IRS Proposes Regulations Addressing Race-Based Programs in Tax-Exempt Private Schools

The Internal Revenue Service and Department of the Treasury have proposed new regulations that might have a far-reaching impact on private schools as well as their major donors. The proposed regulations could cause a private school to lose its tax-exempt status if the IRS determines that the school discriminates on the basis of race, color, or national or ethnic origin, including through policies intended to enhance diversity or remedy historic racial discrimination.

The proposed regulations, REG-119986-25, “Racial Nondiscrimination in Private Schools,” published on Sept. 4, 2026 (the Proposed Regulations), provide that, as determined by the IRS, a private school would fail to qualify as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code), 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.”

While much case law has focused on admissions, the scope of the Proposed Regulations is broader and extends to all aspects of school operations. An IRS determination that a policy or practice discriminates on the basis of race, color, or national or ethnic origin may cause revocation of tax-exempt status, whether in admissions, educational programs, scholarships and financial aid, or athletics.

The preamble to the Proposed Regulations explains that intentions would no longer be considered as grounds to defend policies built around racial or ethnic criteria. The stated goal of the Proposed Regulations is to provide that “all forms of racial discrimination in education, 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), are against a fundamental public policy of the United States and thus preclude a school’s exemption from Federal income tax under section 501(c)(3).”

The Proposed Regulations define “private school” to include any private primary or secondary school, college, professional or trade school, or university, estimated by the IRS and Treasury Department to encompass 18,000 institutions across the country. The IRS and Treasury expect to finalize these regulations by May 31, 2027, with the final regulations taking effect for taxable years beginning after May 31, 2027.

If finalized in their current form, the Proposed Regulations would:

• Cause any deemed non-compliant private school to cease to qualify as a Section 501(c)(3) organization;
• Apply regardless of the intent of the school’s policy, including remedial or diversity-related objectives;
• Repeal the Rev. Proc. 75-50 provisions authorizing policies favoring racial minority groups with respect to admissions, facilities, programs, and financial assistance (including loans and scholarships) when such policies are designed to promote a school’s racially nondiscriminatory policy;
• Allow other criteria to replace race and ethnicity for purposes of assessing comparative disadvantages of a student in scholarship and admissions decisions, including income, geography, and first-generation status; and
• Preserve private schools’ ability to maintain a religious mission or select students on the basis of religious affiliation, provided the criteria are not a proxy for race, color, or national or ethnic origin.



Potential Compliance Considerations for Private Schools

Because the regulations remain proposed, schools may wish to evaluate these issues as potential areas of impact:

• Scholarships and Financial Aid: Schools may wish to inventory all scholarship and financial aid programs, identify which have race-based eligibility criteria, and consider whether modifications may be warranted if the Proposed Regulations are finalized.
• Donor Restrictions and Endowment Gifts: Schools might analyze historic gifts, including endowment funds, that have race-based criteria associated with their implementation, and determine whether modifications require donor consent, court relief, or an administrative deviation proceeding.
• Affinity Groups and Programs: Racial or ethnic affinity groups, racial minority- or identity-based orientation tracks, and similar programs may need to be evaluated to determine whether, under the IRS’s proposed approach, they may be viewed as jeopardizing the school’s exempt status.
• Admission Criteria: Postsecondary institutions that already revised admissions criteria following recent court cases may wish to review whether any residual race-conscious elements in their admission practices would raise concerns under the Proposed Regulations.



How the Proposed Regulations May Affect Private Foundations and Major Donors

New Gifts

• Private foundations, individual philanthropists, and corporate donors that fund scholarships, fellowships, and programs at private schools should consider evaluating their own grantmaking policies, gift agreements, and fund documents to identify any eligibility or preference criteria based on race, ethnicity, or national origin. The Proposed Regulations do not apply to private funders, but if the proposals are finalized in substantially the current form, donors to private schools may need to adapt their approach in order for the institutions to be able to accept their donations.
• Private foundations must monitor grantees and confirm that public charity exempt status remains in place at the time of a grant. A grant to a school that has lost exempt status could constitute a “taxable expenditure,” potentially subjecting the foundation and its leadership to excise taxes unless strict tax compliance procedures are followed. A foundation’s ability to rely on the school’s prior public charity status ends once the status change is publicized.



Existing Gifts

• If existing endowment gifts and other restricted gifts have been established using criteria based on race, ethnicity, or national origin, private schools may need to reach out to donors for permission to make modifications. Funders can help make this process as efficient as possible by being prepared with alternative criteria that aim to achieve a similar charitable goal as the original funding.
• The Proposed Regulations expressly state that race-neutral criteria (such as income, geography, or first-generation status) may permissibly target students who are disadvantaged. This provides helpful clarity for discussions between schools and their donors regarding gift modifications. The parties should take care not to adopt alternatives that merely serve as a proxy for criteria deemed impermissible under the Proposed Regulations, and instead work to evolve existing gifts to achieve philanthropic goals while avoiding risk to the school’s tax-exempt status.



Possible Effects on Tax-Exempt Bond-Financed Educational Facilities

• Be Aware of Tax Risk: Private schools with outstanding tax-exempt debt issued under Section 145 of the Code to finance property owned by or used by a private school should be aware that loss of Section 501(c)(3) status would, absent prior transfer of ownership and use to compliant 501(c)(3) or state or local governmental use, cause the affected tax-exempt debt to become taxable debt.
• Be Aware of Default Risk: The loss of 501(c)(3) status of a private school with facilities financed with tax-exempt debt issued under Section 145 of the Code or certain remedial actions, such as the transfer of ownership of bond-financed facilities, might trigger an event of default under the financing documents. Private schools with such bond-financed facilities should consult with bond counsel if the school might be viewed by the IRS as at risk of losing exemption under the Proposed Regulations.
• Assess Continuing Disclosure Obligations: A school whose exemption is at risk under the Proposed Regulations should evaluate, with disclosure counsel, whether and when that risk becomes a reportable event for its outstanding bonds.
• Coordinate with Relevant Advisors: Bond counsel, general counsel, 501(c)(3) counsel and the institution’s finance office should work together to consider any policy changes that might address potential tax-exempt status concerns and consider anticipatory remedial action or refinancing options if compliance with the Proposed Regulations is uncertain or impossible.



Next Steps

Written comments and requests for a public hearing are due by Nov. 3, 2026. We expect significant commentary on the proposals. GT attorneys across affected sectors – from higher education to philanthropy to public finance – will closely monitor these developments.