Key Points

• The IRS’s proposed regulations redefine racial nondiscrimination requirements for private schools and threaten the federal tax-exempt status — and donor tax deductions — of any private school that considers race, color, or national or ethnic origin in admissions, scholarships, athletics or other programs.
• Private schools that use race, ethnicity or natural origin or proxies for such characteristics (e.g., geographic requirements) in admissions, scholarships and other programs should assess their activities and be prepared to act should the proposed regulations go into effect as written for taxable years begging after May 31, 2027.
• School leaders and in-house counsel should consider submitting comments on the proposed regulations through the Federal eRulemaking Portal at regulations.gov now.

The Internal Revenue Service’s recently issued, proposed private school non-discrimination regulations threaten to put both private schools’ federal income tax exemptions and their donors’ charitable contribution deductions at risk.

The proposed regulations address when a private school will be treated as discriminating 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. If the proposed regulations are finalized in their current form, the existence of such discrimination will result in denial of federal income tax exemption and charitable contribution deductions for donors.

At first blush, the proposed regulations appear consistent with the longstanding policy against discrimination in education and should be a non-issue for private schools. A closer look, however, reveals that the proposed rules will upend many private schools’ well-intended policies designed to reflect community demographics and advance diversity in education.

How do the regulations define private school?

The proposed regulations define a private school as an “educational organization” that is described in Section 501(c)(3) of the Internal Revenue Code of 1986 (Code). Educational organizations include primary, secondary, preparatory, or high schools and colleges and universities. The proposed regulations do not apply to public schools.

Organizations described in Section 501(c)(3) are exempt from federal income tax. Private schools also benefit from the status because it allows donations they receive to qualify as charitable contributions that are tax deductible by the donors. Thus, not only will a private school treated as discriminating under the proposed regulations lose its federal income tax exemption, its donors’ contributions will no longer qualify as tax-deductible charitable contributions. Additional ramifications could include the loss of state-level exemptions that depend on federal tax-exempt status for qualification (e.g., sales and use tax and real property tax exemptions).

How does this relate to ‘affirmative action’ programs?

To reverse decades of discrimination against minority students, many private schools implemented admission, scholarship and loan policies designed to increase minority student representation in their schools. That is, a potential student’s race, color, national or ethnic origin became a factor in admission, scholarship, and loan policies. This practice has often been referred to generically as “affirmative action.”

Affirmative action programs became the subject of lawsuits with plaintiffs claiming that they were denied admission, usually to a college or university, while minority students with lower academic credentials were admitted. The plaintiffs contended this “reverse discrimination” was illegal because they were denied admission based on their race. Most notably, the U.S. Supreme Court in Students for Fair Admissions v. President and Fellows of Harvard College (2023) addressed race-based college admissions criteria, ruling that the race-conscious admissions programs at Harvard University and the University of North Carolina violated the Equal Protection Clause of the Fourteenth Amendment. Critically, the Court’s ruling expressly extended only to college admissions criteria. The IRS now appears to be attempting to extend similar nondiscrimination rules to private school activities that extend far beyond the college admissions process.

If finalized, the proposed regulations would eliminate any form of “reverse discrimination” or “affirmative action” by a private school that seeks to maintain its tax-exempt status and benefit from contributions qualifying as charitable contributions. Race, color, or national or ethnic origin could not be a factor in the school’s administration of its educational, admissions, scholarship, athletic or other policies.

When would the regulations take effect?

The proposed regulations would affect private schools in taxable years beginning after May 31, 2027.

Could religious schools still use religious mission-based selection criteria?

The preamble to the proposed regulations states that “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. Use of a religiously based selection criterion does not become discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may also share ancestry or ethnic characteristics (so long as the selection criteria is based solely on religion and not on shared ancestry or ethnic characteristics).” While no example is provided, presumably, for example, a private primary school for children who practice the Greek Orthodox faith could be operated at a Greek Orthodox Church, but the school could not use Greek ancestry as a criterion in its admissions policies. Children with Ethiopian ancestry (or any other ancestry) who practice the Greek Orthodox faith would have to be admitted on the same basis as children with Greek ancestry.

Important issues to monitor:

As private schools consider the proposed regulations, many issues will emerge.

• Legacy endowments. What effect will the proposed regulations have on donor-restricted funds that provide scholarships for students of certain racial or ethnic backgrounds? Will schools be obligated to seek to modify these funds to comply with federal regulations? If modifications require court approval (a process known in many states as cy pres), are the schools responsible for footing the bill?
• Current recipients. Will current students receiving race or ethnic-based scholarships be able to continue receiving those scholarships until they graduate?
• Indirect participation. Can a private school purge itself of a program that grants scholarships or loans to students of a certain racial or ethnic group by transferring the program to an independent charitable organization that will continue to grant scholarships or loans to students of a certain racial or ethnic group who attend that private school? Of course, those independent organizations would themselves need to be mindful of the risks of providing such awards, especially if they receive federal funding or otherwise participate in federal programs.
• Geographic diversity. Will a policy designed to provide geographic diversity in a student body violate the proposed regulations if the geographic area is composed predominately of residents belonging to a certain racial or ethnic group? Will the IRS look to the discriminatory effect of a private school’s policies? Recent guidance from the Department of Justice, issued in connection with the Trump administration’s broader campaign against “illegal DEI,” has identified proxy criteria as presenting significant legal risk. The DOJ specifically disfavors what it calls “neutral” criteria such as geographic recruitment or eligibility targeting chosen primarily to meet racial or ethnic composition goals, as well as “lived experience” requirements and “cultural competence” statements. The DOJ has advised organizations to scrutinize facially neutral criteria to ensure policies and procedures are not only facially neutral but also neutral as-applied. If the IRS follows this approach, private schools using geographic targeting or other proxy criteria as a means of achieving racial or ethnic diversity could face significant scrutiny, even if their policies do not expressly reference race.
• Student affinity groups. Will the proposed regulations treat race or ethnic-based student affinity groups as discriminatory? Will private schools be able to provide funding or in-kind services to race or ethnic-based student affinity groups? Earlier Trump administration guidance regarding employment practices for federal contractors and federal grant recipients has targeted programs that restrict access based on race or ethnicity. Any policies providing access to facilities, resources or programs based on race or ethnicity should be considered high risk. Assuming a similar approach is taken here, private schools that provide funding, facilities or administrative support to race or ethnic-based affinity groups should ensure that participation in such groups is not limited based on race or ethnicity and is open to all students.
• Continued employment for affirmative action hires. Will faculty or other employees that were hired or promoted using criteria that are discriminatory under the proposed regulations be able to continue in their current employment?

Why it’s important for private schools to provide comments.

These are just a few of the issues that will need to be addressed. It’s impossible to overstate the importance of private schools commenting on the proposed regulations. The proposed regulations will affect private school policies developed over more than half a century. It is important for the IRS to understand how the intended and unintended consequences of the proposed regulations will affect private schools.

The proposed regulations strongly encourage that comments be submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-119986-25) by following the online instructions for submitting comments.

What are the broader implications for nonprofits?

The proposed IRS regulations should be viewed within the broader context of the Trump administration’s aggressive campaign against what it characterizes as “illegal DEI.” While these regulations are specifically directed at private schools, they may signal a willingness by the IRS to leverage tax-exempt status as an enforcement mechanism against exempt organizations generally. s such, exempt organizations that are not private schools should take notice and begin to assess their risk tolerance should these concepts be extended industrywide.

For more information on this and other questions related to private schools, taxes and nonprofits, contact the authors Douglas Charnas at dcharnas@foxrothschild.com or Jacqueline Motyl at jmotyl@foxrothschild.com.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the authors and not necessarily this law firm or its clients.