As many as 18,000 institutions could be affected by proposed regulations the Treasury Department and the IRS announced last week. The rules would strip 501(c)(3) status from any private school, elementary through graduate, that “adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin.”
The legal principle is not new. In 1983, the Supreme Court held in Bob Jones University v. United States that private schools have no right to a federal tax subsidy for racial discrimination. Tax-exempt status under Section 501(c)(3), the court explained, requires an institution to serve the public interest and not violate “fundamental public policy.” Bob Jones University’s admissions practices and restrictions on interracial dating failed that test.
The underlying law is the same as it was in 1983, but with a 2026 twist. Today’s targets are not just the segregationist policies at issue in the Bob Jones era, but what Treasury Secretary Scott Bessent described as “schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing.” The proposed regulations cover admissions, educational policies, scholarships, athletics, and virtually every other school-administered program.
Private K-12 schools have something to worry about. Under the banner of “equity,” many of the country’s most prestigious institutions have embraced overtly race-conscious programming, including affinity groups that sort children into racial-identity groups, scholarships allocated by ethnicity, and admissions practices that weigh race.
In 2020, for example, dozens of faculty at the Dalton School signed an eight-page manifesto demanding twelve full-time DEI staffers, mandatory anti-racism training for board members, and a curricular overhaul centered on racial justice. At Grace Church School, math teacher Paul Rossi was reprimanded and eventually forced out after challenging a mandatory presentation that labeled “objectivity” a characteristic of white supremacy. At Brearley, parent Andrew Gutmann refused to re-enroll his daughter at the then-$54,000-a-year school, accusing the institution of forcing anti-intellectual dogma on children. Megyn Kelly pulled her children from Collegiate and Spence after what she described as aggressive racial conditioning.
Treasury is making explicit that the same rule applies to modern race-conscious preferences. Good intentions will not save discrimination from an IRS audit.
Many private K-12 schools will not have seen this coming. When the Supreme Court decided Students for Fair Admissions v. President and Fellows of Harvard College in 2023 and rejected race-conscious admissions, the case arose under Title VI, which applies to institutions receiving federal financial assistance. Unlike Harvard and most universities, many private K-12 schools take no federal funding. The $70,000-a-year prep schools sitting on nine-figure endowments may have watched SFFA with concern but believed themselves largely immune.
But the tax code reaches where Title VI does not.
Loss of tax-exempt status could be existential. Charitable deductions for donors disappear. Annual funds and capital campaigns become harder to finance. Endowment investment income becomes taxable. Tax-exempt bond financing may be jeopardized. Scholarship organizations and other entities whose operations depend on the school’s exempt status may also be affected. An entire financial ecosystem rests on Section 501(c)(3).
Tax-exempt status is not an entitlement. It reflects a judgment that an organization serves a recognized public benefit, and Bob Jones makes clear that racial discrimination can disqualify an institution from that preferential treatment. Whether the racial classification is defended as exclusionary or inclusive does not change the classification.
The proposed rule does not require schools to abandon efforts to expand opportunity. Schools may continue assisting disadvantaged students using race-neutral criteria such as family income, geography, first-generation status, individual hardship, military-family status, or academic achievement. Religious schools may likewise maintain their religious missions and select students based on genuine religious affiliation consistent with federal law.
The regulations would not take effect until taxable years beginning on or after May 31, 2027. There is a runway, but not a long one, and certainly not a safe harbor. Private schools should review admissions criteria, scholarships, affinity groups, curricular programming, governance documents, nondiscrimination policies, and annual IRS certifications now.
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The sector’s own governing body may have seen the writing on the wall. In 2025, the National Association of Independent Schools suspended its People of Color Conference and Student Diversity Leadership Conference, events that had promoted precisely the kind of race-conscious programming the proposed regulations now target.
Private schools that declined federal funding may have assumed their race-conscious programs were beyond federal reach. That assumption was always incomplete. Section 501(c)(3) supplies a separate source of federal leverage, and Treasury has now made clear that it intends to use it. For schools that classify students by race, the question is no longer whether Washington is looking. It is whether those practices are worth risking tax-exempt status.
Susan Greene is a partner at Holtzman Vogel, where she focuses her practice on complex civil rights and public interest litigation, including anti-discrimination and constitutional law matters. Brandon Smith is the managing partner of Holtzman Vogel’s Nashville office and co-chair of the firm’s State Attorneys General Practice.