Treasury and IRS Propose Regulations on Racial Nondiscrimination Requirements for Private Schools

The U.S. Department of the Treasury and the Internal Revenue Service have issued proposed regulations (REG-119986-25) that would formally incorporate racial nondiscrimination requirements into the Section 501(c)(3) regulations applicable to private schools. The proposal would clarify that a private school is not eligible for federal tax-exempt status if it discriminates on the basis of race, color, or national or ethnic origin in the administration of its educational, admissions, scholarship, athletic, or other school policies.

Background

The proposed regulations are intended to codify the long-standing principle that organizations seeking recognition as charitable organizations under Section 501(c)(3) must operate consistently with fundamental public policy. Treasury and the IRS explain that the United States has a fundamental public policy against racial discrimination in education and that private schools engaging in such discrimination are not entitled to tax-exempt status.

Key Provisions

Under the proposed rules:

• A private school that discriminates based on race, color, or national or ethnic origin would not qualify as an organization described in Section 501(c)(3).
• The prohibition would apply to the administration of educational, admissions, scholarship, athletic, and other school-related policies. For example, scholarships awarded exclusively to students of a particular racial or ethnic group, including programs designed to benefit historically underrepresented or minority populations, could jeopardize a school's qualification for tax-exempt status if such programs are determined to constitute prohibited discrimination under the proposed rules.
• The regulations would provide explicit guidance within the Treasury Regulations rather than relying primarily on judicial precedent and administrative guidance.

Effective Date

If finalized as proposed, the regulations would apply to private schools for taxable years beginning after May 31, 2027. Treasury and the IRS expect final regulations to be issued before that effective date.

What Organizations Should Do

Private schools that are recognized as tax-exempt under Section 501(c)(3) should review their admissions, scholarship, athletic, and other operational policies to ensure compliance with applicable nondiscrimination requirements. Particular attention should be paid to scholarship and financial aid programs that incorporate race or ethnicity as a selection factor, as these arrangements may require modification if the regulations are finalized in their current form. Schools should also evaluate existing documentation, public statements, and governance policies relating to nondiscrimination practices.

The proposed regulations are currently open for public comment, providing stakeholders an opportunity to submit feedback before the rules are finalized.

Takeaway

While the proposal largely reflects existing legal principles regarding racial nondiscrimination by private schools, it would codify those requirements directly into the Section 501(c)(3) regulations and could have significant implications for admissions practices, scholarships, and other programs that use race or ethnicity as an eligibility factor. Private schools should review these programs now and consider whether changes may be needed to preserve compliance and maintain federal tax-exempt status.

How Citrin Cooperman Can Help

Citrin Cooperman's Not-for-Profit Industry Practice works with independent schools, educational organizations, and other tax-exempt entities to evaluate compliance with evolving federal tax requirements. The application of the proposed regulations to a particular school's facts and circumstances may involve complex legal considerations. Schools should consult with qualified legal counsel regarding the interpretation and application of these rules. Citrin Cooperman provides tax, accounting, and advisory services and does not provide legal advice. We would be pleased to assist organizations in evaluating the tax and operational implications of the proposed regulations and in coordinating with their legal advisors as appropriate.