Treasury and IRS propose stripping tax-exempt status from private schools over race-based policies

The Trump administration moved this month to use the tax code as its most direct lever yet against race-conscious education policy, publishing proposed federal regulations that would strip 501(c)(3) tax-exempt status from any private school, K-12 through graduate level, that considers race, color, or national or ethnic origin in admissions, scholarships, athletics, or any other institutional program.

The Department of the Treasury and the Internal Revenue Service issued the proposed regulations on September 3, 2026, framing the action as delivering on President Trump's executive orders ending discrimination and restoring merit-based opportunity. The notice ran in the Federal Register on September 4 under docket REG-119986-25.

The financial stakes are immediate and concrete. Private schools that lose exempt status would face federal income tax on endowment returns, loss of donor deductibility for contributions, potential bondholder income inclusion on tax-exempt bonds, and possible grant clawbacks. For major research universities with multi-billion-dollar endowments, that exposure alone could run into the hundreds of millions of dollars per year.

What the rule actually says

The proposed regulations would deny tax-exempt status under Section 501(c)(3) to any private school that considers race, color, or national or ethnic origin in any school program or policy for any purpose, including remedial or diversity objectives. Comments are due by November 3, 2026, and if finalized the rules would first apply to taxable years beginning after May 31, 2027.

That last clause is significant. It is not a ban on any particular admissions practice as such. It is a tax determination. Schools that the IRS deems noncompliant would simply lose the federal benefits that flow from 501(c)(3) classification. The government has used that tool once before at scale: in Bob Jones University v. United States (1983), the Supreme Court held that a private school practicing racial discrimination could not qualify as tax-exempt because such discrimination violates a fundamental public policy against racial discrimination in education. Treasury is now invoking the same public-policy doctrine, but pointing it in a new direction.

The rule explicitly goes beyond the Students for Fair Admissions v. Harvard ruling that banned race-conscious admissions at colleges in 2023. The proposed regulations provide that all forms of racial discrimination in a private school's policies are contrary to U.S. public policy and preclude tax exemption. Under the proposed regulations, all race-conscious admissions or scholarship programs, even those framed as remedial or diversity-related, would be treated the same as prohibited discrimination.

Additionally, the proposal contemplates modifying Revenue Procedure 75-50 to delete existing safe harbors for policies favoring racial minority groups in admissions, programs and facilities, scholarships and financial assistance. That 1975 guidance has for decades been the IRS's standing interpretation of the Bob Jones framework. Erasing it would remove a layer of protection that historically black colleges and universities, Hispanic-serving institutions, and schools with targeted minority scholarship programs have relied on.

There is a carve-out for religion. The rule would eliminate longstanding IRS guidance allowing certain race-based preferences, while preserving religious schools' ability to select students based on genuine religious affiliation and permitting race-neutral criteria such as income, geography, and first-generation status.

Bessent and Bisignano put their names on it

Treasury Secretary Scott Bessent announced the rule personally. Bessent said, "Under President Trump, this Administration is standing up for America's students by ensuring racial discrimination has no place in American education," and added that "Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does 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. Having both the Treasury secretary and the IRS's top official attach their names to the announcement was deliberate; it signals this is not a staff-level regulatory matter but a priority the administration intends to defend.

Scale: 18,000 schools, 750,000 students

The Treasury Department and IRS estimate that the proposed regulations may affect as many as 18,000 private educational institutions and roughly 750,000 students. That number spans day schools in suburban counties, Ivy League universities, historically black colleges, and trade schools alike.

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.

Donors, too, are in the crosshairs. Despite its focus solely on schools, the proposed regulations could also impact donors that fund scholarships and certain academic programs, and could be used as a stepping stone to applying the administration's definition of discrimination against other tax-exempt organizations. Tax lawyers at Mondaq flagged that possibility specifically as a risk for foundations and philanthropies that fund race-targeted academic chairs or fellowship programs.

Legal fight virtually certain

The November 3 comment deadline is only the beginning of what legal analysts across the political spectrum expect to be extended litigation. Commentary from tax-exempt-organization specialists at NEO Law Group raised First Amendment and administrative-law concerns about using a broad "public policy" standard to determine tax exemption, arguing that such a condition could struggle to survive judicial scrutiny.

Analysts at The College Investor advise watching for three signals: whether major independent school associations request a public hearing, whether schools preemptively convert race-based scholarships to income-based criteria, and where the first lawsuit gets filed once the rule is final.

Given how quickly other education rules have drawn injunctions, a legal stay before the 2027 effective date is a real possibility. The administration's parallel effort to revoke Harvard's tax-exempt status over antisemitism concerns earlier this year drew an immediate federal court challenge, giving plaintiffs a ready-made procedural template for fighting this rule too.

The Association of Governing Boards of Universities and Colleges (AGB) put out an urgent advisory last week, telling member institutions to evaluate the potential financial, tax, fundraising, and operational consequences of any challenge to their Section 501(c)(3) status, identify partnerships and joint programs that could be affected, and ensure that legal counsel, advancement and foundation leaders, financial officers, enrollment leaders, and other relevant administrators are coordinating their review.

Washington context

This rule lands in a specific legislative and judicial moment. The Supreme Court's 2023 SFFA v. Harvard decision banned race-conscious admissions at colleges, but left scholarship programs, DEI offices, and affinity programming in a legal gray zone. The proposed IRS rule tries to close that zone using the tax code rather than waiting for fresh litigation. It is the most aggressive domestic regulatory action the administration has taken on higher education since earlier executive orders directing agencies to end DEI contracting.

Congress is largely on recess through mid-November, per the cancellation of the September 21 and 28 session weeks. The House has canceled the September 21 and September 28 session weeks, eliminating eight voting days and leaving four legislative days before members leave Washington until mid-November. That gives higher education lobbyists limited time on Capitol Hill to seek a legislative block before the comment period closes.

Democrats have no procedural mechanism to stop a notice-and-comment rulemaking. Their path is the courts, and several civil rights organizations were already preparing filings as of this week, according to reporting by Gibson Dunn and Holland & Knight attorneys following the docket.

What to Watch

• November 3, 2026: The public comment deadline for REG-119986-25. The volume and nature of comments from university associations, HBCU leaders, and civil rights groups will shape whether Treasury holds a public hearing and how it drafts the final rule.
• Pre-emptive policy shifts: Watch whether schools preemptively convert race-based scholarships to income-based criteria before the final rule takes effect, as many did after SFFA.
• The first lawsuit: Legal analysts widely expect a court challenge the day the final rule publishes. The question is venue: a D.C. Circuit challenge on administrative-law grounds, or a direct First Amendment suit filed in a friendlier circuit.
• HBCU response: Historically black colleges and universities have operated under specific IRS guidance protecting certain race-conscious programs since 1975. How Treasury addresses HBCU concerns in the final rule, or whether it does at all, will be among the most politically charged details in the rulemaking record.
• The Bob Jones question: The 1983 Supreme Court ruling gave Treasury authority to revoke Bob Jones University's exemption over racial discrimination. Courts will now have to decide whether that same doctrine can be deployed to reach affirmative-action programs rather than exclusionary ones. The legal theory runs in the opposite direction from its original application, and that tension sits at the center of every anticipated lawsuit.

Sources: IRS press release IR-2026-103 | U.S. Treasury press release | Federal Register, REG-119986-25 | Gibson Dunn analysis | Holland & Knight analysis | AGB advisory | Forbes | UPI