IRS Proposes New Rules for Private Schools with Race-Based Policies

On September 4, 2026, the Department of the Treasury and the Internal Revenue Service published proposed regulations (REG-119986-25) that would add a new Treas. Reg. § 1.501(c)(3)-2 to the Income Tax Regulations. If finalized as proposed, the rule would remove the tax-exempt status under Section 501(c)(3) of the Internal Revenue Code from any private school that adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin — regardless of the purpose of such discrimination, including remedial or diversity-related objectives.

The stakes are significant: noncompliant schools could lose their federal income tax exemption, contributions to them could cease to qualify as deductible charitable contributions under Section 170, and outstanding tax-exempt qualified 501(c)(3) bonds that depend on the 501(c)(3) status of the school conduit borrower would become taxable with the loss of 501(c)(3) status. Treasury and the IRS estimate that approximately 18,000 tax-exempt private schools and 750,000 students potentially eligible for identity-based scholarships may be affected.

Important: This rule is proposed only. It has not been finalized and does not change current law. The proposed regulations are subject to public comment and may be revised before finalization. Written or electronic comments and requests for a public hearing are due November 3, 2026 (i.e., 60 days after Federal Register publication).

If you have questions about how these proposed regulations may impact your institution or your donations to private schools, please reach out to your Mintz attorney or Meghan Burke, Chair of the Education Practice, for further guidance.

Background: Current Law and the Proposed Rule

Under long-standing IRS authority, private schools must maintain racially nondiscriminatory policies to qualify for tax-exempt status under Section 501(c)(3). This principle traces to Rev. Rul. 71-447 (1971) and was upheld by the Supreme Court in Bob Jones University v. United States (1983), which held that racial discrimination in education is contrary to fundamental public policy and that the IRS did not exceed its authority in revoking the tax-exempt status of discriminatory schools.

The current framework is implemented primarily through Rev. Proc. 75-50, which sets forth guidelines and recordkeeping requirements for nondiscrimination compliance. Notably, Section 3.02 of Rev. Proc. 75-50 currently provides that a school’s policy of favoring racial minority groups with respect to admissions, facilities, programs, and financial assistance will not constitute impermissible discrimination when the purpose is to promote the school’s racially nondiscriminatory policy.

In 2023, the Supreme Court’s decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College (SFFA) held that race-conscious admissions programs at Harvard and the University of North Carolina violated the Equal Protection Clause and Title VI of the Civil Rights Act of 1964. The proposed rule expressly builds on SFFA and the broader line of Supreme Court precedent from Brown v. Board of Education through Bob Jones.

What the Proposed Rule Would Do

The Core Prohibition

Proposed Treas. Reg. § 1.501(c)(3)-2(b) would provide that a private school is not “operated exclusively for exempt purposes” 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.

Critically, the proposed rule would treat discrimination for any purpose — including remedial or diversity-related objectives — as falling within this prohibition. This represents a significant change from the current framework under Rev. Proc. 75-50, which explicitly permits policies favoring racial minorities when designed to promote nondiscrimination.

Covered Institutions

Under proposed Section 1.501(c)(3)-2(c), a “private school” means an organization that (1) is described in Section 501(c)(3) and (2) is classified as an educational organization described in Section 170(b)(1)(A)(ii). This definition covers

• private primary and secondary schools (K–12),
• colleges and universities,
• professional schools (e.g., law, medical, and business schools), and
• trade and vocational schools.

Expressly excluded: Governmental units and their agencies, instrumentalities, and organizations owned or operated by governmental units. Additionally, the definition is based on classification under Section 170(b)(1)(A)(ii), which requires that an institution’s primary function be the presentation of formal instruction and that it maintain a regular faculty, curriculum, and enrolled student body.

Proposed Effective Date

The proposed regulations would apply to taxable years of private schools beginning after May 31, 2027. For many schools, this means the regulations would be effective for their 2028 fiscal year. Treasury and the IRS expect to finalize the regulations, with any necessary modifications, in advance of that date.

Changes to Rev. Proc. 75-50

If finalized as proposed, the rule would delete specific provisions of Rev. Proc. 75-50 that currently protect certain race-conscious programs:

• Section 3.02, second sentence (which currently provides that a policy favoring racial minority groups in admissions, facilities, programs, and financial assistance does not constitute discrimination when the purpose is to promote the school’s nondiscriminatory policy) would be removed.
• Section 4.05, third and fourth sentences (which currently provide that scholarships and loans favoring members of racial minority groups designed to promote a school’s nondiscriminatory policy, or that do not significantly derogate from such policy, will not adversely affect exempt status) would be removed.

All other provisions of Rev. Proc. 75-50 (as modified by Rev. Proc. 2019-22) would remain in effect.

Clarifications for Religious Institutions

The proposed rule includes an important clarification: it would not preclude a private school from

• maintaining a religious mission, curriculum, or program of observance; or
• selecting students based on religious affiliation or membership.

A religiously based selection criterion does not become discrimination based on race, color, or national or ethnic origin merely because members of the relevant religious community may share ancestry or ethnic characteristics — so long as the criterion is based solely on religion and not on shared ancestry or ethnicity.

Anti-Bias and Anti-Discrimination Efforts

The proposed rule would not prohibit private schools (or other organizations) from taking actions or adopting policies intended to eliminate prejudice and discrimination, consistent with existing Treas. Reg. § 1.501(c)(3)-1(d)(2). However, such efforts may not be carried out through policies or practices that discriminate based on race, color, or national or ethnic origin. In practice, this means schools may continue programs designed to promote inclusion, provided those programs do not employ race-based eligibility criteria.

Implications for Donor-Restricted Scholarships and Endowments

The proposed rule has potentially significant implications for schools that administer scholarships, fellowships, or loan programs with race-based eligibility criteria — including those established through donor-restricted gifts and endowed funds.

If finalized, schools administering such funds should:

• Conduct a comprehensive inventory of all scholarship, fellowship, and loan funds to identify those with race-, color-, or national/ethnic origin-based eligibility criteria.
• Review the underlying donor instruments, gift agreements, and trust documents governing restricted funds.
• Work with living donors to renegotiate or amend fund terms to adopt permissible alternative eligibility criteria (e.g., income level, geographic origin, first-generation college student status).
• Where donors are deceased, evaluate legally permissible modification doctrines under applicable state law.
• Consult with legal counsel regarding any fiduciary obligations and potential donor notification or court approval requirements.

Treasury acknowledges that compliance costs will depend on the legal circumstances under which each scholarship was created, and that administrative and legal costs will be incurred, particularly where donor consent or court proceedings are required.

Implications for Outstanding Tax-Exempt Bonds

Many private schools have financed campus facilities, dormitories, and other capital projects through tax-exempt “qualified 501(c)(3) bonds” issued under Section 145 of the Internal Revenue Code. The tax-exempt status of these bonds depends on the conduit borrower maintaining its Section 501(c)(3) status. If a school loses its tax exemption under the proposed rule, several significant consequences could follow:

• Loss of tax-exempt status on bonds. Bonds issued as “qualified 501(c)(3) bonds” could lose their tax-exempt status, causing bondholders to face federal income tax on interest payments going forward. This could trigger a market value decline and bondholder claims.
• Covenant defaults and acceleration. Most tax-exempt bond indentures require the borrower to maintain its 501(c)(3) status as a continuing covenant. Loss of exempt status would constitute an event of default under these documents, potentially triggering acceleration of the outstanding principal balance or other remedies available to bondholders.
• Interest rate adjustments. Some bond documents provide for interest rate increases (“grossed-up” or “taxable” rates) if the bonds lose tax-exempt status. 
• Issuer and conduit relationships. Schools that borrowed through state or local governmental issuers (acting as conduit issuers) should review their loan agreements and any indemnification obligations to the issuer. Most agreements require the borrower to indemnify the issuer for any adverse tax consequences resulting from the borrower’s actions.

Practical Action-Item Checklist for Education Institutions

We recommend that affected institutions begin the following steps now, in advance of potential finalization:

• ▢ Policy audit. Review all admissions, scholarship, loan, athletic, and other school-administered or school-supported program policies for any criteria based on race, color, or national or ethnic origin.
• ▢ Scholarship and endowment inventory. Identify all endowed and restricted funds with identity-based eligibility criteria. Catalog the governing instruments and any donor restrictions.
• ▢ Donor outreach. For restricted funds with living donors, initiate discussions about amending fund terms to adopt permissible alternative criteria (e.g., income, geography, first-generation status).
• ▢ Legal analysis of restricted funds. For funds with deceased donors or irrevocable restrictions, engage counsel to evaluate modification doctrines available under applicable state law (cy pres, equitable deviation, etc.).
• ▢ Religious institution review. If your institution selects students based on religious affiliation, confirm that selection criteria are based solely on religion and not on shared ancestry or ethnic characteristics.
• ▢ Tax-exempt bond review. Schools with outstanding tax-exempt bonds should promptly review their bond documents — including indentures, loan agreements, and continuing disclosure undertakings — with bond counsel to assess exposure and evaluate remediation strategies in advance of the proposed effective date.
• ▢ Board and leadership briefing. Inform governing boards, senior leadership, general counsel, financial aid offices, and development/advancement teams about the proposed rule and potential compliance implications.
• ▢ Consider submitting comments. Evaluate whether your institution should submit public comments on the proposed rule via the Federal eRulemaking Portal (Docket: IRS, REG-119986-25). Comments are due by November 3, 2026.
• ▢ Monitor developments. Track the comment period, any public hearing, and the finalization timeline. Engage counsel to evaluate how any changes in the final rule may differ from the proposal.

Your Mintz attorney can provide additional guidance to assess your institution’s risks and prepare for compliance should these regulations go into effect. Further questions can be directed to Member Meghan Burke, Chair / Education Practice. 

Guidance for Education-Focused Donors

Donors who have made or are contemplating gifts to educational institutions for race-based scholarships, fellowships, or similar programs should be aware that:

• If the proposed rule is finalized, schools that continue to administer scholarships with race-based criteria may risk their tax-exempt status, which could affect the deductibility of past and future contributions.
• Schools may approach living donors to discuss amending gift terms to adopt permissible race-neutral criteria.
• Donors considering new gifts should discuss with counsel whether proposed eligibility criteria would be consistent with the proposed rule, if finalized.
• Existing gifts governed by irrevocable instruments may be subject to judicial modification proceedings under state law.

Key Uncertainties and Open Questions

Because the proposed rule remains subject to public comment and revision, several important uncertainties remain:

• Scope of “school-administered or school-supported program.” The proposed rule applies to any “school-administered or school-supported program” but does not provide detailed examples or safe harbors defining the outer boundaries of this category.
• Impact on affiliated foundations. The proposed rule addresses “private schools” as defined by Sections 501(c)(3) and 170(b)(1)(A)(ii). It is not clear how the rule would apply to separate Section 501(c)(3) foundations or supporting organizations that make grants to schools for race-based scholarship programs. Schools and their affiliated foundations should monitor guidance on this point.
• Interaction with state law. Many states have their own nondiscrimination requirements, cy pres statutes, and charitable trust doctrines. The interplay between the proposed federal rule and state law obligations may vary significantly by jurisdiction.
• Transition and compliance timeline. The proposed rule would take effect for taxable years beginning after May 31, 2027, and Treasury expects to finalize it before that date. However, the comment process or legal challenges could delay finalization or alter its terms.
• Recordkeeping and enforcement. The proposed rule does not prescribe new recordkeeping obligations beyond those already required by Rev. Proc. 75-50. It remains to be seen whether additional compliance guidance will be issued.

Comment Deadline and How to Participate

Written or electronic comments and requests for a public hearing must be received within 60 days of the proposed rule’s publication in the Federal Register. Based on the publication date of September 4, 2026, the comment deadline is November 3, 2026.

Comments may be submitted:

• Electronically: Via the Federal eRulemaking Portal at https://www.regulations.gov (Docket: IRS, REG-119986-25).
• By mail: CC:PA:01:PR (REG-119986-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

For further information, contact the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) at (202) 317-6000, or the Publications and Regulations Section at (202) 317-6901 or [email protected].

DISCLAIMER

This client alert is provided for general informational purposes only and does not constitute legal advice. The information contained herein should not be relied upon as a substitute for consultation with qualified legal counsel regarding your specific facts and circumstances. The proposed rule discussed in this alert has not been finalized and may be revised or withdrawn. No attorney-client relationship is created by the distribution or receipt of this alert.

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