The IRS proposes to make race-conscious programmes cost a school its tax exemption

The Internal Revenue Service and the Treasury Department proposed a rule on 4 September 2026 that would write into regulation the principle that a racially discriminatory private school is not tax exempt.¹ The proposal adds a new 26 CFR 1.501(c)(3)-2, issued under section 7805(a), and would apply “in taxable years beginning after May 31, 2027.”¹ Treasury and the IRS estimate it “may affect the 18,000 private elementary, secondary, and post-secondary schools in the United States that currently 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.”¹ Comments and requests for a public hearing are due 3 November 2026; the proposal provides that a hearing “will be scheduled if requested in writing by any person that timely submits electronic or written comments.”¹ It follows the Office of Legal Counsel’s opinion of 9 June 2026 on disparate impact (see OLC holds the EEOC’s disparate-impact rules unconstitutional) and the Commission’s rescission of the Title VII affirmative action guidelines on 6 July 2026 (see The EEOC removes the Title VII affirmative action safe harbor).²³

1. The codified rule is old; the extension is not. Bob Jones University v. United States held in 1983 that the IRS did not exceed its authority in announcing its interpretation of section 501(c)(3), and upheld the revocation of exempt status for schools maintaining racially discriminatory policies.¹⁴ What the proposal adds is a scope clause: it would provide that “all forms of racial discrimination in education, 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), are against a fundamental public policy of the United States and thus preclude a school’s exemption from Federal income tax under section 501(c)(3).”¹ The next sentence generalises it — “discriminating based on race, color, or national or ethnic origin for any purpose by a private school is contrary to a fundamental public policy.”¹ The agencies’ own summary states that the rule “would further define race-based action for the purpose of ameliorating societal discrimination as a form of discrimination.”¹ There is no materiality threshold: proposed § 1.501(c)(3)-2(b) reaches a school that “adopts, maintains, or enforces any policy or practice” that discriminates.¹

2. The permission being withdrawn is explicit, datable, and wider than scholarships. Revenue Procedure 75-50 currently provides that “[f]inancial assistance programs favoring members of one or more racial groups that do not significantly derogate from the school’s racially nondiscriminatory policy similarly will not adversely affect the school’s exempt status.”¹ The proposal states that portions of that procedure “would be incompatible with the new rules,” and specifies the surgery: Rev. Proc. 75-50, as modified by Rev. Proc. 2019-22, “would be modified by deleting the second sentence of section 3.02 and the third and fourth sentences of section 4.05.”¹ The deleted sentence of section 3.02 is the broader of the two: it provides that a “policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance will not constitute discrimination on the basis of race when the purpose and effect is to promote the establishment and maintenance of that school’s racially nondiscriminatory policy as to students.”¹ A minority scholarship programme expressly safe since 1975 would stop being safe. The agencies’ own economic analysis expects substitution rather than loss of status: schools “may use a different mechanism for allocating scholarships and loans to recipients, for example, using geographic or income-based criteria in lieu of a racial or ethnic criterion,” a shift “not expected to result in significant compliance costs.”¹

3. The reach is wider than the litigation that produced the doctrine. Students for Fair Admissions was decided under the Equal Protection Clause and Title VI, which bind state actors and recipients of federal funds.¹⁵ The proposal’s own chain already includes a private-actor rung: it cites Runyon v. McCrary, 427 U.S. 160 (1976), as “holding that 42 U.S.C. 1981 (Section 1981) bars a private school from discriminating against applicants based on their race,” and notes the Court confirmed the same year “that the protections of Section 1981 apply equally to all persons regardless of race.”¹⁶ What the exemption condition adds to section 1981 is the sanction: loss of section 501(c)(3) status rather than a damages action by an applicant. The rule defines “private school” as an organisation “described in section 501(c)(3) and classified as an educational organization described in section 170(b)(1)(A)(ii),” and excludes “a governmental unit, an agency or instrumentality of a governmental unit, or an organization owned or operated by an agency or instrumentality of a governmental unit.”¹ The public-policy evidence the rule offers runs “Brown to Runyon to Bob Jones to Students for Fair Admissions,” together with executive orders it cites from 10730 in 1957 to 14173 and 14280 in 2025.¹

4. Three carve-outs are stated. Religious schools are protected: the rule “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,” and religious selection does not become racial discrimination merely because a religious community shares ancestry — “so long as the selection criteria is based solely on religion and not on shared ancestry or ethnic characteristics.”¹ Anti-discrimination work survives on a condition: a school may still “take actions or adopt policies intended to eliminate prejudice and discrimination,” consistent with the existing § 1.501(c)(3)-1(d)(2), but only if it “achieves these purposes by means other than actions or policies that discriminate on the basis of race, color, or national or ethnic origin.”¹ The permitted end stays; the race-conscious means go. And the definition itself carves out government-owned and government-operated institutions entirely.¹