Administration Seeks to Condition Tax-Exempt Status on Race-Neutral Admissions, Scholarships, and Educational Policies

The U.S. Department of the Treasury and Internal Revenue Service (IRS) issued proposed regulations on September 3, 2026, that would deny or revoke federal tax-exempt status for private educational institutions that engage in racial discrimination in admissions, scholarships, financial aid, athletics, or other school-administered programs. If finalized, the proposal would represent one of the most significant federal tax developments affecting educational institutions in decades and reflects a broader Administration effort to use the tax code as a tool to enforce nondiscrimination standards.

The regulations would apply to private elementary and secondary schools, colleges and universities, professional schools, and trade schools. Treasury estimates that as many as 18,000 educational institutions could be affected. Comments to the proposed regulations are due 60 days from the publication date.

Expansion Beyond the Supreme Court’s Admissions Decision

The proposal builds on the Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard, which prohibited consideration of race in college admissions. Treasury’s proposal extends well beyond admissions and would apply across virtually all aspects of school operations.

Under the proposed rules, tax-exempt status could be jeopardized if a school maintains race-based policies involving:

• Admissions
• Scholarships and financial aid
• Student loan programs
• Educational policies
• Athletics
• Student organizations
• Mentorship programs
• Other school-administered or school-supported activities

Treasury would also eliminate prior IRS guidance that permitted certain race-conscious preferences in admissions, scholarships, programs, and financial assistance, concluding that those provisions are inconsistent with current Supreme Court precedent.

Importantly, schools would still be permitted to use race-neutral criteria such as family income, geography, first-generation status, military family status, hardship, and academic achievement. Religious institutions could continue to make admissions decisions based on religious affiliation consistent with current law.

Significant Financial Implications

The financial stakes are substantial. Tax-exempt status allows institutions to receive tax-deductible charitable contributions, access tax-exempt bond financing, and avoid taxation on much of their investment income. Loss of exempt status could significantly increase operating costs and affect fundraising efforts.

Treasury has indicated that final regulations would generally apply to taxable years beginning on or after May 31, 2027, providing affected institutions time to review and revise existing policies.

The Legal Foundation: Bob Jones University

Treasury grounds the proposal in a line of Supreme Court decisions including, Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions. According to Treasury, these decisions establish that eligibility for tax-exempt status is conditioned on compliance with fundamental public policy, including prohibitions against racial discrimination.

The most important precedent is Bob Jones University, where the Supreme Court upheld the revocation of a university’s tax-exempt status due to racially discriminatory policies. The Administration is now seeking to apply that principle to modern race-conscious admissions, scholarship, and programmatic policies.

The proposal is likely to face significant legal challenges if finalized.

Part of a Broader Treasury Oversight Agenda

This proposal should be viewed within the context of broader Treasury and congressional efforts to increase oversight of tax-exempt organizations.

Earlier this year, Treasury announced its Form 990 Transparency Initiative, designed to expand reporting requirements relating to government grants, government contracts, and fiscal sponsorship arrangements. Treasury characterized the initiative as an effort to strengthen transparency and accountability throughout the nonprofit sector. This initiative follows efforts by U.S. House Committee on Ways and Means to bring attention to what the Committee sees as a lack of transparency related to fiscal sponsorship arrangements. To that end, the Committee passed the Fiscal Sponsorship Transparency Act (H.R. 9721) on July 22, 2026.  

Taken together, the congressional efforts, Treasury’s Form 990 initiative, and the proposed educational institution regulations suggest a more aggressive approach toward administration and enforcement of the rules governing tax-exempt organizations. Educational institutions, foundations, and other charitable organizations should expect increased scrutiny of governance, reporting, and compliance practices.

For additional perspective on Treasury’s Form 990 initiative and its implications for nonprofit organizations, see prior analysis published in Thomson Reuters, “Former Congressional Tax Counsel Unpacks Planned Form 990 Overhaul.”

Bottom Line

While the immediate impact falls on private schools and universities, the proposal has significance for the broader nonprofit sector. Alongside Treasury’s Form 990 Transparency Initiative, it signals a growing willingness by the Administration to use federal tax law as a mechanism for setting standards of conduct and increasing oversight of tax-exempt organizations. Educational institutions, foundations, and charities should closely monitor these developments and evaluate whether existing policies and compliance frameworks may warrant review.