Treasury, IRS Propose Rule to Strip Tax-Exempt Status From Private Schools That Use Race in Admissions

WASHINGTON, The Treasury Department and the Internal Revenue Service on Sept. 3 proposed regulations that would revoke federal tax-exempt status from private schools that discriminate on the basis of race, color, or national or ethnic origin, a rule the administration says carries out President Trump's executive orders on merit-based opportunity and that critics say weaponizes the tax code against minority-support programs.

The notice of proposed rulemaking, designated REG-119986-25, was filed Sept. 3 and published in the Federal Register the following day, according to documents reviewed by IRS and Treasury press releases. The agencies estimate the rule could affect as many as 18,000 private schools, including colleges, universities, professional schools, trade schools, and elementary schools across the country.

Under the proposed rule, a private school would not qualify for 501(c)(3) status if it adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin. The reach is broad. According to the Federal Register filing, the proposed regulations cover admissions, scholarships, financial assistance, athletics, facilities, and any other school-administered program.

The rule would also eliminate provisions in existing IRS guidance, Revenue Procedure 75-50, issued in 1975, that historically permitted schools to consider certain racial preferences. Treasury and the IRS concluded those provisions are inconsistent with a uniform nondiscrimination standard and with Supreme Court case law, citing Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard, according to a Treasury press release.

Treasury Secretary Scott Bessent, in a statement quoted in the press release, said the rule "establish[es] a clear standard, and the institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status." IRS Chief Executive Frank Bisignano said schools "that continue to engage in racial discrimination should expect to lose that status."

The rule preserves an existing carve-out for religious institutions. Private schools may continue to select students based on genuine religious affiliation and to maintain religious missions and curricula, according to the Treasury press release and the Federal Register notice.

Opposition from higher-education groups was swift. The American Council on Education and the American Association of University Professors have signaled they may challenge the regulations during the public comment period and through litigation if a final rule is issued, according to a legal analysis by Latham regulatory counsel published this week. AAUP President Todd Wolfson, quoted by UPI, called the proposal "blatantly racist political coercion."

The administration and its critics read the underlying law differently. Administration officials frame the proposal as enforcement of a race-neutral standard grounded in established Supreme Court precedent. Opponents argue the rule's sweep, which administration officials have said includes targeted support programs for Black and minority students, goes well beyond what those precedents require, according to reporting by the Idaho Public Press.

Losing 501(c)(3) status carries significant financial consequences. As noted by Forbes in its coverage of the proposal, tax-exempt status enables donor deductions, lower borrowing costs, and tax-free endowment earnings; losing it would render affected institutions taxable entities and raise their operating costs substantially.

The comment period closes Nov. 3, 2026, according to the Latham regulatory analysis. Treasury and the IRS said they expect to finalize the rule before May 31, 2027, the date the regulations would take effect for most affected institutions. Legal challenges are widely anticipated before any final rule goes into force.

Sources cited:
- IRS IR-2026-103 / Treasury Press Release (https://home.treasury.gov/news/press-releases/sb0621)
- Federal Register: Racial Nondiscrimination in Private Schools (REG-119986-25) (https://www.federalregister.gov/documents/2026/09/04/2026-18127/racial-nondiscrimination-in-private-schools)
- CNBC (https://www.cnbc.com/2026/09/03/treasury-irs-proposal-tax-exempt-schools-charitable-donations.html)
- Latham Regulatory Analysis (Beyond the First 100 Days) (https://www.lathamreg.com/2026/09/irs-proposal-would-tie-tax-exempt-status-to-expanded-racial-nondiscrimination-policies-in-private-schools/)
- UPI (https://www.upi.com/Top_News/US/2026/09/03/trump-administration-private-schools-race-tax-exempt/4431788453431/)
- Idaho Public Press (https://idahopublicpress.com/proposed-irs-rule-could-end-tax-exempt-status-for-schools-with-race-based-programs/)
- Forbes (https://www.forbes.com/sites/nathangoldman/2026/09/03/irs-just-put-18000-private-schools-tax-exempt-status-on-notice/)