Treasury and IRS propose stripping tax exemption from schools that use race in aid or admissions

The Treasury Department and the Internal Revenue Service issued proposed regulations on 3 September that would deny federal tax-exempt status to private schools, including colleges and universities, that adopt or keep a policy that discriminates on the basis of race, color, or national or ethnic origin. The notice, IR-2026-103, says the change would cover admissions, scholarships, facilities, programs and financial aid. Treasury estimates as many as 18,000 private educational institutions could fall under the rule.

The proposal would also delete older IRS guidance that allowed schools to favor certain racial preferences as a way to widen access. Treasury said the final text "would further define race-based action for the purpose of ameliorating societal discrimination as a form of discrimination." Schools could still give aid on other criteria. They could not, under the draft, make decisions or confer benefits because of race.

Final regulations would apply to taxable years beginning on or after 31 May 2027. That date is the main operational fact in the packet. Institutions would have roughly eight months after a final rule, assuming a winter or spring finish, to rewrite policies if they want to keep 501(c)(3) status. Loss of that status would hit donor deductions, tax-exempt bond issuance and the exemption on investment income, the three money channels that make the designation valuable.

Treasury Secretary Scott Bessent said schools that rebrand race-based preferences as equitable or inclusive would still fail the test. IRS Chief Executive Officer Frank J. Bisignano said institutions that continue those practices "should expect to lose that status." Ted Mitchell, president of the American Council on Education, said the group will oppose the rule in the comment period.

The draft sits on top of a long IRS history. Since 1971 the service has treated racially discriminatory private schools as ineligible for exemption, a position the Supreme Court upheld in Bob Jones University v. United States in 1983. The new text tries to turn that old bar around so that preferences designed to help minority students count as the same kind of racial classification. That is the legal move education groups say they will fight. The notice itself gives little detail on how agents would judge a scholarship, a summer program or a targeted advising office.

Coverage in the New York Times, Bloomberg and the Associated Press treated the proposal as an extension of the administration's campaign against campus diversity programs, now aimed at the tax code rather than grant conditions or civil-rights investigations. The 18,000 figure includes secondary schools as well as higher education. A small religious day school with a race-conscious aid fund would face the same status risk as a university with a large endowment.

Nothing in the 3 September notice revokes anyone's exemption today. It opens a comment period and sets a prospective effective date. The political fight will run through that period and through whatever lawsuit follows a final rule. The practical fight for school counsel is a calendar: inventory every race-tagged program before May 2027, decide what to keep under a non-racial proxy, and price the cost of losing 501(c)(3) if the rule sticks and a given program does not change.

Bessent tied the proposal to executive orders on merit and discrimination. Mitchell tied the opposition to the comment file. The IRS will have to write the definitions that the current notice only flags. Until those definitions exist, the 18,000 estimate is a ceiling on exposure, not a list of schools already marked for loss of status.