On September 3, 2026, the Treasury Department and the IRS issued a proposed regulation to end federal tax-exempt status for private schools that have policies or practices found to discriminate on the basis of race.

Overview of Regulation

The proposed regulation states that a private school is not operated exclusively for exempt purposes if it has any policy or practice that “discriminates on the basis of race, color, or national or ethnic origin” related to “any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program.” The rule applies to all private section 501(c)(3) educational institutions, including primary and secondary schools, colleges, universities, professional schools, and trade schools.

The supplementary information in the Notice of Proposed Rulemaking provides additional information on how the new regulation is likely to be applied:

• The background of this regulation explains that the “fundamental public policy” on which the regulation is based stems from several Supreme Court cases, including Brown v. Board of Education, Bob Jones University v. United States, and, most recently, Students for Fair Admissions v. Harvard.
• It further notes that any program that considers race or ethnicity may violate the regulation, “regardless of the intent behind or the legality of such discrimination (for example, where such discrimination is defended as serving remedial or diversity-related objectives).”
• The explanation of the provisions makes clear that private schools with programs or affiliations based on religion are not affected by this change. However, the proposed regulation itself is silent on the topic of religious schools. 
• Additionally, the new regulation would modify existing guidance. It removes Rev. Proc. 75-50’s safe harbors for certain admissions policies, programs, financial assistance, and scholarships favoring certain racial or ethnic groups when “the purpose and effect is to promote the establishment and maintenance of that school’s racially nondiscriminatory policy as to students.”
• The economic section of the Notice of Proposed Rulemaking suggests that donors could continue to donate using other socioeconomic characteristics, such as “income, geography, or first-generation student status.” It further acknowledges that such donations and scholarships may result in a population that is “similar” to that of recipients of donations based on race. 
  • Notably, this seems to conflict with the DOJ’s July 2025 guidance, which advised that use of certain characteristics, such as first-generation status or geographic targeting, could be unlawful proxies for race and achieve discriminatory outcomes.

The regulation includes a 60-day comment period and, if adopted, would take effect on May 31, 2027.

Implications for Section 501(c)(3) Organizations

This proposed regulation carries significant risks for schools with section 501(c)(3) status. It also suggests that the government is proceeding with new guidelines, and every tax-exempt entity—not just schools—may be affected as these guidelines continue to develop. The regulation seems to conflate diversity initiatives with racial discrimination—it does not define exactly what programs are “discriminatory” and expressly notes that diversity-related programs may be considered discriminatory under the rule. Together, these provisions would allow the IRS to make broad determinations about what may fall within the prohibition, and could ultimately result in the loss of tax-exempt status for educational institutions around the country.

The regulation also removes existing safe harbors and does not include exceptions, indicating that diversity-focused scholarships, fellowships, and pipeline programs may be squarely within the scope of the prohibition. 

As noted above, for other section 501(c)(3) organizations, this rule may preview additional regulations that the IRS could seek to implement more broadly across the tax-exempt sector in the post-Students for Fair Admissions landscape, and, even in its current form, may result in a chilling effect on all section 501(c)(3) organizations. 

WilmerHale has extensive experience helping educational institutions and other nonprofits navigate complex government enforcement issues, especially as the executive branch’s actions in this area continue. We are closely monitoring Administration and congressional actions, and are available to support schools and other nonprofits implicated in this developing landscape and have the capabilities to assist with comment preparation in response to the proposed regulation.