools currently operating under section 501(c)(3) of the Internal Revenue Code (“Tax Exempt Schools”). For purposes of the rule, the term “school” includes elementary, secondary, and post-secondary educational organizations. Section 501(c)(3) exempts from federal income tax organizations that are organized and operated exclusively for religious, charitable, educational, or other specified purposes, including qualifying private schools.
Overview of the Proposed Rulemaking
Under the proposed rule, a private school is “not an organization described in section 501(c)(3)” 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, for any purpose, including those that previously permitted race-consciousness.” While federal tax law already requires private schools seeking section 501(c)(3) status to maintain racially nondiscriminatory policies, the proposed rule would materially narrow the existing framework by eliminating IRS provisions that permit certain race-conscious measures designed to promote nondiscrimination and by providing that discrimination based on race, color, or national or ethnic origin is disqualifying “for any purpose,” even where the practice is otherwise lawful.
The proposal would also revise Rev. Proc. 75-50 by deleting the provisions that currently permit certain race-conscious admissions, program, and financial-aid practices designed to promote a school’s racially nondiscriminatory policy. Notably, Treasury states that the proposed tax-exemption standard would apply “regardless of the intent behind or the legality of such discrimination (for example, where such discrimination is defended as serving remedial or diversity-related objectives),” on the basis that such practices “are against a fundamental public policy of the United States.”
According to the preamble, the regulations would affect an estimated “18,000 private elementary, secondary, and post-secondary schools in the United States that currently qualify for tax exempt status” and “the approximately 750,000 students attending these schools who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity.”
The preamble clarifies that private schools may maintain religious missions, curricula, and programs of observance and may select students based on religious affiliation or membership even if the members of the religion may also share ancestry or ethnic characteristics, so long as the selection criteria is solely based on religion and is not a proxy for ancestry or ethnicity. Schools are also permitted to maintain policies that are intended to eliminate prejudice and discrimination, using means other than policies that discriminate on the basis of race, color, or national or ethnic origin, consistent with existing law.
Treasury and the IRS will receive comments on the proposed rule through November 3, 2026, and have scheduled a telephonic hearing for December 2, 2026. Institutions and associations that wish to testify must submit an outline of their proposed testimony by November 3, 2026, the same date comments are due. If finalized, the regulations would apply to taxable years beginning after May 31, 2027.
Private K-12 Schools May Face the Greatest Marginal Impact
For many colleges and universities, the proposal builds on other executive actions targeting diversity, equity, and inclusion initiatives (DEI), including a March 26, 2026, executive order directing agencies to expressly prohibit “racially discriminatory DEI activities” in government contracts and July 29, 2025, Department of Justice “Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination.” Private K-12 schools, however, typically are less dependent on federal funding and were therefore arguably less affected by these prior executive actions.
Although federal tax law already conditions a private school’s section 501(c)(3) status on maintaining a racially nondiscriminatory policy as to students, the proposed rule would apply an expanded, express requirement to K-12 admissions, financial aid, athletics and other supported programs through that status. Treasury expressly acknowledges this difference. The preamble notes that private primary and secondary schools were not directly affected by Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (SFFA) but expects that they will adjust their admissions criteria to preserve tax-exempt status. Treasury further assumes that compliance costs will be minimal to the extent private K-12 schools already adjusted their admissions practices following SFFA, while acknowledging that it lacks data concerning current K-12 admissions practices or the cost of changing them.
The significance for private K-12 schools therefore lies less in the existence of a tax-based nondiscrimination condition—which already exists—than in the proposed rule’s broader substantive standard and its express application to admissions, aid, athletics, and other school-supported programs.
Implementation Issues for Schools to Consider
The proposed rule provides little explicit guidance on how it would apply in several common situations. Schools may wish to consider whether to submit comments calling for the final regulations to address the following issues.
Scholarships, endowments and restricted gifts. Treasury recognizes that a school may need to work with a donor (or a donor’s heirs) to replace race-based scholarship criteria, but assumes that the related legal and administrative costs generally will be insignificant. That assumption may not account for older endowments, unavailable or deceased donors, multi-year awards, pooled funds or restrictions that cannot be modified without donor consent. The preamble identifies geographic and income-based criteria as possible alternatives for determining scholarship eligibility. However, the proposed rule does not explain whether a school may continue to hold or administer a restricted fund while seeking modification, whether funds must be returned, or how prolonged state-law proceedings would affect federal compliance.
The meaning of discrimination. The proposed rule states that discrimination based on race, color or national or ethnic origin is prohibited for any purpose but does not otherwise define the term. In recounting federal policy against racial discrimination, the preamble cites Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity, among other executive actions. However, the proposed rule does not explain how it would apply to targeted outreach, open-to-all affinity or pipeline programs, consideration of an individual’s experiences with discrimination, demographic data, or criteria that may correlate with race or ethnicity.
The scope of school-supported programs. The proposed rule would apply to educational and admissions policies, scholarship and loan programs, athletic programs and other school-administered or school-supported programs. This expands the terminology used in existing IRS guidance by reaching programs that are either “school-administered” or “school-supported,” whereas Revenue Ruling 71-447 refers only to “school-administered programs.” The proposed rule does not define what degree or type of support creates is sufficient to create responsibility for an otherwise separate program. For example, it is unclear whether the proposed rule would apply to separately incorporated foundations, outside scholarship programs, student organizations, alumni initiatives, internships, summer programs, joint ventures and community or pipeline programs that use a school’s facilities, funding, personnel, branding or referrals but are not controlled by the school.
Compliance throughout the transitioning phase. The proposed rule would apply to taxable years beginning after May 31, 2027. However, it does not address how schools will be judged during the transition stages for institutions that are making good faith efforts to comply with the rule. Furthermore, there is no safe harbor for a school that has initiated the process of modifying a restricted gift, but has not yet obtained the necessary donor, court, or regulatory approvals, nor does it address multi-year scholarship commitments already made to students. Schools may therefore face uncertainty if they cannot complete the modification process before the beginning of their first taxable year to which the rule applies.
Materiality of noncompliance. The proposed rule draws no distinction between a single instance of noncompliance and a pervasive institutional policy. The proposed rule does not include a materiality threshold, knowledge requirement, exception for minor instances of noncompliance, or notice-and-cure period that would allow a school to correct noncompliance before its tax-exempt status is placed at risk. Unlike some other tax-exempt regulatory regimes, the proposal does not establish a framework that considers factors such as the significance of a violation, whether it was inadvertent, or whether the institution promptly corrected it. Schools may therefore wish to request a notice-and-cure process or other proportionality standard before tax-exempt status is placed at risk.
Financial burden. Treasury’s economic analysis assumes that compliance costs will be relatively low and that donors will be able to easily adapt scholarship criteria to become race-neutral, while acknowledging it does not have the data to model the cost to schools. Treasury and the IRS also expect donors may continue to contribute using alternative scholarship criteria, such as income, geography, or first-generation status. Treasury and the IRS also assume that any economic effects on other school-supported programs or education policies administered by private schools would be insignificant, describing them as a “relatively narrow, miscellaneous group of activities.” They further assume that admissions-related compliance costs will be minimal to the extent private K-12 schools have already modified their policies following SFFA and expect almost all private schools to revise their scholarship and loan criteria if the rule is finalized. Schools and associations with data regarding administrative, legal, and other compliance costs should consider submitting comments to inform Treasury’s analysis and development of the final rule.
Potential Legal Challenges to the Regulation
If finalized in its current form, the regulation is likely to attract legal challenges. The proposed rule relies largely on two Supreme Court cases as legal authority for this rulemaking: the 2023 SFFA decision and the 1983 Bob Jones University v. United States decision. The SFFA decision held that Harvard’s and the University of North Carolina’s consideration of race in their admissions policies violated the Fourteenth Amendment’s equal protection clause and Title VI of the Civil Rights Act of 1964, even though it was used for the “plainly worthy” goal of achieving a diverse student body. In the Bob Jones University case, the Supreme Court affirmed the IRS’s revocation of tax exemption from the university based on its policy of denying admission to applicants engaged in an interracial marriage or known to advocate interracial marriage or dating. The Court held that:
to warrant exemption under section 501(c)(3), an institution must fall within a category specified in that section and must demonstrably serve and be in harmony with the public interest. The institution’s purpose must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred.
Potential challengers may argue that Bob Jones is inapposite because it involved conduct already condemned by a broad and deeply established national consensus, whereas the preamble to the proposed rule expressly includes otherwise lawful practices, undercutting the assertion that such measures are “at odds with the common community conscience.”
The lack of a definition of “discrimination” in any educational program, combined with the statement that a finding of discrimination in an educational practice “for any purpose” will disqualify a school from tax-exemption regardless of the intent of the practice, may also fuel legal challenges. Considering arguments raised by challengers to other anti-DEI initiatives of this Administration, one can anticipate lawsuits claiming that the rule exceeds Treasury’s authority under section 501(c)(3), is impermissibly vague, violates the First Amendment rights of private schools, or is arbitrary and capricious under the Administrative Procedure Act. In addition, challengers may argue that neither section 501(c)(3) nor Bob Jones University authorize Treasury to declare that judicially sustained remedial policies are categorically contrary to fundamental public policy. In addition, after Loper Bright Enterprises v. Raimondo, a reviewing court would independently interpret section 501(c)(3) rather than defer to Treasury’s construction under Chevron.
What Schools Should Do Now
During the rulemaking process, schools can take several steps to prepare:
Schools that review potentially affected programs, document practical concerns, and participate individually or through educational associations will be better positioned to help shape the final rule, protect their tax-exempt status, and respond to the final requirements.
Pillsbury attorneys are continuing to monitor the proposed rule and can assist schools in reviewing how it may affect their programs, preparing individual or coalition comments, developing an approach to potential implementation, and analyzing potential legal challenges.