The Internal Revenue Service (IRS) published a Notice of Proposed Rulemaking (REG -119986-25) on September 3, 2026, that would add new regulations under Section 501(c)(3) imposing a strict nondiscrimination standard for private schools. Under the proposed regulations, a private school (as defined in Section 170(b)(1)(A)(ii) of the Internal Revenue Code, which includes higher education institutions such as colleges and universities) may not discriminate on the basis of race, color, or national or ethnic origin for any purpose in the administration of any of its educational, admissions, scholarship, athletic, or other programs or policies. Any single impermissible program or policy would jeopardize the federal tax-exempt status of the school. These proposed regulations would be effective for taxable years beginning after May 31, 2027.
Fundamental Policy of the United States
The Notice begins with an analysis of the federal legislation involving discrimination, the Supreme Court cases starting with Brown v. Board of Education through Students for Fair Admissions v. Harvard College, and the IRS' own revenue rulings and procedures. Following the analysis, the Notice concludes that race-based admissions policies, including affirmative action admissions and Diversity, Equity, and Inclusion (DEI) policies, do not survive strict scrutiny because they "lack sufficiently focused and measurable objectives warranting the use of race, unavoidably employ race in a negative manner, involve racial stereotyping, and lack meaningful end points." The Notice states that any race-based purpose, including ameliorating societal discrimination, does not constitute a compelling interest that justifies race-based action in a private school policy or program.
The Notice and proposed regulations provide that any racial discrimination in education – regardless of intent or legality – is contrary to the fundamental policy of the United States and therefore bars a private school from federal income tax exemption under Section 501(c)(3). This prohibition applies to all race-based programs, including affirmative action, DEI, and similar initiatives. In short, a private school that discriminates on the basis of race, color, or national or ethnic origin for any purpose cannot qualify for or maintain its Section 501(c)(3) status.
Applicability to Private Schools Only
The Notice and proposed regulations would apply only to private schools, as described in Section 170(b)(1)(A)(ii). A private school's primary function is to provide formal instruction; it ordinarily has a regular faculty, curriculum, and enrolled student body attending classes where its educational activities are regularly conducted. Private schools include primary, secondary, preparatory, and high schools, as well as colleges and universities. Federal, state, and other publicly supported schools are expressly excluded from the Notice and proposed regulations.
Other Exceptions from the Notice and proposed regulations
In addition, the Notice and proposed regulations would not prevent a private school with a religious mission from maintaining its mission, curriculum, or program of observance or selecting students based on such religious observance and not on race. The religious criteria, however, must not be a proxy for shared ancestry or ethnic discrimination.
Finally, the Notice and proposed regulations would not bar a private school from taking actions or adopting policies designed to reduce prejudice or discrimination, so long as those measures do not themselves discriminate on the basis of race, color, or national or ethnic origin.
Comments
The publication of the Notice and proposed regulations initiates a comment period that began September 3 and ends November 2, 2026. The Notice indicates that there are 18,000 private schools in the United States and 750,000 students currently in attendance at such schools. We expect that numerous organizations will file comments on the Notice and proposed regulations, including higher education and K-12 associations, religious organizations, and organizations with race-based/affirmative action or DEI scholarship or award programs.
Steps to Take Now
Private schools should use the period before the proposed regulations are expected to be finalized to conduct a prompt, comprehensive review of potentially affected policies and programs. This process should include:
- Identifying all educational, admissions, scholarship, athletic, and other policies and programs that may be subject to the proposed nondiscrimination standard;
- Reviewing each policy and program for race-based criteria, preferences, restrictions, effects, or other features that could be viewed as inconsistent with the Notice and proposed regulations;
- Reviewing donor-created scholarship, gift, and endowment programs that are implemented or managed by the school;
- Reviewing gift agreements carefully to determine whether changes are needed and whether donor consent would be required; and
- Amending any noncompliant policy, program, or agreement to align with the new nondiscrimination standard.
Failure to complete this review and make necessary changes could jeopardize the school's tax-exempt status under Section 501(c)(3). The Notice and proposed regulations are strict: a single noncompliant policy or program could adversely affect a school's exemption.
All institutions that may be impacted by this Notice and proposed regulations should consider whether to file comments within the 60-day comment period. The Notice and proposed regulations are sparse and guidance is minimal. Thus, filing comments highlighting the need for clarification is important. The Notice contains the procedures and steps necessary for the filing of comments, whether electronically or by hard copy. All comments filed will be published and may not be withdrawn once filed.
If you have any questions related to the Notice and proposed regulations or filing comments, please reach out to Mark A. Baugh, Jacqueline A. Henson, Linda A. Klein, or a member of Baker Donelson's Education Team.