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Treasury proposes rule to strip tax-exempt status from schools with race-based programs

Treasury proposes rule to strip tax-exempt status from schools with race-based programs

Rule Changes

Proposal would end federal tax exemption for private schools that consider race in admissions, scholarships, or other programs

September 4th, 2026: Proposal published in Federal Register

Overview

Updated Sep 7

The Treasury Department proposed a rule on September 3 that would end federal tax-exempt status for private schools and colleges that give students any benefit based on race. The Internal Revenue Service estimates 18,000 institutions could be affected, along with 750,000 students holding race-based scholarships.

A school that loses tax-exempt status loses the deductibility of charitable donations, access to tax-exempt bonds, and other federal benefits. The rule would apply to admissions, scholarships, athletics, and every other school-administered program. It would take effect for taxable years beginning after May 31, 2027.

Why it matters

If this rule takes effect, donations to private schools lose their tax deduction unless schools end race-based admissions and aid programs.

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Key Indicators

18,000
Private schools potentially affected
Treasury and IRS estimate the rule could affect tax-exempt private primary, secondary, post-secondary, professional, and trade schools.
750,000
Students with race-based scholarships
Students who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity.
May 31, 2027
Proposed effective date
Rule would apply to taxable years beginning after this date, giving schools time to adjust policies.

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People Involved

Scott Bessent
Scott Bessent
Treasury Secretary
Leading the administration's push to tie tax-exempt status to anti-discrimination compliance
ST
Shiloh Theberge
Chair, higher education law practice at Fisher Phillips
Analyzing the rule's impact on minority-serving institutions
 Joe Rosenberg
Joe Rosenberg
Senior fellow, Urban-Brookings Tax Policy Center
Commenting on the tax consequences of the rule
 Jamie Beaton
Jamie Beaton
Co-founder and CEO, Crimson Education
Warning of a drop in charitable giving to affected schools

Organizations Involved

U.S. Department of the Treasury
U.S. Department of the Treasury
Federal agency
Issuing agency for the proposed rule

Issued the proposed rule on September 3, 2026, alongside the IRS.
Internal Revenue Service
Internal Revenue Service
Federal tax agency
Co-issuing agency and administrator of tax-exempt status

Co-issued the proposed rule and estimates 18,000 institutions could be affected.

Timeline

June 2023 September 2026

3 events Latest: September 4th, 2026 · 2 months ago

  1. Proposal published in Federal Register

    Latest Procedural

    Proposed regulations published, opening the public comment period before finalization.

  2. Treasury proposes tax-exemption rule

    Regulation

    Treasury and IRS propose ending tax-exempt status for schools with race-based programs, covering 18,000 institutions and 750,000 scholarship students.

  3. Supreme Court strikes down race-based admissions

    Legal

    Court rules Harvard and UNC admissions policies violate the Equal Protection Clause.

Scenarios

1

Treasury finalizes tax-exemption rule for May 2027

Likely Resolves by May 31, 2027

Discussed by: Treasury and IRS statements, Federal Register notice

The public comment period closes and Treasury publishes a final rule largely unchanged from the proposal. Schools that maintain race-based policies lose tax-exempt status for taxable years beginning after May 31, 2027. Treasury and IRS have said this is the expected timeline, with affected institutions given time to amend policies before the rule applies.

2

Court blocks Treasury's tax-exemption rule

Possible Resolves by End of 2027

Discussed by: Shiloh Theberge of Fisher Phillips; Inside Higher Ed analysis

Nonprofit schools or civil rights organizations file suit arguing the rule exceeds Treasury's statutory authority under the Internal Revenue Code or violates First Amendment associational rights. A federal court issues an injunction before the May 2027 effective date, halting enforcement pending appellate review. Affected institutions, particularly HBCUs and tribal colleges, would be the likely plaintiffs.

3

Treasury modifies rule after comment period

Possible Resolves by May 31, 2027

Discussed by: Coverage in Inside Higher Ed and Bloomberg Tax

Under pressure from religious schools and minority-serving institutions during the comment period, Treasury narrows the rule. Possible changes include exemptions for religious schools' admissions based on genuine religious affiliation, grandfathering existing scholarships, or limiting the rule to admission policies rather than all school programs. Treasury has already noted religious schools may continue selecting students based on religious membership.

Historical Context

3 moments from history that rhyme with this story — and how they unfolded.

May 1983

Bob Jones University v. United States (1983)

The Supreme Court upheld the IRS's decision to deny tax-exempt status to Bob Jones University, a private Christian school that banned interracial dating. The Court ruled that tax exemption requires compliance with fundamental public policy, which prohibits racial discrimination.

Then

The IRS retained power to deny tax exemption for racial discrimination. The principle became settled law.

Now

Established that tax-exempt status is conditioned on non-discrimination, a standard Treasury says this rule simply codifies.

Why this matters now

This is the direct legal precedent Treasury cites for linking tax exemption to anti-discrimination policy.

May 1954

Brown v. Board of Education (1954)

The Supreme Court ruled that racial segregation in public schools violates the Fourteenth Amendment's Equal Protection Clause, overturning the separate but equal doctrine.

Then

Desegregation orders followed; resistance was often violent and prolonged.

Now

Established racial non-discrimination as fundamental public policy in American education.

Why this matters now

Treasury cites Brown as the foundation of the public policy requiring non-discrimination in education.

June 2023

Students for Fair Admissions v. Harvard (2023)

The Supreme Court struck down race-conscious admissions policies at Harvard and the University of North Carolina, ruling they violate the Equal Protection Clause.

Then

Colleges ended race-based admissions policies; some shifted to income or geographic criteria.

Now

Provided the legal basis for arguing that race-based programs in education are unconstitutional under current law.

Why this matters now

Treasury cites this ruling to argue that race-based scholarships and other programs are discriminatory, not merely admissions.

Sources

(14)
+8
Federal Register U.S. Department of the Treasury CNBC Inside Higher Ed Reuters NPR Bloomberg Tax Education Week Los Angeles Times ABC News Internal Revenue Service Newsweek Holland & Knight PBS News