IRS Proposes Section 1.501(c)(3)-2 to Tighten Racial Nondiscrimination Rules for Private Schools

The Treasury Department and the IRS issued a proposed rule September 3, 2026, that would put private schools using race-based policies at risk of losing their tax exemptions. The measure would treat discrimination in admissions, scholarships, loans, athletics and other programs as evidence that a school is not operated exclusively for charitable purposes.

The proposal would add Section 1.501(c)(3)-2 to the Treasury regulations. It is titled “Racial Nondiscrimination in Private Schools” and carries the identifiers REG-119986-25 and RIN 1545-BS05.

Treasury Secretary Scott Bessent said schools could not avoid that result by changing the language around their programs.

“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature.”

Frank J. Bisignano, the IRS CEO and acting head, said the proposal was intended to warn institutions that continue using racial discrimination.

“Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status.”

The proposed standard would cover private education from elementary instruction through advanced professional training. Treasury and the IRS said its reach would include primary schools, secondary schools, colleges, professional schools, and trade or vocational schools.

The listed programs extend beyond admissions. The proposal discusses scholarships, loans, facilities, athletics and other school programs, including policies that favor or exclude students because of race.

The proposal draws a line between race-based and race-neutral selection

The agency’s approach would not bar schools from using every factor connected to student access. It preserves criteria that do not classify students by race.

Religious schools would retain room to maintain their religious missions. They could also select students based on genuine religious affiliation or membership.

The proposed rule does not describe those standards as racial preferences. It instead targets policies that use race directly, including programs described as race-conscious or affirmative-action-based.

The rule would amend the charitable-activity regulation

The measure would amend Treasury Regulation §1.501(c)(3)-1(d)(2), the provision defining charitable activity for organizations seeking tax-exempt status under 501(c)(3). The new language would say schools engaging in racial discrimination are not operated exclusively for charitable purposes.

Treasury and the IRS said all forms of racial discrimination in education conflict with the United States’ fundamental public policy. The proposal applies that reasoning even when a school describes the policy as “equitable,” “inclusive,” or “diversity-enhancing.”

It also refers to discrimination defended as remedial or diversity-related. The government’s stated position is that the justification does not change the racial character of the policy.

That position relies on a Supreme Court precedent. In Bob Jones University v. United States, the court upheld the denial of a tax exemption to a private school that discriminated against African Americans.

The proposal appears designed to clarify how that public-policy doctrine applies after Students for Fair Admissions v. Harvard and UNC in 2023. That case has become part of the backdrop for the administration’s treatment of race-conscious programs in education.

The proposal could reach about 18,000 institutions

The IRS said the rule could affect up to 18,000 private educational institutions. A separate 2026 analysis also used an estimate of about 18,000 schools, although that figure came from commentary rather than an official government release.

Schools that continue race-based admissions or financial-aid policies would face the direct tax-exemption issue described in the proposal. The measure focuses on the conditions for charitable status, rather than creating a separate admissions rule for every private school.

Existing IRS guidance already requires private schools seeking exemption to adopt, publicize and operate under a racially nondiscriminatory policy. The new proposal would spell out how the agency says the public-policy principle applies to race-based practices across school programs.

The public-comment process now stands between the proposal and enforcement

The measure remains a proposed regulation, not a final rule. Treasury must complete notice-and-comment procedures before issuing a final version.

The White House completed its regulatory review on August 23, 2026, under the Office of Information and Regulatory Affairs. A separate tax-law account placed OIRA’s review completion on August 18, 2026.

One projected timetable calls for final regulations by May 31, 2027. Under that account, the rule would apply to taxable years beginning after May 31, 2027.

That timetable is not yet an operative requirement for schools. The proposal was publicly issued on September 3, 2026, and its text remains subject to changes during the rulemaking process.

Tax lawyers are already disputing the government’s authority

Alexander Reid, National Leader of BakerHostetler’s Tax-Exempt Organizations and Charitable Giving team, argued that Treasury lacks authority to impose a broad fundamental-public-policy requirement beyond the statute itself.

Critics in the nonprofit tax bar say the administration is extending the public-policy doctrine beyond the text of 501(c)(3) and beyond the holding in Bob Jones. Their argument challenges the legal foundation of the proposed regulation, not the proposal’s description of the programs it would cover.

Treasury and the IRS frame the measure differently. They describe it as an enforcement step against racial discrimination carried out through institutions receiving federal tax benefits.

The next formal step is notice and comment. Until Treasury completes that process and issues a final regulation, the September 3 proposal remains the government’s stated position rather than an effective final standard.