Global Daily Tax News, US Drafts Regulations To Remove Private Schools' Tax-Exempt Status, (Sep 10, 2026)

The US Treasury Department and the Internal Revenue Service have issued proposed regulations that underscore the Government's ability under law to strip private schools of federal tax-exempt status for engaging in racial discrimination.

The two agencies said, "Federal law provides tax-exempt status to organizations that operate exclusively for charitable and educational purposes. For decades, the Supreme Court has recognized that eligibility for tax-exempt status is conditioned on compliance with fundamental public policy, including the prohibition against racial discrimination."

"The proposed regulations update Treasury and IRS guidance to reflect that longstanding principle, as established in Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard, and provide greater clarity for private educational institutions regarding the nondiscrimination requirements associated with federal tax-exempt status."

Under the proposed rule, a private school would not qualify for Federal tax-exempt status under section 501(c)(3) if it adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin. The rule would apply across admissions, educational policies, scholarships and loans, athletics, and every other school-administered or school-supported program, the agencies said.

The proposed regulations would apply to tax-exempt private primary and secondary schools, colleges, universities, professional schools, and trade schools.

The proposal would also eliminate outdated provisions of IRS guidance that permitted schools to favor certain racial preferences in admissions, facilities, programs, scholarships, and financial assistance. Treasury and the IRS said they have concluded that these provisions are inconsistent with a uniform nondiscrimination standard and are incompatible with the Supreme Court's case law.

The proposal would not prevent a private school from maintaining a religious mission, curriculum, or program of religious observance. Religious schools may continue to select students based on genuine religious affiliation or membership to remain consistent with existing federal law, they said.

They said the proposal allows schools to continue expanding educational opportunity to assist disadvantaged students using race-neutral criteria such as family income, geographic location, first-generation status, individual hardship, military family status, or academic achievement when awarding admission or financial assistance. However, schools may not make decisions or confer benefits on the basis of race, color, or national or ethnic origin, they said.

The final regulations would apply to taxable years beginning on or after May 31, 2027.