Key Takeaways
- The IRS has proposed a rule that would strip 501(c)(3) tax-exempt status from any private school — K-12 included — that considers race, color, or national or ethnic origin in admissions, scholarships, or other school programs, even for a diversity-related or remedial purpose.
- Nothing changes today. This is only a proposed regulation, subject to a 60-day public comment period, and, if finalized, it would not take effect until taxable years beginning after May 31, 2027. There is time to plan a measured response.
The Proposed Regulation
On September 4, 2026, the Treasury Department and IRS published proposed regulations that would add a new Treasury Regulation — §1.501(c)(3)-2 — interpreting Section 501(c)(3) of the Internal Revenue Code. The rule would provide that a “private school” is not “operated exclusively for exempt purposes” — and therefore cannot qualify for 501(c)(3) status — if it adopts, maintains, or enforces any policy that discriminates on the basis of race, color, or national or ethnic origin in admissions, educational policy, scholarships or loans, athletics, or any other school-administered program.
The proposal largely codifies the IRS’s long-standing position under Bob Jones University v. United States and Revenue Ruling 71-447, which already require a racially nondiscriminatory admissions policy as a condition of tax exemption — and Treasury’s explanation grounds the proposal further in Brown v. Board of Education and Students for Fair Admissions v. Harvard. What is new is that the IRS would explicitly extend that prohibition to race-conscious action taken for a remedial or diversity-related purpose, and would delete the current carve-out in Revenue Procedure 75-50 that allows schools to favor racial minority groups in admissions or financial aid to promote a nondiscriminatory environment.
The proposal, as currently drafted, would not ban DEI programming outright. Schools may continue efforts aimed at eliminating prejudice and discrimination, so long as those efforts do not themselves use race, color, or national or ethnic origin as an eligibility or selection criterion. Religious schools also retain the ability to select students based on religious affiliation, even where that affiliation correlates with shared ancestry or ethnicity.
It is important to note that a challenge by the IRS to a school’s tax-exempt status is a lengthy process with an administrative appeal and judicial protections available. For example, the Bob Jones University case spanned roughly 7 years from the IRS’s formal revocation of the University’s tax-exempt status in 1976 to the Supreme Court’s final decision in 1983 — and traced back to an IRS policy change in 1970. Also, under the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, federal courts are no longer required to defer to an agency’s interpretation of ambiguous statutes, so this new interpretation of Tax Code Section 501(c)(3) could be vulnerable to challenge. Separately, because this rule reflects a policy priority of the current administration rather than a change compelled by statute or court order, it is also vulnerable to being withdrawn, narrowed, or changed by a future administration — as has happened with other Treasury and IRS regulatory initiatives that changed with a change in administration. That possibility is a reason for schools to avoid rushing to comply before the rule is final.
Impact on Independent Schools
Most independent K-12 schools were removed from direct fallout from Students for Fair Admissions v. Harvard because that Supreme Court decision was grounded in Title VI, which reaches only recipients of federal financial assistance — a category most independent schools fall outside of. This proposal uses a different lever entirely: it ties race-conscious practices directly to the 501(c)(3) exemption that virtually every independent school depends on, regardless of whether the school accepts any federal funding.
In practical terms, the areas most likely to draw scrutiny are: (1) admissions criteria that consider race, ethnicity, or national origin as a factor; (2) scholarship or financial-aid eligibility tied to those same categories, including certain donor-restricted funds; and (3) affinity groups or programs that condition participation on race or ethnicity. General diversity, equity, and inclusion programming that does not use race as a gatekeeping criterion is not the target of this rule.
Recommended Next Steps
In response to this development, independent schools would be wise to consider the following:
- Proceed thoughtfully and cautiously, without overreacting. This is a proposed rule with a delayed effective date. Wholesale, immediate changes to admissions, financial aid, or programming are not warranted and could create their own disruption.
- Better understand your school’s practices that could be impacted if this rule is codified. Audit where race, ethnicity, or national origin currently factor into admissions decisions, scholarship or financial-aid criteria, or affinity-group participation.
- Flag donor-restricted funds separately. Scholarships tied to a donor’s explicit racial criteria raise distinct legal and administrative issues and deserve individualized attention before any change is made.
- Monitor, don’t sprint. Final regulations are expected before the May 31, 2027, effective date. We will continue to track this rulemaking and will flag any material developments.
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If you have questions about how this proposal may intersect with your school’s current admissions, financial-aid, or programming practices, we are happy to help you take a measured, well-documented look before any changes are needed.