Background: Private school tax exemption and racial nondiscrimination
Section 501(c)(3) generally requires an organization to be organized and operated exclusively for charitable, educational or other exempt purposes. In the private school context, the IRS has long taken the position that an organization does not qualify for tax exemption if it maintains a racially discriminatory policy as to students.
The U.S. Supreme Court upheld the IRS’s position in Bob Jones University v. United States, 461 U.S. 574 (1983), concluding that racial discrimination in education is contrary to fundamental public policy and that schools maintaining racially discriminatory policies do not qualify for tax exemption under section 501(c)(3).
Existing IRS guidance defines a racially nondiscriminatory policy as one under which the school admits students of any race to all rights, privileges, programs and activities generally available to students and does not discriminate on the basis of race in educational policies, admissions, scholarships, loan programs, athletics or other school-administered programs. Existing guidance (Rev. Proc. 75-50) also clarifies that certain policies favoring racial minority groups do not constitute discrimination under specified circumstances.
Tax-exempt private schools generally report compliance with these requirements on Form 990, Schedule E. Schools not required to file Form 990 instead file Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax.
Proposed regulations
The proposed regulations are the result of a project identified by Treasury and the IRS in the 2025-2026 Priority Guidance Plan regarding racial nondiscrimination and private school tax exemption. The proposal also takes into account non-tax federal court decisions on the role and definition of racial discrimination in higher education, such as in admission policies.
Prop. Reg. section 1.501(c)(3)-2, titled Racial nondiscrimination requirement for private schools, would provide that a private school is not operated exclusively for section 501(c)(3) exempt purposes if it adopts, maintains or enforces any policy or practice that discriminates on the basis of race, color or national or ethnic origin in the administration of any:
- Educational policy
- Admissions policy
- Scholarship or loan program
- Athletic program
- Other school-administered or school-supported program
The proposed regulations further provide that discrimination on the basis of race, color, or national or ethnic origin includes such discrimination "for any purpose." A private school that fails to satisfy the nondiscrimination requirement would not qualify as an organization described in section 501(c)(3) for taxable years beginning after May 31, 2027.
The proposal would apply to private primary and secondary schools, colleges, professional or trade schools, and universities as described under section 170(b)(1)(A)(ii). Governmental units, agencies or instrumentalities, or organizations operated by governmental units would be excluded.
The government’s explanation accompanying the regulations
The proposed regulations are accompanied by a lengthy preamble, which does not constitute legally binding guidance but provides insight into Treasury’s and the IRS’s rationale for the proposal.
The preamble discusses historic and recent case law addressing racial discrimination in education and explains the government’s view that all forms of racial discrimination in education are contrary to fundamental public policy, regardless of the intent behind the policy or whether the policy is framed as “remedial or diversity-related.”
The preamble therefore notes that if the regs are finalized, Rev. Proc. 75-50 would be modified by deleting language that currently provides that certain policies and programs favoring racial minority groups do not constitute discrimination when designed to promote a school’s racially nondiscriminatory policy.
The preamble also states that the proposed regulations are not intended to preclude a private school from maintaining a religious mission, curriculum or program of observance, or from selecting students on the basis of religious affiliation or membership, provided the criteria are based on religion and not shared ancestry or ethnic characteristics. However, this distinction is not contained in the actual text of the regulations.
What’s next: Effective date and comment deadline
If finalized, the proposed regulations would apply to taxable years beginning after May 31, 2027.
Treasury and the IRS have requested that organizations interested in submitting comments on the proposed regulations do so by Nov. 3, 2026.
RSM insights
Section 501(c)(3) private schools can prepare for potential changes by evaluating how the proposed regulations may affect existing admissions, financial aid, scholarship, and student-support policies and programs.
Tax advisors can assist in evaluating the federal tax implications of the proposed regulations, assessing potential effects on tax-exempt status and related tax-reporting requirements, and preparing comments for submission to Treasury and the IRS.
