Treasury Proposes Stripping Tax Exemptions from Schools Using Race-Based Criteria

Key points

• Proposed regulations tie tax-exempt status to a broad nondiscrimination standard covering race, color, and national origin for private educational institutions.
• The rules would eliminate existing IRS guidance that permitted race-conscious policies for diversity purposes, applying the prohibition 'for any purpose.'
• Institutions risk losing federal tax-exempt status, which could end the deductibility of contributions and jeopardize state tax exemptions.
• The proposal specifically targets scholarships and financial aid conditioned on race, encouraging schools to use race-neutral proxies like income or first-generation status.
• Religious schools may still select students based on genuine religious affiliation, provided it is not a pretext for racial discrimination.

Background

This development follows the Supreme Court's 2023 decision in Students for Fair Admissions, which struck down race-conscious admissions at Harvard and UNC. The current proposal builds on the 1983 Bob Jones University case, which established that racial discrimination is contrary to public policy for charitable organizations. Earlier coverage noted that the IRS released these proposed regulations on September 3, 2026, with a 60-day comment period and potential effectiveness for taxable years beginning after May 31, 2027.

How outlets are covering it

Politico highlights the uncertainty and fear within the higher education sector, noting that the rules are 'unusually stringent' yet 'vague,' leaving institutions unsure if common practices like Black History Month could trigger penalties. Senator Sheldon Whitehouse questioned whether such cultural events would jeopardize tax-exempt status. In contrast, Buchanan Ingersoll & Rooney PC provides a detailed legal and compliance analysis, framing the proposal as a formalization of existing Supreme Court precedents. They emphasize the need for proactive policy reviews and donor engagement to mitigate risks, rather than focusing on the ambiguity of the rules. While Politico stresses the potential for overreach and financial instability, the legal analysis focuses on the technical requirements for maintaining compliance and the elimination of race-conscious diversity initiatives.

Why it matters

The potential loss of tax-exempt status would have severe financial consequences for private schools and universities, including higher borrowing costs and the loss of deductible donations. This could force a nationwide shift in how institutions approach diversity, equity, and inclusion, potentially replacing race-based criteria with socioeconomic or geographic measures. The outcome will determine whether private educational institutions can continue to use race-conscious policies to promote diversity without facing federal penalties.

What to watch

The proposed regulations are currently in a 60-day public comment period. Institutions are advised to review their policies, engage with donors to modify race-based restrictions, and document race-neutral alternatives. The final rules could take effect for taxable years beginning after May 31, 2027, depending on the outcome of the comment period and subsequent regulatory actions.