The U.S. Department of the Treasury and Internal Revenue Service have proposed regulations that would make racial nondiscrimination an express condition of federal tax-exempt status for various primary and secondary schools, including private K-12 schools. The proposal treats race-conscious policies as discriminatory even when intended to promote diversity or remedy disadvantage. If finalized in their current form, a school's use of race as a criterion—even for a remedial or diversity-related purpose—could jeopardize its federal tax-exempt status.
The proposed regulations would place in jeopardy schools’ loss of tax-exempt status under Section 501(c)(3) if they adopt, maintain or enforce a policy or practice that discriminates on the basis of race, color or national or ethnic origin. Although the basic premise of nondiscrimination based on race is not new, (the Supreme Court's 1983 decision in Bob Jones University v. United States upheld the IRS's denial of tax-exempt status to private schools maintaining racially discriminatory policies), the proposed regulations would explicitly extend the nondiscrimination prohibition to race-conscious action taken for a remedial or diversity-related purpose and would eliminate the safe harbor under prior Treasury guidance for schools to favor racial minority groups in admissions or financial aid to promote a nondiscriminatory environment.
The new regulations are heavily informed by the Supreme Court's more recent decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, which held that the race-conscious college admissions programs violated federal law. The regulations are also consistent with other regulatory actions taken by the Trump administration.
The proposed regulations would apply not only to policies excluding students because of race but to race-conscious policies adopted for any purpose, including policies intended to promote diversity or remedy the effects of past discrimination. For private schools, the practical consequence is significant because a violation could lead to the loss of tax-exempt status on which private schools rely.
The Proposed Rule
The proposed regulations provide that a private school would not be considered operated exclusively for exempt purposes if it “adopts, maintains, or enforces” a policy or practice that discriminates on the basis of race, color or national or ethnic origin in:
- educational policies;
- admissions;
- scholarships or loans;
- athletics; or
- other school-administered or school-supported programs.
Significantly, the proposal provides that discrimination includes discrimination based on race, color, or national or ethnic origin “for any purpose.” Thus, the proposed rule does not distinguish between policies adopted for an exclusionary purpose and policies adopted for remedial, diversity-related or other purposes.
If finalized as proposed, the rule would apply to taxable years beginning on or after May 31, 2027. Treasury and the IRS also propose to remove provisions of Revenue Procedure 75-50 that currently provide that certain policies favoring racial minority groups may be consistent with a school's racially nondiscriminatory policy when designed to promote nondiscrimination.
Don’t Panic, Prepare
It is far from certain that the rule in its current form would impact schools in the near future. The final rule could differ materially from the proposal and litigation is possible, if not likely, if Treasury adopts the rule in its current form. Even if the rule did become effective, schools will not automatically lose their tax-exempt status. The process for revoking tax-exempt status is long and complicated, with substantial opportunity for court review and appeal.
Nevertheless, the proposal is part of a broader enforcement strategy by the federal government and potential litigation strategy by private plaintiffs to limit or prohibit the use of race in any decision-making process. Even if schools do not make any immediate changes, there is good reason for schools to begin reviewing their policies and planning for the future.
Conduct a Race-Conscious Policy Inventory
Schools should consider identifying existing policies, programs and scholarships for which race, color, ethnicity or national origin is an express eligibility factor or is otherwise considered in decision-making.
The review can extend beyond admissions to include financial aid, fellowships, mentoring and leadership programs, student organizations and affinity groups, athletics and other school-supported activities.
Scholarships should be given special attention, and to the extent any donor-restricted funds specifically address racial criteria, schools should be understanding and evaluating their ability to make changes to the programs and determining whether donor consent or court approval may be required.
Evaluate Risk and Consider Alternatives
Once programs are identified, schools should consider evaluating the risk associated with each and whether changes could be made that reduce risk while still serving the goals of the programs. For programs designed to address disadvantages or expand opportunities, schools should consider whether eligibility can instead be based on socioeconomic or other individualized criteria. Potential alternatives include income, geographic disadvantage, educational opportunity, individual hardship or other measures of disadvantage.
Proceed Cautiously
Wholesale changes are not warranted yet. But schools should consider beginning to examine their programs so that if changes are to be made, they have time to proceed cautiously and thoughtfully, after a full review of all information and alternatives. Schools also should consider whether any review should be conducted in coordination with legal counsel, which could help shield the school’s analysis and deliberations from subsequent disclosure or discovery.
What Comes Next?
The proposed regulations are subject to notice-and-comment rulemaking. The proposal states that Treasury and the IRS expect to finalize the regulations before May 31, 2027, with the rules applying to taxable years beginning on or after that date. Many organizations representing schools are preparing comments to the proposed regulations, and schools that wish to participate in the notice-and-comments process may wish to consider reaching out to such organizations.
Miles & Stockbridge’s education law lawyers are monitoring the progress of the rule and will provide updates as the rulemaking process—and potentially subsequent litigation—unfolds.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.