On September 3, 2026, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued proposed regulations (“Proposed Regulations”) that provide that a “private school” is not described as an educational organization exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”) if it does not satisfy a new race-based “nondiscrimination requirement.”
The scope and application of the new race-based nondiscrimination requirement is extremely broad and has the potential to adversely impact thousands of private schools that are currently tax exempt, as well as hundreds of thousands of students. Private school educational policies, scholarship and loan programs, and athletic programs will be potentially impacted by the Proposed Regulations.
What Private Schools are Subject to the Proposed Regulations?
Under the Proposed Regulations, the term “private school” means an organization described in Code section 501(c)(3) (without regard to the new nondiscrimination requirement of the Proposed Regulations) and classified as an educational organization described in Code section 170(b)(1)(A)(ii). The term does not include a governmental unit, an agency or instrumentality of a governmental unit, or an organization that is owned or operated by an agency or instrumentality of a governmental unit. As such, the Proposed Regulations do not apply to public or state schools, colleges, or universities.
The Proposed Regulations would apply to all tax-exempt private schools meeting the above definition, including primary, secondary, preparatory, or high schools, colleges and universities, and professional and trade schools.
The Treasury and the IRS estimate that the Proposed Regulations may affect the 18,000 private elementary, secondary, and post-secondary schools in the United States that qualify for tax-exempt status and the 750,000 students attending these schools who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity. The Proposed Regulations may also affect taxpayers who donate to scholarship funds administered by private schools that use racial criterial to determine scholarship eligibility.
What is the New Nondiscrimination Requirement?
A private school must be operated exclusively for one or more exempt purposes to be an organization described in section 501(c)(3). Under the new nondiscrimination requirement, a private school is not operated exclusively for 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, or other school-administered or school-supported program.” Discrimination on the basis of race, color, or national or ethnic origin includes any discrimination on the basis of race, color, or national or ethnic origin for any purpose. This would include the supposed educational benefits of a diverse student body.
The new nondiscrimination requirement would eliminate certain safe-harbor provisions of Rev. Proc. 75-50 that currently permit tax-exempt private schools to favor racial minority groups with respect to admissions, facilities and programs, and financial assistance.
The new nondiscrimination requirement would not 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. Use of a religiously-based selection criterion does not become discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may also share ancestry or ethnic characteristics (so long as the selection criteria is based solely on religion and not on shared ancestry or ethnic characteristics).
Similarly, the Proposed Regulations would not disturb the continued ability of an organization (including a private school) to take actions or adopt policies intended to eliminate prejudice and discrimination, provided the organization achieves these purposes by means other than actions or policies that discriminate on the basis of race, color, or national or ethnic origin.
The Proposed Regulations are not expected to affect private school athletic programs where inclusion is generally based on athletic ability rather than race or ethnicity. In addition, the Treasury and the IRS expect that donors may continue to donate to private schools using alternative criteria, such as income, geography, or first-generation student status. What is not known is the extent to which the IRS may view using such criteria as an indirect method of achieving what is not permitted more directly under the Proposed Regulations.
Next Steps for Tax-Exempt Private Schools
The Treasury and the IRS expect that private primary and secondary schools, in order to maintain their tax-exempt status, will adjust their admissions, scholarship, and loan criteria to conform to the Proposed Regulations.
Although the Proposed Regulations are not final (and could be subsequently modified based on comments to the Proposed Regulations or rescinded or delayed by litigation or other challenges), private schools that are tax exempt under Code section 501(c)(3) should determine the extent to which any of their current school-administered or school-related policies and programs—including those related to education, admissions, scholarships, loans, financial aid, and athletics—are not in compliance with the nondiscrimination requirement.
To the extent their policies and programs are not in compliance, private schools should begin to revise their affected policies and programs in order to comply with the new nondiscrimination requirement by the effective date of the Proposed Regulations. Private schools will also need to review existing programs established by donor gifts and bequests which provide benefits for underrepresented groups. In some cases, it may be necessary to obtain donor or judicial modification of such gifts in order to comply with the new nondiscrimination rules.
Finally, it is not known how aggressively the IRS will be able to enforce the Proposed Regulations against 18,000 tax-exempt private schools given current IRS staffing and budget reductions.
Comments and Effective Date of the Proposed Regulations
Comments on the Proposed Regulations must be submitted by November 3, 2026. The Proposed Regulations apply with respect to the taxable years of any private school beginning after May 31, 2027. The Treasury and IRS expect to finalize the Proposed Regulations, with any modifications based on comments received, in advance of May 31, 2027.
For More Information
For more information or if you have any questions regarding the Proposed Regulations, please visit our Higher Education Web Page (Higher Education | Thompson Coburn LLP); or contact one of the following attorneys:
Larry Katzenstein in St. Louis Missouri at 314-552-6187 ([email protected])
Rick Lawton in St. Louis Missouri at 314-552-6070 ([email protected])
Jackie Dimmitt in St. Louis, Missouri at 314-552-6588 ([email protected])
