Treasury Proposes Expanded Nondiscrimination Rules for Tax-Exempt Private Schools
The Treasury Department and the IRS have released proposed regulations that would alter the racial nondiscrimination requirements applicable to tax-exempt private schools under section 501(c)(3). There is concern in the nonprofit sector that the proposed expansion to the definition of racial discrimination for private schools could be applied in the future to other nonprofit organizations and activities.
Racial Nondiscrimination in Private Schools
The proposed regulations generally provide that a private school will not qualify for tax-exempt status if it adopts, maintains, or enforces any policy or practice that discriminates based on race, color, or national or ethnic origin. The prohibition would apply broadly to admissions, scholarships and loans, athletics, educational policies, and other school-administered or supported programs. Significantly, the restriction would apply regardless of the policy’s purpose, including when a race-conscious policy is intended to promote diversity or remedy past discrimination.
The regulations would apply to private primary and secondary schools, colleges, universities, and professional and trade schools classified under section 170(b)(1)(A)(ii). Treasury and IRS estimate that approximately 18,000 schools and as many as 750,000 students receiving scholarships could be affected.
The proposal would also modify Rev. Proc. 75-50, which establishes the racial nondiscrimination policies and related requirements applicable to private schools. If the regulations are finalized as proposed, Rev. Proc. 75-50 (as modified by Rev. Proc. 2019-22) would remain in effect, except that the sentences Treasury and IRS consider “incompatible with the proposed rules” would be deleted. Those sentences currently permit certain policies favoring racial minority groups in admissions, facilities, programs, scholarships, and financial assistance when intended to establish or maintain a school’s racially nondiscriminatory policy.
Schools may also need to review their donor-restricted scholarship programs. Changing restrictions that require race-conscious eligibility criteria may require coordination with donors or their heirs and could implicate state charitable trust laws and the authority of state charity regulators.
Next Steps
If finalized as currently proposed, the regulations would apply to taxable years beginning after May 31, 2027. A non-compliant school could lose its tax exemption, affecting both its taxation and the deductibility of contributions from donors. Treasury is seeking comments “on all aspects of the proposed regulations,” and taxpayers have until November 3, 2026, to do so.
Although the proposed regulations apply only to private educational institutions, they warrant attention across the exempt organization sector.
Contact
We will continue to monitor whether this approach remains limited to schools or signals a broader public policy rationale that could be extended to other nonprofit organizations. Contact GRF’s Nonprofit Tax Team with any questions regarding the proposed regulations.
GRF’s Nonprofit Tax Team helps tax-exempt organizations maintain their exempt status and meet IRS obligations—preparing Forms 990, 990-T, and 990-PF, analyzing unrelated business income and public support tests, reviewing lobbying and compensation compliance, and advising on everything from exemption applications to IRS audit defense and strategic tax planning.
