Proposed IRS Regulations Impose New Racial Nondiscrimination Requirement to Qualify for 501(c)(3) Tax-Exempt Status

On September 4, 2026, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued proposed regulation §1.501(c)(3)-2 (the “Proposed Regulations”), which require private schools to comply with a racial nondiscrimination requirement in their policies and programs to qualify for Internal Revenue Code (“IRC”) §501(c)(3) tax-exempt status. Of particular note, the Proposed Regulations would treat race-based action for the purpose of ameliorating societal discrimination as prohibited discrimination. According to the preamble to the Proposed Regulations, 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 therefore preclude a school’s tax exemption under §501(c)(3).

If finalized, the Proposed Regulations would apply to any taxable year of a private school beginning after May 31, 2027.[1] Comments on the Proposed Regulations are due by November 3, 2026.

To protect their tax-exempt status, private schools should review their existing policies and programs well in advance of May 31, 2027, in the event the Proposed Regulations are finalized as proposed, and continue to follow developments regarding the Proposed Regulations.

Proposed Regulations – Additional Detail

General Rule – Proposed §1.501(c)(3)-2(a)

A private school that fails to satisfy the nondiscrimination requirement does not qualify as a §501(c)(3) tax-exempt organization with respect to any taxable year of the private school beginning after May 31, 2027.

Nondiscrimination Requirement - Proposed §1.501(c)(3)-2(b)

• A private school is not operated exclusively for exempt purposes (and therefore does not qualify as a §501(c)(3) tax-exempt organization) if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program. For this purpose, “discrimination on the basis of race, color, or national or ethnic origin includes any discrimination on the basis of race, color, or national or ethnic origin for any purpose.” (emphasis added) As set forth above, prohibited discrimination includes race-based action for the purpose of ameliorating societal discrimination.
• Treasury and the IRS appear to say that using alternative criteria in lieu of racial or ethnic criteria – such as income, geography, or first-generation student status – in its programs or policies does not violate the nondiscrimination requirement, at least with respect to programs funded by third-party donors.[2]
• According to the preamble, the Proposed Regulations 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, so long as the selection criteria is based solely on religion and not on shared ancestry or ethnic characteristics.

Definition of Private School - Proposed §1.501(c)(3)-2(c)

• A “private school” means a §501(c)(3) organization that is classified as an educational organization described in IRC §170(b)(1)(A)(ii), which is an organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.[3]
• Private schools include private primary and secondary schools, colleges, professional and trade schools, and universities.[4] However, it is unclear whether other §501(c)(3) organizations that are classified as §170(b)(1)(A)(ii) educational organizations – for example, many preschools – are intended to be covered by the regulation.
• A private school does not include a governmental unit, an agency or instrumentality of a governmental unit, or an organization that is owned or operated by an agency or instrumentality of a governmental unit. For this purpose, a “governmental unit” means the United States, a State, an Indian Tribal government, the District of Columbia, a possession of the United States, or a political subdivision of any of the foregoing. It is unclear whether a governmental organization that is also a Section 501(c)(3) organization is intended to be subject to the Proposed Regulations.

Conforming Changes to IRS Rev. Proc. 75-50

IRS Rev. Proc. 75-50 (as modified by IRS Rev. Proc. 2019-22) sets forth guidelines and recordkeeping requirements for determining whether private schools applying for §501(c)(3) tax-exempt status, or that are presently recognized as tax-exempt, have racially nondiscriminatory policies as to students.

If the Proposed Regulations are finalized, the preamble states that the following changes will be made to IRS Rev. Proc. 75-50, effective for taxable years of private schools beginning after May 31, 2027:

• The second sentence of Sec. 3.02 in bold below will be deleted due to being incompatible with §1.501(c)(3)-2.

  “The Service considers discrimination on the basis of race to include discrimination on the basis of color and national or ethnic origin. 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.” (emphasis added)

• The third and fourth sentences of Sec. 4.05 in bold below will be deleted due to being incompatible with §1.501(c)(3)-2.

  “Scholarship and loan programs. As a general rule, all scholarship or other comparable benefits procurable for use at any given school must be offered on a racially nondiscriminatory basis. Their availability on this basis must be known throughout the general community being served by the school and should be referred to in the publicity required by this section in order for that school to be considered racially nondiscriminatory as to students. Consistent with section 3.02, supra, scholarships and loans that are made pursuant to financial assistance programs favoring members of one or more racial minority groups that are designed to promote a school's racially nondiscriminatory policy will not adversely affect the school's exempt status. Financial 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 (emphasis added).

If you have any questions about the Proposed Regulations, please reach out to K&B Nonprofit or Education attorneys Bettina Toner (btoner@kb-law.com), Elka Sachs (esachs@kb-law.com), Jonathan Cohen (jcohen@kb-law.com), and Marguerite Lombardo (mlombardo@kb-law.com).

Krokidas & Bluestein’s Nonprofit Law Practice provides a full array of advice and guidance to nonprofit organizations of all types, on a wide range of legal matters, including tax exemption, nonprofit governance, public charities law, mergers, acquisitions and corporate affiliations, regulatory and compliance matters, employment, real estate, financing and litigation.

Krokidas & Bluestein LLP’s Education Law Practice provides a full array of advice and guidance to charter schools and other education entities on a wide range of legal matters, including student discipline, special education, employment, governance, tax, regulatory and compliance matters, real estate, financing and litigation.

[1] According to the preamble, Treasury and the IRS expect to finalize the Proposed Regulations, with any necessary modifications based on timely comments received, in advance of May 31, 2027.

[2] With respect to scholarships and loans endowed by donors, the Special Analyses of the Economic Effects of the Proposed Regulations states: “The Treasury Department and the IRS expect that donors may continue to donate to private schools using alternative criteria, such as income, geography, or first-generation student status. The use of these alternative criteria results in a weaker relationship with race and ethnicity and a stronger relationship with other indicators of disadvantage such as income.” (Footnote omitted)

[3] The preamble notes that Treasury Regulation §1.170A-9(c)(1) provides that an “educational organization” is described in §170(b)(1)(A)(ii) if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. It should be noted that the Eighth Circuit Court of Appeals determined that Treasury Regulation §1.170A-9(c)(1) imposed requirements not consistent with the definition of “educational organization” in statutory provision §170(b)(1)(A)(ii), namely the requirement that an organization’s primary function must be the presentation of formal instruction in order to be considered a qualified educational organization. Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021). If that analysis is accepted by the First Circuit, it is possible that the Proposed Regulations would be interpreted to apply to a broader class of educational organizations in Massachusetts.

[4] The preamble states that the Proposed Regulations would “make clear to all private schools (that is, all private primary and secondary schools, colleges, professional or trade schools, and universities) the need to eliminate all impermissible racially discriminatory policies incompatible with the benefit of Federal income tax exemption.” (emphasis added).