We have written previously about whether a private school’s federal tax-exempt status, standing alone, subjects the school to Title IX regulations, discussing two federal district court decisions treating a Section 501(c)(3) exemption as federal financial assistance sufficient to trigger Title IX. In our 2024 follow-up, we explained that the Fourth Circuit Court of Appeals had rejected that theory. A tax exemption, the court concluded, is not an affirmative transfer of federal funds.

The federal government is now approaching tax-exempt status for private schools from a different direction. Rather than treating Section 501(c)(3) status as federal financial assistance, the U.S. Department of the Treasury and Internal Revenue Service have proposed regulations that would condition the exemption itself on a broad prohibition against race-based policies and practices. If finalized as proposed the regulations would materially change the compliance landscape for private schools, including schools that do not receive federal financial assistance and are not otherwise subject to Title IX.

What the Proposed Regulations Would Do

The proposed regulations would deny Section 501(c)(3) status to a private school that adopts, maintains, or enforces any policy or practice that discriminates based on race, color, or national or ethnic origin in admissions, educational policies, scholarships and loans, athletics, and every other school-administered or school-supported program. The proposal is not limited to a school’s intentional exclusion or racial segregation. It would treat all race-based preferences as discrimination even when a school’s purpose is to promote diversity, expand opportunity, or remedy the effects of past discrimination. Treasury’s position is that discrimination based on race, color, or national or ethnic origin is inconsistent with Section 501(c)(3) status regardless of the policy’s purpose or whether the particular practice might otherwise be lawful.

In that respect, the proposal extends beyond the direct holding of the U.S. Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard College (“SFFA”). SFFA addressed race-conscious admissions at Harvard. Although SFFA allows a school to consider an applicant’s discussion of how race affected the applicant’s life when that experience bears on individual character or ability, it does not permit schools to use personal essays or similar mechanisms to recreate race-based preferences indirectly. Private schools would need to preserve that distinction carefully under the proposed rule.

That represents an important change from existing IRS guidance. Revenue Procedure 75-50 currently permits certain policies favoring racial minority groups when their purpose and effect are to establish or maintain a school’s racially nondiscriminatory policy. It also protects certain scholarships and financial-assistance programs favoring minority groups. Treasury proposes to delete those provisions. Treasury now seeks to combine that public-policy principle with the Supreme Court’s reasoning in SFFA. The proposal effectively takes the position that all race-based educational preferences—not merely exclusionary or segregationist practices—are inconsistent with the public policy required for tax exemption.

The regulations would apply broadly to tax-exempt private elementary and secondary schools, colleges, universities, professional schools, and trade schools. Treasury and the IRS estimate that as many as 18,000 institutions may be affected.

Comments and requests for a public hearing are due November 3, 2026. Treasury expects to issue final regulations before May 31, 2027, with the rules applying to taxable years beginning after that date. For a school using a July 1 fiscal year, that could mean July 1, 2027. For a calendar-year institution, the first affected taxable year ordinarily would begin January 1, 2028.

This Is Not a New Title IX Rule

The proposal does not overturn the Fourth Circuit’s conclusion that tax-exempt status is not, by itself, federal financial assistance under Title IX. A private school that receives no federal financial assistance may remain outside Title IX while still becoming subject to this new tax rule.

The distinction matters. Title IX addresses sex discrimination by recipients of federal financial assistance. The proposed regulations address racial discrimination by asking whether a school engaging in such practices is operating for a qualifying charitable or educational purpose under Section 501(c)(3).

The government’s primary authority is the Supreme Court’s 1983 decision in Bob Jones University v. United States. There, the Court upheld the revocation of tax-exempt status from schools maintaining racially discriminatory policies because those policies violated a fundamental national public policy.

How Schools Are Likely to Respond

Many affected schools are likely to preserve their exemptions and simply move toward race-neutral criteria as required under the proposed regulations. However, the proposed regulations expressly recognize that schools may still rely on alternative criteria such as family income, geographic location, first-generation status, individual hardship, military-family status, and academic achievement in their decision-making processes. In other words, schools still may be able to pursue many of the same access and opportunity goals, but would need to do so carefully, without making race, color, or national or ethnic origin an express eligibility requirement or decision-making preference.

Admissions offices may separate demographic data from individual student acceptance decisions while continuing to collect information needed to assess the school’s outreach and outcomes. Schools may expand recruitment in underserved communities, consider socioeconomic disadvantage, and evaluate an applicant’s individual experiences. However, schools should not assume that even a facially neutral criterion is safe if it can also be seen as a disguised racial preference.

Scholarship programs will present some of the most difficult challenges for schools under the proposed regulations. Schools should look to identify endowed and donor-restricted funds that use racial or ethnic eligibility criteria and undertake a detailed review of the governing gift instruments. Depending on the language and applicable state law, a school may need donor consent, an agreement with the donor’s representatives, court approval to modify the restriction, or consider implementing another legally permissible solution. Schools should not simply rewrite a restricted scholarship or redirect its assets without first analyzing their potential underlying fiduciary obligations.

Religious schools receive an express but limited clarification. They may continue to maintain a religious mission, curriculum, or observance program and may select students based on genuine religious affiliation or membership. A religious criterion does not become racial discrimination merely because members of the faith share ancestry or ethnic characteristics. The selection decision, however, must actually be based on religion and not ancestry or ethnicity.

Some institutions and educational associations are likely to seek revisions through the comment process. Others may prepare litigation challenging the final rule. A small number of schools may decide that preserving a particular policy is more important than retaining tax-exempt status, but that would be an expensive choice. Loss of exemption can affect federal income taxation, the deductibility of contributions, grants, financing arrangements, state and local tax treatment, and donor confidence.

Legal Challenges Are Foreseeable

The Treasury has substantial support for the core proposition of the proposed regulations that racially discriminatory schools should not receive charitable tax benefits. Bob Jones University v. United States, a 1983 U.S. Supreme Court decision, remains a formidable precedent, and federal law has long prohibited private schools from excluding applicants based on race. The more difficult question is whether the Treasury can persuasively argue that the rationale of Bob Jones University should be extended to every race-conscious policy, including measures that may be intended to remedy discrimination or expand access and that may not otherwise be unlawful.

Challenges to the proposed regulations are likely to argue that Treasury has moved beyond interpreting Section 501(c)(3) and has instead created a new nationwide education policy without sufficiently clear congressional authorization. Opponents may contend that Bob Jones University involved racial exclusion and segregation, not every use of race for every purpose. They also may argue that a “fundamental public policy” must be firmly established and nationally uniform before it can become an unwritten condition of tax exemption.

Administrative Procedure Act claims are also foreseeable. Challengers may attack the proposal as overly broad, insufficiently explained, or inadequately attentive to reliance interests, donor restrictions, existing remedial obligations, and the differences between K–12 schools and higher education. After the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, reviewing courts will independently determine the meaning of the tax statute rather than automatically deferring to Treasury’s interpretation.

Religious schools could raise additional statutory and constitutional claims if the IRS applies the rule in a way that treats religious identity as a proxy for ethnicity. Nevertheless, Bob Jones University rejected a religious-liberty challenge to the government’s compelling interest in eliminating racial discrimination in education. Any successful challenge likely would depend on the regulation’s scope or application, not on a broad attack on the government’s authority to deny tax benefits for racial discrimination.

What Private Schools Should Do Now

While the proposed regulations are not yet final, schools should use the period before implementation to better understand their exposure and prepare alternatives. Schools should inventory all policies and practices that use race, color, or national or ethnic origin as a criterion or preference. The review should extend beyond the admissions office to scholarships, financial aid, summer programs, mentoring, athletics, student organizations, discipline, outreach programs, and relationships with affiliated foundations or outside scholarship administrators. Informal practices matter just as much as written policies.

Schools with donor-restricted scholarship funds should begin identifying the governing documents and available modification procedures. That process can take time, particularly if donors are deceased, gift language is inflexible, or court approval may be necessary.

Schools also should develop contingency language for admissions, scholarships, and other programs so that changes can be implemented promptly if the final regulations remain substantially unchanged. The goal is preparation, not premature abandonment of existing programs before the government completes the rulemaking process.

The public comment period for the proposed regulations creates an important opportunity. Schools and associations should consider requesting clearer definitions, examples, transition rules, and guidance addressing individual student experiences, demographic data collection, targeted outreach, court-ordered remedies, donor-restricted funds, and programs administered by affiliated organizations. Board and senior leadership involvement will be essential. This is not simply an admissions-office issue. The possible loss of tax exemption presents an enterprise-level financial and governance risk that warrants coordinated attention from school leadership, legal counsel, development personnel, and finance staff.

The proposed regulations present a consequential shift, but they are only the beginning of the process. Private schools should follow the final rule closely, participate where appropriate, and use the coming months to understand which programs may need to change and which mission goals can continue through carefully designed race-neutral approaches.

If you have questions about the proposed regulations, private-school compliance, or other tax-exempt organization issues, please contact Doug Taylor at (703) 526-5586 or rdougtaylor@beankinney.com or Timothy Hughes at (703) 526-5582 or thughes@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Consult an attorney regarding any specific legal questions. Any views or opinions expressed herein are those of the authors and are not necessarily the views of the firm or any client of the firm.