Treasury Wants to Strip Tax-Exempt Status From Any School That Uses Race. The Rule Reaches About 18,000 of Them.

The Treasury Department and the Internal Revenue Service proposed regulations on Thursday that would deny federal tax-exempt status to any private school that "adopts, maintains, or enforces" a policy or practice discriminating on the basis of race, color, or national or ethnic origin. The reach is broad by design: admissions, educational policies, scholarships and loans, athletics, and every other program a school administers or supports.

Treasury put the number of institutions potentially affected at roughly 18,000 — colleges, universities, professional schools, trade schools and elementary and secondary schools that currently hold 501(c)(3) status. Losing that status would mean paying federal income tax on net earnings, and it would also strip donors of the charitable deduction on gifts to the school, which is the part likely to concentrate the minds of development offices.

Treasury Secretary Scott Bessent framed the proposal as closing a workaround. "Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature," he said. IRS chief Frank Bisignano added that private educational institutions promoting discriminatory practices "will no longer be afforded the benefits of federal tax-exempt status." The agencies cite President Trump's executive orders on the subject as the impetus.

The legal scaffolding runs through three Supreme Court decisions. Brown v. Board of Education supplies the principle. Bob Jones University v. United States, decided in 1983, is the direct precedent — it upheld the IRS revoking a university's exemption over a racially discriminatory dating policy, on the theory that a charity must not violate fundamental public policy. Students for Fair Admissions v. Harvard, decided in 2023, ended race-conscious admissions at colleges. The proposal effectively extends that ruling's logic from constitutional and Title VI grounds into the tax code, where the enforcement lever is money rather than litigation.

The regulations carve out two things. Religious schools may keep their religious missions and may select students on the basis of genuine religious affiliation. And schools may keep expanding access using race-neutral criteria — family income, geography, first-generation status, individual hardship, military family status, academic achievement. That is the same menu of proxies many institutions adopted after the 2023 ruling.

Final regulations would apply to taxable years beginning on or after May 31, 2027, which Treasury describes as giving schools time to review and rewrite admissions, scholarship and aid policies. Between now and then the proposal goes through notice and comment, and almost certainly through court. The open question is how the IRS would judge intent: a scholarship that is race-neutral on paper but was designed to produce a particular demographic result is exactly the kind of case that will decide how much this rule actually changes.