Treasury, IRS propose revoking tax-exempt status for private schools that use race-based policies

The Treasury Department and Internal Revenue Service on Thursday proposed a rule that would deny or revoke federal tax-exempt status for private schools that discriminate on the basis of race, color, or national or ethnic origin, including in admissions, scholarships, athletics and other school-run programs.

The agencies announced the move Sept. 3 in a Treasury press release and issued a Notice of Proposed Rulemaking, “Racial Nondiscrimination in Private Schools,” scheduled for publication in the Federal Register on Sept. 4. It is not an immediate enforcement action. The proposal would add a new regulation, 26 CFR Section 1.501(c)(3)-2, and if finalized as written would apply to tax years beginning after May 31, 2027. The rule would be open to public comment for 60 days after publication, and requests for a public hearing would be due in that same period.

In the proposed rule’s summary, the agencies said it “would update existing regulations to provide that a private school is not described as an organization exempt from Federal income tax if it discriminates on the basis of race, color, or national or ethnic origin in administration of its educational, admissions, scholarship, athletic, or other policies.” Treasury said the rule would apply broadly to private elementary and secondary schools, colleges, universities, professional schools and trade schools. It would cover admissions, educational policies, scholarships and loans, athletics, and every other school-administered or school-supported program. The preamble also says that “race-based action for the purpose of ameliorating societal discrimination” would count as discrimination under the proposal.

At the same time, Treasury and the IRS said schools could still use race-neutral criteria to help disadvantaged students, including family income, geographic location, first-generation status, hardship, military family status and academic achievement. The proposal also says it would not prevent a private school from maintaining a religious mission, curriculum or program of religious observance, and that religious schools may continue to select students based on genuine religious affiliation or membership, consistent with federal law.

The stakes are significant because Section 501(c)(3) status exempts qualifying organizations from federal income tax and generally allows donors to claim a charitable deduction for gifts. A school that loses that status would lose the exemption, and donors could lose the deduction for contributions to an institution that is no longer tax-exempt. Treasury and the IRS estimate the proposal may affect up to 18,000 private tax-exempt schools and about 750,000 students who may receive race-based scholarships or allocations. Treasury Secretary Scott Bessent said, “Under President Trump, this Administration is standing up for America’s students by ensuring racial discrimination has no place in American education.” IRS Chief Executive Officer Frank J. Bisignano said, “Private educational institutions that promote discriminatory practices will no longer be afforded the benefits of federal tax-exempt status.”

Treasury said the proposal would also remove what it described as outdated IRS guidance that had allowed some racial preferences in admissions, facilities, programs, scholarships and financial aid, tying the change to President Donald Trump’s executive orders on ending discrimination and restoring merit-based opportunity. The legal foundation is not new: The government has long held that racially discriminatory private schools are not entitled to charitable tax exemption, a principle upheld by the Supreme Court in Bob Jones University v. United States in 1983. What is new here is that Treasury and the IRS are moving to write that standard explicitly into modern federal regulations, while also stating that race-based admissions or scholarship preferences would count as discrimination for tax-exemption purposes.