Department of the Treasury, Internal Revenue Service, Notice of Proposed Rulemaking: Racial Nondiscrimination in Private Schools, REG-119986-25, RIN 1545-BS05, FR Doc. 2026-18127 (filed September 3, 2026, 8:45 a.m., scheduled for publication in the Federal Register on September 4, 2026)

On September 3, 2026, the Department of the Treasury and the Internal Revenue Service (IRS) released a significant Notice of Proposed Rulemaking (REG-119986-25) that codifies and expands the racial nondiscrimination requirements for private schools seeking or maintaining tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. Under the proposed regulations, which add a new Section 1.501(c)(3)-2 to the Income Tax Regulations, any private school that adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin will be deemed not “operated exclusively for exempt purposes” and will consequently lose its federal tax exemption.

Crucially, the proposed rules make no exceptions for “benign” or race-conscious affirmative action, diversity, or remedial programs. This regulatory shift represents a direct response to recent federal jurisprudence—most notably the Supreme Court’s decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College. The proposed regulations also formally modify long-standing administrative guidelines by stripping Revenue Procedure 75-50 of its safe harbors for race-conscious admissions and financial aid programs. This article provides tax professionals with a technical analysis of the proposed rules, their judicial justifications, the specific modifications to existing guidance, and the expected timeline for compliance.

Statutory and Historical Framework

To understand the legal basis of REG-119986-25, one must examine the intersection of Section 501(c)(3), Section 170, and common-law charitable principles. Section 501(c)(3) describes organizations organized and operated exclusively for “charitable... or educational purposes.” These organizations are generally exempt from Federal income tax under Section 501(a). Section 170(a) allows individual and corporate taxpayers to deduct “charitable contributions” made to organizations specified in Section 170(c)(2). Section 170(b)(1)(A)(ii) specifically covers “educational organizations” that maintain a regular faculty, curriculum, and a regularly enrolled student body, which is further defined in Section 1.170A-9(c)(1) of the regulations.

While Sections 170 and 501(c)(3) do not explicitly define “charitable” or “educational” to require racial nondiscrimination, the regulations under Section 1.501(c)(3)-1(d)(2) state that “charitable” is used in its “generally accepted legal sense” as developed by judicial decisions. This definition includes the “promotion of social welfare by organizations designed to... eliminate prejudice and discrimination.”

For over 50 years, federal tax policy has integrated common-law charitable trust principles, which dictate that “all charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy.” Per the proposed regulations’ preamble, the public policy of the United States against racial discrimination in education has been established through an “unbroken line of cases” spanning more than seven decades:

Brown v. Board of Education of Topeka, 347 U.S. 483 (1954): Held that state-sanctioned racial segregation in public schools violates the Equal Protection Clause of the Fourteenth Amendment, with subsequent compliance requiring public schools to admit students “on a racially nondiscriminatory basis” (Brown v. Board of Education, 349 U.S. 294, 300–301 (1955)).
Title VI of the Civil Rights Act of 1964, 42 U.S.C. § 2000d: Categorically prohibits discrimination based on race, color, or national origin in “any program or activity receiving Federal financial assistance.”
Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), aff’d sub nom. Coit v. Green, 404 U.S. 997 (1971): Enjoined the Treasury and the IRS from recognizing private schools in Mississippi as tax-exempt if they maintained racially discriminatory policies. The court declared that the Internal Revenue “Code must be construed and applied in consonance with the Federal public policy against support for racial segregation of schools, public or private.” It defined a nondiscriminatory policy as requiring the admission of students “to all the rights, privileges, programs and activities generally accorded or made available to students.”
Revenue Ruling 71-447, 1971-2 C.B. 230: Formalized the IRS position nationwide, establishing that a private school without a racially nondiscriminatory policy as to students does not qualify for Section 501(c)(3) status because its operations are contrary to established public policy.
Runyon v. McCrary, 427 U.S. 160 (1976) and McDonald v. Santa Fe Trail Transp. Co., 427 U.S. 273 (1976): Confirmed that 42 U.S.C. § 1981 bars private schools from discriminating against applicants based on race, and that these protections apply equally to all persons regardless of race.
Bob Jones University v. United States, 461 U.S. 574 (1983): Resolved any doubt regarding IRS authority, holding that “entitlement to a tax exemption depends on meeting a ‘charitable’ standard under common law; that is, serving a public purpose and not being contrary to established public policy.” The Supreme Court concluded that “racial discrimination in education violates a most fundamental national public policy, as well as rights of individuals,” and therefore, “racially discriminatory educational institutions cannot be viewed as conferring a public benefit within the ‘charitable’ concept... or within Congressional intent underlying § 170 and § 501(c)(3).”

Reasons for Issuance of the Proposed Regulations

Although the IRS’s position has been governed by Revenue Ruling 71-447 and Revenue Procedure 75-50 for decades, these rules have never been formally incorporated into the Treasury Regulations under Section 501(c)(3). This lack of regulatory codification created potential enforcement vulnerabilities and ambiguities, particularly in light of evolving Supreme Court jurisprudence regarding race-conscious admissions and financial aid.

The Treasury Department and the IRS determined that formal regulations are necessary to “clarify the law applicable to qualification for the Federal tax exemption of private schools, which would eliminate ambiguity and ensure consistent application across all private schools.” Furthermore, codification provides “administrative certainty for IRS personnel and ensure[s] that Federal income tax exemption does not benefit racially discriminatory practices in education.”

Specifically, the proposed regulations address the legal tension surrounding race-conscious “affirmative action” policies in private education. While Revenue Procedure 75-50 previously permitted private schools to favor racial minority groups in admissions and financial aid to promote desegregation, the Supreme Court’s recent structural shift in equal protection doctrine has rendered such “benign” racial classifications legally unviable per the preamble. By promulgating Section 1.501(c)(3)-2, the IRS establishes a uniform national standard that matches contemporary federal constitutional law, making it clear that “all forms of racial discrimination in education, regardless of the intent behind or the legality of such discrimination... are against a fundamental public policy of the United States.”

The IRS’s Judicial and Constitutional Analysis

To justify its position that remedial or diversity-oriented racial classifications now violate “fundamental public policy,” the IRS provides an exhaustive analysis of the Supreme Court’s affirmative action jurisprudence over the last fifty years. This analysis traces the rise and eventual fall of race-conscious educational policies, demonstrating how the legal boundaries have shifted:

The Era of Scrutiny and Individualized Plus Factors

The IRS’s analysis begins with Regents of the University of California v. Bakke, 438 U.S. 265 (1978). In Bakke, a divided Court addressed whether a state medical school’s affirmative action program, which reserved a specific quota of seats for minority applicants, violated the Equal Protection Clause and Title VI. While four justices argued that Title VI categorically barred any race-based exclusions and four others argued that race-based criteria designed to mitigate past discrimination were permissible, Justice Powell’s controlling opinion established that “any race-based classification, even for a purportedly benign purpose, was subject to strict scrutiny.” Under this standard, setting aside a rigid racial quota was unconstitutional, but utilizing race as a non-decisive “plus” factor within an individualized review to attain the educational benefits of a diverse student body was deemed permissible.

This “plus factor” framework was solidified in Grutter v. Bollinger, 539 U.S. 306 (2003). In Grutter, the Supreme Court upheld the University of Michigan Law School’s highly individualized, holistic admissions policy, reiterating that “maintaining the diversity of a university’s student body was a compelling state interest which could justify race-conscious admissions policies.” However, the Court warned that “race-conscious admissions policies should be limited in time” because “a core purpose of the Fourteenth Amendment was to do away with all governmentally imposed discrimination based on race.” Justice O’Connor famously wrote that “racial classifications, however compelling their goals, are potentially so dangerous that they may be employed no more broadly than the interest demands,” and expressed an expectation that “25 years from the date of the opinion, the use of racial preferences will no longer be necessary to further the interest approved today.”

Concurrently, in Gratz v. Bollinger, 539 U.S. 244 (2003), the Court struck down the University of Michigan’s undergraduate admissions policy, which automatically awarded “points” to applicants from underrepresented minority groups. The Court found that this mechanical, non-individualized point allocation made race the decisive factor rather than a mere “plus” factor, meaning it was not “sufficiently narrowly tailored to meet the strict scrutiny standard.”

In Fisher v. University of Texas, 579 U.S. 365 (2016), the Court again narrowly upheld an individualized race-conscious undergraduate admissions program. However, it observed that it “remains an enduring challenge to our Nation’s education system to reconcile the pursuit of diversity with the constitutional promise of equal treatment and dignity,” and ordered the university to continuously assess whether changing demographics or alternative, race-neutral approaches could satisfy its diversity goals without relying on racial classifications.

The Structural Shift in Students for Fair Admissions

The critical turning point analyzed by the IRS is Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023) (SFFA). In SFFA, the Supreme Court held that the race-conscious admissions programs at Harvard College and the University of North Carolina employed unlawful racial discrimination in violation of Title VI and the Equal Protection Clause, respectively.

The Court emphasized the exceptionally restrictive nature of the strict scrutiny standard:

“Our acceptance of race-based state action has been rare for a reason. Distinctions between citizens solely because of their ancestry are by their very nature odious to a free people whose institutions are founded upon the doctrine of equality. That principle cannot be overridden except in the most extraordinary case.”

Applying this standard, the Court held that the universities’ admissions policies could not survive because they “lack sufficiently focused and measurable objectives warranting the use of race, unavoidably employ race in a negative manner, involve racial stereotyping, and lack meaningful end points.”

Significantly, the IRS highlights the SFFA Court’s explicit rejection of “remedying societal discrimination” as a compelling government interest. The Court observed that “in the years after Bakke, the Court repeatedly held that ameliorating societal discrimination does not constitute a compelling interest that justifies race-based state action.”

Through this analysis, the IRS argues that under modern federal law, any policy that classifies and treats students differently based on race—regardless of its “remedial” or “benign” intent—is constitutionally suspect and contrary to the fundamental public policy of the United States. Consequently, because Section 501(c)(3) tax exemption requires adherence to this fundamental public policy, private schools utilizing such race-conscious policies are ineligible for exempt status.

Additions, Revisions, and Deletions to Current Regulations

The notice of proposed rulemaking implements these principles through specific, structural changes to 26 CFR Part 1:

New Regulations Added

The proposed rules add Section 1.501(c)(3)-2 to 26 CFR Part 1, consisting of four primary paragraphs:

Paragraph (a) (In general): Establishes the foundational operational test, stating that a private school must be operated exclusively for one or more exempt purposes (as defined in § 1.501(c)(3)-1(d)) to be exempt under Section 501(c)(3). It explicitly warns that “a private school that fails to satisfy the nondiscrimination requirement of paragraph (b) of this section is not an organization described in section 501(c)(3) with respect to any taxable year of the private school described in paragraph (d).”
Paragraph (b) (Nondiscrimination requirement): Defines what constitutes a failure of the operational test. A 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.” Crucially, it defines “discrimination on the basis of race, color, or national or ethnic origin” to include “any discrimination on the basis of race, color, or national or ethnic origin for any purpose,” thereby explicitly capturing diversity-related and remedial programs.
Paragraph (c) (Private school defined): Clarifies that the term “private school” means any Section 501(c)(3) organization that is classified as an educational organization under Section 170(b)(1)(A)(ii) (encompassing private primary or secondary schools, colleges, professional or trade schools, and universities). It specifically excludes “a governmental unit, an agency or instrumentality of a governmental unit, or an organization that is owned or operated by an agency or instrumentality of a governmental unit.” It defines a “governmental unit” to include the United States, a State, an Indian Tribal government, the District of Columbia, a possession of the United States, or any political subdivision thereof.
Paragraph (d) (Applicability date): Formally mandates that the section applies “with respect to the taxable year of any private school beginning after May 31, 2027.”

Revisions and Retained Regulations

It is critical to note that the proposed regulations do not modify or amend the text of any existing regulatory sections under 26 CFR. The general authority citation for Part 1 continues to read under 26 U.S.C. § 7805.

Furthermore, several key aspects of current law are preserved without revision:

Prejudice Elimination: The proposed regulations do not disturb the ability of a Section 501(c)(3) organization to take actions or adopt policies intended to eliminate prejudice and discrimination, consistent with existing Section 1.501(c)(3)-1(d)(2). However, the organization must achieve these social welfare purposes “by means other than actions or policies that discriminate on the basis of race, color, or national or ethnic origin.”
Religious Admissions: The rules do not preclude a private school from maintaining a religious mission, curriculum, or program of observance, or from selecting students on the basis of religious affiliation or membership. Under Section 3.03 of Revenue Procedure 75-50, religiously-based selection criteria do not constitute racial discrimination “merely because members of the relevant religious community may also share ancestry or ethnic characteristics,” provided the criteria are “based solely on religion and not on shared ancestry or ethnic characteristics.”

Modifications to Revenue Procedure 75-50

While the text of 26 CFR is not altered, the proposed regulations formally and directly modify Revenue Procedure 75-50 (as modified by Revenue Procedure 2019-22) to eliminate provisions that are incompatible with the new rules. Upon finalization of the proposed regulations, the following specific sentences will be deleted:

The second sentence of section 3.02: This sentence currently states that:

“A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance will not constitute discrimination on the basis of race when the purpose and effect is to promote the establishment and maintenance of that school’s racially nondiscriminatory policy as to students.”
The third and fourth sentences of section 4.05: These sentences currently state that:

“Consistent with section 3.02, supra, scholarships and loans that are made pursuant to financial assistance programs favoring members of one or more racial minority groups that are designed to promote a school’s racially nondiscriminatory policy will not adversely affect the school’s exempt status. Financial assistance programs favoring members of one or more racial groups that do not significantly derogate from the school’s racially nondiscriminatory policy similarly will not adversely affect the school’s exempt status.”

By deleting these safe harbors, the IRS ensures that any admissions or financial aid programs favoring minority groups will be treated as racially discriminatory and will result in the loss of tax-exempt status under Section 1.501(c)(3)-2. Apart from these specific deletions, the remainder of Revenue Procedure 75-50 (including its organizational statements of policy, annual certifications, and recordkeeping requirements) remains in full effect.

Proposed Effective Date and Taxpayer Reliance

The Treasury Department and the IRS expect to finalize these regulations, incorporating any modifications based on public comments, in advance of May 31, 2027. The regulations are proposed to apply to taxable years of private schools beginning after May 31, 2027. The IRS noted that this prospective applicability date “will allow any private schools that may need to amend their existing policies, including admissions or scholarship policies, to do so before the beginning of any taxable year to which the final regulations are expected to apply.”

Regarding whether taxpayers may rely on these proposed regulations pending finalization: The Notice of Proposed Rulemaking does not contain any provision allowing for interim reliance. Because the regulations are merely proposed, they do not have the force of law. Taxpayers must continue to comply with existing regulations and Revenue Procedure 75-50 in its unamended form until the final regulations are officially published in the Federal Register.

However, CPAs and EAs must advise their private school clients to use this interim period to conduct an immediate audit of their admissions criteria, athletic programs, and endowed scholarship funds. If a school maintains any race-based scholarship program (even if funded by a restricted donor endowment), it must work to revise the criteria—potentially shifting to race-neutral proxies such as geographic or income-based indicators—prior to the beginning of their first taxable year after May 31, 2027, to avoid a potential loss of tax-exempt status.

Prepared with assistance from Gemini Notebook.