Treasury proposes revoking tax-exempt status for race-based school aid

The U.S. Treasury Department and the Internal Revenue Service have proposed new rules that could revoke the 501(c)(3) tax-exempt status of up to 18,000 private schools, colleges, and universities. The proposal, expected to take effect on May 31, 2027, targets institutions that utilize race, color, or national or ethnic origin in their admissions, scholarships, financial aid, or athletic programs.

Under the proposed standard, any policy intended to promote diversity or remedy past discrimination through race-based treatment would be classified as discrimination, making it inconsistent with federal tax-exempt status. This would eliminate existing IRS guidance that allows certain preferences for minority groups to advance nondiscriminatory policies. The Treasury and IRS estimate that approximately 750,000 students attend the affected institutions and may be impacted by changes to scholarships allocated via racial or ethnic criteria.

While the loss of tax exemption might not significantly increase federal income tax liabilities for the schools, it would impact fundraising, as donors would no longer be able to deduct contributions made directly to these institutions. The administration has tied these proposed standards to Supreme Court precedents, including the 2023 Students for Fair Admissions decision.