Treasury Proposes Pulling Tax Exemptions From Private Schools With Race-Based Programs

A sweeping proposal—not a final rule

WASHINGTON — The Treasury Department and Internal Revenue Service proposed a regulation Thursday that would deny federal tax-exempt status to private schools and colleges that the government determines discriminate on the basis of race, color, or national or ethnic origin.

The 28-page notice, identified as REG-119986-25, was placed on public inspection September 3 and is scheduled for Federal Register publication September 4. It is a proposed rule, not a policy already in force. The public may submit comments and requests for a hearing for 60 days after publication.

Treasury and the IRS estimate that as many as 18,000 tax-exempt private educational institutions could be affected, including primary and secondary schools, colleges, universities, professional schools and trade schools. That estimate describes potential regulatory reach; it is not a finding that 18,000 institutions currently violate the proposed standard.

Read the source: Treasury Department: Official September 3 announcement and scope summary ↗

What conduct the proposal would cover

If finalized as written, the regulation would reach admissions, educational policies, scholarships and loans, athletics and other school-administered or school-supported programs. It would treat race-based distinctions as incompatible with section 501(c)(3) tax exemption even when a school describes them as remedial or diversity-related.

The proposal would remove portions of 1975 IRS guidance that allowed some preferences benefiting racial minority groups when designed to establish or maintain a school’s nondiscriminatory policy. Treasury says that older language conflicts with what it views as a uniform nondiscrimination rule.

Losing exemption can affect more than an institution’s own federal income-tax treatment. The Associated Press notes that nonprofit status also enables qualifying donations to be tax-deductible, making the rule potentially consequential for fundraising as well as school programs.

Read the source: Federal Register: Public-inspection page for proposed rule REG-119986-25 ↗

What schools could still consider

The proposal expressly permits schools to expand opportunity through race-neutral criteria, including family income, geographic location, first-generation status, individual hardship, military-family status and academic achievement.

It also says private schools may maintain a religious mission, curriculum and observance program and may select students based on genuine religious affiliation or membership. The proposed text says religion cannot be used as a substitute for decisions actually based on race, color, ancestry or ethnicity.

Programs intended to eliminate prejudice or discrimination could continue, according to the proposal, as long as they do not themselves confer or withhold benefits on one of the prohibited racial or ethnic grounds.

Read the source: Federal Register: Full 28-page proposed-rule PDF ↗

The administration’s legal argument—and the limits of today’s action

Treasury grounds the proposal in the national policy against racial discrimination reflected in Brown v. Board of Education, the Civil Rights Act, Bob Jones University v. United States and the Supreme Court’s 2023 Students for Fair Admissions decision restricting race-conscious college admissions.

Treasury Secretary Scott Bessent argues that relabeling race-based preferences as equity, inclusion or diversity does not change their character. The administration’s position is a policy and legal argument advanced in a notice of proposed rulemaking; it is not a new Supreme Court holding.

The proposal extends beyond admissions to scholarships, facilities, athletics and other programs. Whether a final version survives administrative-law or constitutional challenges cannot be known now. No court has reviewed this not-yet-final regulation.

Read the source: Associated Press: Independent report on the proposal and potential consequences ↗

Timeline, public participation and what remains unknown

The draft says final regulations would apply to taxable years beginning after May 31, 2027. That date does not turn the proposal into law automatically: Treasury must review comments, decide whether to revise or finalize the rule and publish a final action.

Still unknown are the final language, enforcement procedures, audit priorities, number of schools that would actually lose exemption, compliance costs and litigation outcome. The public-inspection document also cautions that only the official Federal Register edition supplies legal notice after publication.

The stakes demand precision from both sides. Schools should not present a proposal as an immediate revocation order, and federal officials should explain clearly how any final standard will distinguish unlawful discrimination from lawful race-neutral efforts to broaden educational opportunity.

The accompanying photograph is an authentic March 2007 image of the United States Treasury Building by Loren, released into the public domain. It does not show a school, student, alleged violation or rulemaking proceeding.

Read the source: Wall Street Journal: Independent report on the proposed IRS enforcement standard ↗