IRS Takes Aim: Proposed Rule Threatens Tax-Exempt Status of Private Schools

The IRS’s Proposed Rule on Race-Conscious Policies in Private Schools 

On September 4, 2026, the IRS published a notice of proposed rulemaking (NPRM) titled “Racial Nondiscrimination in Private Schools” (REG-119986-25). The proposed rule would extend the prohibition against racial discrimination in private schools to policies and practices that are intended to serve “remedial or diversity-related objectives,” such as those commonly associated with diversity, equity, and inclusion (DEI) initiatives. Under the proposed rule, any private primary or secondary school, college, professional or trade school, or university, would lose its tax-exempt status if it adopts, maintains, or enforces any policy or practice that considers race, color, or national or ethnic origin in the administration of any admissions policy, scholarship or loan program, athletic program, or other school-administered program. Comments are due November 3, 2026, and, if finalized, the proposed rule would go into effect on May 31, 2027. 

Legal Precedent and Public Policy Basis for the Proposed Rule 

The NPRM relies on legal precedent establishing that the IRS may require private schools to maintain racially nondiscriminatory student policies as a condition of tax-exempt status under Internal Revenue Code Section 501(c)(3). The Supreme Court upheld this requirement in Bob Jones University v. United States, 461 U.S. 574 (1983), finding that tax exempt status depends on meeting a “charitable” standard by serving a public purpose, and concluding that “[r]acially 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)” of the Internal Revenue Code. Id. at 595–96.   

The proposed rulemaking also relies on the Supreme Court’s decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll., 600 U.S. 181 (2023), where the Court held that the individualized consideration of race in admissions violates the Equal Protection Clause and Title VI of the Civil Rights Act of 1964.  

According to the proposed rulemaking, racial discrimination in private schools violates public policy “regardless of the intent behind or the legality of such discrimination,” meaning that even policies that have been upheld as legal and/or serve remedial or diversity-related objectives, including DEI programs, fall within the scope of the proposed rule. 

Practical Impact and Compliance Considerations for Private Schools 

The proposed rule is the latest step in the Trump Administration’s sustained effort to eliminate race-conscious policies and practices, particularly in education, throughout the country. The NPRM estimates that it would impact over 18,000 private elementary, secondary, and post-secondary schools and 750,000 students who may qualify for “scholarships allocated on the basis of racial, ethnic, or national identity.”   

Schools and other stakeholders should consider whether to submit comments via the Federal eRulemaking Portal. Further, private schools, colleges, and universities should evaluate their existing policies, with particular attention to: (1) scholarship and financial aid programs that consider race, including donor-directed giving arrangements that include racial eligibility criteria; (2) race-conscious admissions criteria at the K-12 level; and (3) athletic and extracurricular programs where race may factor into participation or benefit allocation. 

Crowell’s attorneys are monitoring these developments closely and are available to assist educational institutions in assessing their compliance posture and developing responsive strategies. Please contact one of the attorneys below or your regular Crowell contact to learn more.