Administration Proposes Expanded Tax-Exempt Rules for Private Schools

Action: On September 4, the Treasury Department and Internal Revenue Service (IRS) proposed regulations that would deny Federal tax-exempt status under Section 501(c)(3) to private schools at all levels of education that “discriminate based on race, color, or national or ethnic origin in admissions, scholarships, loans, athletics, or other school-administered or supported programs.”

Trusted Insights for What’s Ahead^®

• The proposed rule represents a shift toward using the tax code as an additional mechanism for applying Federal nondiscrimination standards to all levels of private education. Comments are due November 3; a final rule would apply to taxable years beginning after May 31, 2027.
• The rule would revise longstanding IRS guidance that permitted certain racial preferences intended to further a school’s nondiscriminatory policy.¹ Treasury now proposes treating race-based distinctions as inconsistent with tax-exempt status regardless of their purpose, while permitting race-neutral criteria such as income, geography, or first-generation student status.²
• It relies on the Supreme Court’s 1982 Bob Jones University decision,³ which upheld revocation of tax-exempt status for a school whose practices violate fundamental public policy, and the Court’s 2023 Students for Fair Admissions (SFFA) decisions on race-conscious admissions. The proposed rule would apply that framework to scholarships and other school-supported programs.
• Treasury estimates the proposal could affect approximately 18,000 private schools and nearly 750,000 students potentially eligible for race-, ethnicity-, or national-origin-based scholarships. Because colleges have already revised admissions policies following SFFA, Treasury expects the main higher education effects to fall on scholarships and financial aid, including legal and administrative costs for institutions with donor-restricted funds, while anticipating that many schools and donors would shift to race-neutral criteria.
• Some groups have questioned the proposal’s legal and economic effects. One higher education organization argues that the rule exceeds Treasury’s authority and could affect institutions’ ability to attract donations and grants, bringing potential compliance burdens and legal uncertainty.⁴
• What This Means for CEOs
  • The rule raises a broad legal question of how far Treasury may extend the Bob Jones fundamental-public-policy doctrine following SFFA. Private universities and their corporate and philanthropic partners may need to review scholarships, restricted gifts, and other education programs using race or ethnicity.
  • For companies and foundations, the clearest tax exposure concerns charitable contributions: Section 170 of the Internal Revenue Code generally links deductibility to contributions to qualifying organizations.⁵ Commercial relationships, including research agreements, recruiting, and sponsorships, are governed separately and would not automatically be affected by a change in an institution’s 501(c)(3) status.
  • The longer-term business impact will depend on the final rule and how courts interpret Treasury’s authority to use tax-exempt status as an enforcement mechanism for race-related education policies beyond the admissions practices addressed in SFFA.