We are revisiting a topic we previously discussed in prior Legal Alerts – how the Trump Administration is addressing Diversity Equity and Inclusion (DEI). In prior Alerts we discussed New EEOC Guidance on Acceptable Workplace DEI Practices and DOJ’s Clarification of “Unlawful” DEI, which addressed the Trump Administration’s approach to DEI in the workplace.
In this Alert, we discuss a joint press release issued by The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) on September 3, 2026, addressing the Trump Administration’s approach to DEI in private schools. The Joint Press Release announced proposed regulations to end federal tax-exempt status for private schools engaging in racial discrimination. This move furthers President Trump’s Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity.
This development is not a cause for panic. In fact, we believe this development presents a profound opportunity for all tax-exempt organizations (including but not limited to private schools) to reflect on their DEI activities and reaffirm such activities further their core tax-exempt missions and constructively promote the value of diversity within their workplaces and communities.
The Proposed Regulations: Nothing Has Changed Yet
The proposed amendments to 26 C.F.R. Part 1 add §1.501(c)(3)-2 to clarify that any racial discrimination by private schools – whether in admissions, scholarships or loans, athletics or other school-administered programs, and regardless of remedial or diversity intent – violates fundamental public policy and precludes qualification for 501(c)(3) tax exempt status. This action is consistent with enforcement efforts taken by the Trump Administration to end federal funding for public schools determined to have engaged in racially discriminatory admissions practices, facilitated race-based scholarship and grant programs, or implemented racial preferences in athletics and other school-administered programs.
Additionally, the amendments eliminate portions of IRS Revenue Procedures 75-50 that permitted certain minority-favoring policies designed to support nondiscrimination objectives.
The proposed amendments are subject to a 60-day public comment period and, if finalized, will apply to private schools for taxable years beginning after May 31, 2027.
Key Provisions of the Amendments
- Apply to all private schools, including private primary and secondary schools, colleges, professional or trade schools and universities seeking or maintaining their 501(c)(3) tax-exempt status.
- Prohibit private schools from discriminating based on race, color or national or ethnic origin in admissions, scholarship or loans, athletics and other school-administered or supported programs.
- Do not prohibit private religious schools from considering in admissions genuine religious affiliation or membership.
Impact on Private Schools
- Eliminate race-restrictive eligibility criteria from all scholarships and loans, including endowed scholarships. Schools must remove from all financial awards (including scholarships, grants and loans) terms that limit eligibility based on race, color and national or ethnic origin. This requirement extends to endowed scholarships for which private donors – not the school – have established the eligibility criteria. We note that the process through which “illegal” donor intent is modified may need to include the applicable state Attorney General’s Office consistent with such Office’s statutory standing to protect the public’s interest in donated assets.
- Eliminate race-based criteria or preferences in admissions. Schools must eliminate any race, color, national or ethnic origin preferences in admissions. The new rules prohibit schools from using race, color, national or ethnic origin as a factor when making admissions decisions, including whether to admit, deny or waitlist an applicant for admission.
- Eliminate race-based criteria or preferences in athletics. Schools may not consider race, color, national or ethnic origin preferences when making decisions regarding eligibility for any aspect of athletic programs, including participation, scholarship awards, coaching and other benefits.
- Eliminate race-based criteria or preferences in school-based programs. This extends to any school-administered, supported or promoted program. This may include, for example, Honors Capstones or social justice programs, character education initiatives, experiential learning programs and student affinity groups.
Why Private Schools Should Care
Any race-based criterion, regardless of remedial or diversity intent, used in admissions, scholarships or loans, athletics or other school-supported programs could jeopardize a private school’s 501(c)(3) status for taxable years after May 31, 2027. Complying with the new rules may require private schools to amend scholarship terms that explicitly – or implicitly – include race-based eligibility criteria and work with donors to amend similar eligibility criteria for their endowed scholarships.
Recommendations for Private Schools
- Inventory and review all admissions, educational, scholarship or loan, athletic and other school-administered or supported program policies for any race, color, or national or ethnic origin eligibility criteria.
- Identify endowed scholarships or restricted funds with race-based eligibility criteria and develop strategies to amend criteria consistent with donor intent where possible, involving the state Attorney General’s Office when necessary, or address funds that cannot be modified. Where donor intent cannot be modified to eliminate race-based eligibility criteria, schools may need to explore alternative options, including discontinuing the applicable donor relationship.
- Explore alternative, compliant, and race-neutral eligibility criteria that still expands educational opportunity to disadvantaged students. As discussed in our prior Alert, schools should be aware of using unlawful proxies for race, color, national or ethnic origin. Such proxies include neutral criteria that effectively function as substitutes for explicit consideration of race or other protected characteristics. Examples of race-neutral eligibility criteria that are likely to insulate a school from scrutiny include socioeconomic status, income, geography, first-generation status, academic achievement, field of study or extracurricular involvement.
- Update policies, handbooks, application materials, marketing, and award letters to remove race-based criteria.
- Train staff on the new prohibitions, policies, handbooks and other literature.
- Evaluate donor communications and gift agreements to align with compliant criteria going forward.
- Coordinate among admissions, financial aid, development, athletics and other relevant teams to implement changes prior to the first taxable year beginning after May 31, 2027.
Why All Tax-Exempt Organizations Should Care
While the proposed regulations only apply to tax-exempt private schools, we think they, along with other recent developments, present a valuable opportunity for all tax-exempt organizations. More specifically, we believe what appears to be a larger DEI cultural pendulum swing (for example, U.S. Representative Alexandria Ocasio-Cortez’s recent characterization of Woke 1.0 as “crazy” and Tyler Austin Harper’s “Confessions”) presents all tax-exempt organizations an opportunity to reflect on how their DEI activities further their underlying missions (or not), as well as champion diversity in furtherance of fostering cooperative collaboration within the organization and its community. Guided by their statutory fiduciary duties of care and loyalty, we believe organizations’ boards of directors and management can turn these developments into an opportunity to build operationally sustainable diversity programs.
Practical Takeaways
Private schools should evaluate their admissions policies, scholarships, financial aid programs, athletics programs, and school-sponsored activities to ensure eligibility criteria do not explicitly or implicitly rely on race, color, or national or ethnic origin. Where noncompliance is identified, schools need to shift to race-neutral criteria to preserve compliance with the new rules.
This evaluation should include assessment of donor-restricted funds and scholarships. This may be a complicated task as donors may be unavailable, and when available, may be unwilling to modify criteria. Where possible, schools should work with donors and the relevant state Attorney General’s Office, as required, to amend any noncompliant criteria. If donor intent cannot be modified, schools may need to consider alternative solutions, including discontinuing the scholarship, program or even donor relationship.
Because the proposed regulations would apply to taxable years beginning after May 31, 2027, proactive schools should use academic year 2026-2027 to conduct self-directed or attorney-client privileged compliance reviews, revise polices, train administrators and document all race-neutral methods explored to expand educational opportunities for its students. Taking these proactive steps will mitigate liability in the event of an IRS audit or review by another federal agency.
While these new rules apply exclusively to race, color, national and ethnic origin, it is conceivable that future amendments could extend similar requirements to other protected characteristics, including sex. As a result, schools may view these initial amendments and compliance effort not only as a response to current requirements, but also as a potential framework for addressing future regulatory obligations.
Organizations should not panic or rush to make changes. Rather, organizations should lean on their fiduciaries now to assess their DEI programs in a prudent and strategic manner. If the IRS were ever to come knocking, take solace in knowing the process through which an organization’s tax-exempt status can be revoked provides an organization with ample opportunity to defend itself and multiple appeal options.
Should you have questions or need advice regarding this or related matters, please reach out to a member of Harris Beach Murtha’s Higher Education Industry Team, Tax-Exempt Organizations & Nonprofits Industry Team or Labor and Employment Practice Group; attorney Edward Spinella at (860) 240-6059 and espinella@harrisbeachmurtha.com; attorney Eboné Luciano at (203) 772-7711 and eluciano@harrisbeachmurtha.com; or the Harris Beach Murtha attorney with whom you most frequently work.
This alert does not purport to be a substitute for advice of counsel on specific matters.
Harris Beach Murtha’s lawyers and consultants practice from offices throughout Connecticut in Bantam, Hartford, New Haven and Stamford; New York State in Albany, Binghamton, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse, Long Island and White Plains; as well as in Boston, Massachusetts, and Newark, New Jersey.