Treasury and IRS Propose Rule to End Tax-Exempt Status for Discriminatory Schools

Treasury and IRS Enforcement Standards

Under the proposed rule, private educational institutions would lose their tax-exempt status under section 501(c)(3) if they adopt, maintain, or enforce a policy or practice that discriminates based on race, color, or national or ethnic origin, according to the Department of the Treasury. Treasury Secretary Scott Bessent stated that schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing do not change their discriminatory nature.

IRS Chief Executive Officer Frank J. Bisignano noted that the regulations put institutions on notice that schools continuing to engage in racial discrimination should expect to lose tax-exempt benefits. The rules span admissions, educational policies, scholarships, loans, athletics, and all other school-administered programs, potentially affecting up to 18,000 private educational institutions, according to Treasury and IRS estimates.

Legal Precedent and Scope of the Rule

Federal law grants tax-exempt status to organizations operating exclusively for charitable and educational purposes. For decades, the Supreme Court has conditioned this eligibility on compliance with fundamental public policy, including the prohibition against racial discrimination, as established in cases such as Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard, according to the Treasury Department.

The proposed guidance eliminates outdated provisions that permitted schools to favor certain racial preferences in admissions, facilities, programs, scholarships, and financial assistance. Treasury and the IRS concluded those provisions are inconsistent with a uniform nondiscrimination standard.

Exemptions and Timeline for Compliance

The proposal does not prevent private schools from maintaining a religious mission, curriculum, or program of religious observance. Religious schools may continue selecting students based on genuine religious affiliation or membership to remain consistent with existing federal law, according to the regulatory text.

Additionally, schools may continue expanding educational opportunities for disadvantaged students using race-neutral criteria such as family income, geographic location, first-generation status, individual hardship, military family status, or academic achievement. The final regulations are scheduled to apply to taxable years beginning on or after May 31, 2027, giving affected institutions time to review and update their policies.