On September 3, 2026, the Treasury Department and IRS proposed regulations that would strip federal tax-exempt status from private schools, including K-12 institutions, for racial discrimination in admissions, scholarships, athletics, or other programs. The 28-page proposal, titled "Racial Nondiscrimination in Private Schools," is scheduled for Federal Register publication September 4 and cites Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard. Treasury Secretary Scott Bessent said race-based preferences remain discriminatory even when described as equitable, inclusive, or diversity-enhancing, and IRS CEO Frank Bisignano said schools that persist in such practices should expect to lose their exemption.
How the rule would work
Under proposed section 1.501(c)(3)-2(b), a school would lose exempt status if it adopts, maintains, or enforces discrimination for any purpose, including remedial or diversity-related goals. The proposal would revise Rev. Proc. 75-50, removing language that previously allowed schools to favor racial minority groups when the purpose was a racially nondiscriminatory policy. In its announcement, the IRS said race-neutral factors remain available, including family income, geographic location, first-generation status, individual hardship, military family status, and academic achievement. Schools can also keep admission standards tied to genuine religious affiliation, and anti-prejudice programs are allowed as long as no race is given preference.
The final regulation would apply to taxable years beginning after May 31, 2027. Comments and hearing requests are due within 60 days of publication, a period that runs into early November. The proposal contains no interim reliance provision, so schools cannot rely on it before it is finalized.
Legal groundwork
Federal tax enforcement against a school's racial policy has reached the Supreme Court only rarely. In 1983, the Court in Bob Jones University v. United States upheld the IRS's decision to revoke a private university's tax-exempt status because the school barred interracial dating and marriage. The Court ruled that racial discrimination in education violates fundamental national public policy. The university dropped the ban in 2000 and regained tax-exempt status in 2017.
The new proposal relies on that case and on two others. The 2023 Students for Fair Admissions decision struck down race-conscious admissions at Harvard and the University of North Carolina. The proposal extends that reasoning to tax-exempt determinations, though the SFFA court addressed claims under Title VI and the Equal Protection Clause, not the tax code.
The administration has already used the SFFA ruling against public schools. It investigated districts with race-specific programming, including Chicago Public Schools' Black Student Success Plan, and moved to rewrite federal grant rules to restrict racial equity programs. A federal judge blocked a related administration attempt to require schools to certify that they avoid DEI practices as a condition of federal funding. The tax proposal carries the same argument into the private school sector.
What the agencies expect
Treasury and IRS's regulatory impact analysis predicts compliance rather than mass loss of exemptions. The agencies wrote that all private primary and secondary schools will adjust their admissions criteria to retain tax-exempt status. They expect legal and administrative costs for revising donor-endowed scholarship criteria, changes in which students receive scholarships, and possible shifts in donor giving. Their analysis projects that the total number and dollar value of scholarships will remain unchanged.
Tax consequences
Loss of 501(c)(3) status would subject schools to federal income tax and end the federal deduction for donations to them. Joe Rosenberg of the Urban-Brookings Tax Policy Center said that would essentially remove deductibility for most taxpayers. A 2025 tax law created a new above-the-line charitable deduction of up to $1,000 for single filers and $2,000 for joint filers, expanding the group of donors who can claim a charitable deduction.
Opposition
Legal observers anticipate challenges. Shiloh Theberge, chair of the higher education law practice group at Fisher Phillips, said a key challenge would be that the rule is arbitrary and capricious and that the IRS cannot abruptly redefine what public policy requires, because Bob Jones did not authorize that change. She identified historically Black colleges, tribal colleges, and other minority-serving institutions as the schools most exposed to loss of exemption because of their share of race-based programs and donor-restricted funds.
Education advocates also pushed back. EdTrust president Denise Forte said the proposal is the administration's clearest effort to keep working-class Americans and people of color out of higher education and that it exceeds agency authority. Amy Berman, a former Justice Department official focused on educational opportunities, warned that schools might overcomply out of caution, which would harm students. Kara Freeman, president of the National Association of College and University Business Officers, also said the rule exceeds agency authority.
The National Association of Independent Schools said it is reviewing the proposal and that major questions about its scope, interpretation, and implementation remain.