Under New IRS Rule, Private School Tax Exemptions Are at Risk

The Internal Revenue Service (IRS) issued a proposed rule on Sept. 3 that would strip 501(c)(3) status from private schools whose admissions or scholarship decisions consider race, color or national/ethnic origin, regardless of whether the policy is framed around diversity or remedial goals. The agency estimates the change would affect roughly 18,000 private elementary, secondary, and post-secondary schools. The proposal, published as REG-119986-25, comes after years of court challenges to race-conscious admissions policies at colleges and universities.

Redrawing the Line on Tax-exempt Status
The proposed regulation clarifies that a school is not "operated exclusively for exempt purposes," the core requirement for maintaining 501(c)(3) status, if its admissions, scholarship, loan, athletic or other school-administered programs factor in race, color, or national or ethnic origin. That standard would apply broadly:

• A scholarship fund limited to students of a particular ethnic background
• An admissions preference tied to race
• An athletic program restricted along similar lines

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