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What the proposed rule would change
Published as REG-119986-25 on September 4, 2026, the proposal would add section 1.501(c)(3)-2 to the federal income tax regulations. Under its proposed text, a covered school would fail the requirement to operate exclusively for exempt purposes if it adopted, maintained, or enforced discrimination based on race, color, or national or ethnic origin.
The restriction would apply to school policies and practices involving:
- Admissions and other educational policies;
- Scholarship or loan programs;
- Athletics; and
- Other programs administered or supported by the school.
The proposal says discrimination for any purpose is included. Its preamble says that would encompass practices defended as remedial or as promoting diversity. If finalized in this form, the rule would make compliance relevant to a covered school’s federal section 501(c)(3) eligibility; it does not itself establish that any particular school has violated the proposed standard.
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Which schools would be covered?
The proposed definition reaches organizations described in section 501(c)(3) that are classified as educational organizations under section 170(b)(1)(A)(ii). The IRS describes this category as including private primary and secondary schools, colleges, professional or trade schools, and universities.
The proposed definition excludes governmental units, their agencies or instrumentalities, and organizations owned or operated by such an agency or instrumentality. Coverage would therefore depend on the organization’s legal and operational status, not simply on whether it provides education.
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What rationale do the agencies give?
The agencies frame the proposal as an application of the public-policy principle that they say limits section 501(c)(3) eligibility for organizations that engage in racial discrimination. The preamble discusses the Equal Protection Clause, federal civil-rights law, and Supreme Court decisions including Brown, Runyon, Bob Jones, and Students for Fair Admissions.
Those are the agencies’ stated legal and policy grounds for the proposed regulation, not a final regulatory determination or a ruling on every school’s circumstances. The proposal’s language and its preamble explain the agencies’ position; they should not be confused with a rule already in effect.
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The proposal says it would not prohibit a school from maintaining a religious mission, religious curriculum, or religious observance program. It also distinguishes selection based solely on religious affiliation or membership from selection based on shared ancestry or ethnicity.
The IRS announcement also identifies race-neutral criteria that may support admissions or financial assistance, including:
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- Family income;
- Geographic location;
- First-generation status;
- Individual hardship;
- Military-family status; and
- Academic achievement.
The agencies also say organizations may pursue anti-prejudice and antidiscrimination objectives through means other than policies that discriminate on the specified bases. These are distinctions stated by the proposal and the IRS announcement, not a guarantee that any particular policy will qualify without regard to its design or application.
What are the dates and next steps?
| Date or period | What it means |
|---|---|
| September 4, 2026 | REG-119986-25 was published in the Federal Register as 91 FR 56811. |
| November 3, 2026 | Deadline for written comments and requests for a public hearing. |
| Taxable years beginning after May 31, 2027 | Proposed applicability date. The preamble anticipates that final regulations would be published before then, but their timing and text remain unsettled. |
The IRS 2026–2027 Initial Priority Guidance Plan lists final regulations on applying the fundamental public policy against racial discrimination to private-school section 501(c)(3) eligibility as a planned item following the proposal. A plan entry signals planned work; it does not guarantee when a final rule will appear or what it will contain.
How does the proposal relate to existing school notices and certifications?
Existing IRS instructions describe nondiscrimination notices and annual certification requirements for private schools. Under the Instructions for Form 8940 (12/2025), a private school that does not file Form 990 or Form 990-EZ makes its certification using Form 5578.
The proposed regulation would modify specified language in Revenue Procedure 75-50 if finalized. It says the other parts of that revenue procedure would remain in effect. The proposal therefore addresses how the existing framework would be changed, rather than saying that the notice and certification process disappears.
What do the agencies estimate about potential effects?
| Agency estimate | How to read it |
|---|---|
| 18,000 private elementary, secondary, and postsecondary schools | Treasury and the IRS estimate this number of schools could potentially be affected. It is not a count of schools found to have discriminatory practices. |
| 750,000 students | Treasury and the IRS estimate this number could potentially qualify for scholarships allocated on racial, ethnic, or national-identity bases. It is not a count of confirmed affected students. |
The preamble says the agencies lack readily available parameters to quantify some donor contributions, lack data on the extent of race-based admissions practices at private primary and secondary schools, and cannot model some compliance costs. The figures are estimates, not observed outcomes or a complete accounting of the proposal’s effects.
What schools and families should understand now
For now, the relevant distinction is between an agency proposal and an operative final regulation: the IRS and Treasury have proposed a new condition for covered schools, but comments are still being accepted and final text remains pending. Schools assessing a specific admissions, scholarship, or other policy should distinguish the proposal’s general language from its application to their own facts and seek qualified nonprofit tax advice where needed.
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