On September 3, 2026, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) announced proposed regulations that could significantly affect independent K-12 schools and their tax-exempt status. The proposed regulations provide that an independent school that "adopts, maintains, or enforces" any policy or practice that discriminates based on race, color, or national or ethnic origin will no longer qualify for federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). If adopted, the proposed regulations would take effect on May 31, 2027, and would impact a wide range of independent schools' diversity, inclusion, and belonging policies and practices.
What Would the Proposed Regulations Require?
Under the proposed regulations, an independent school would lose its status as a tax-exempt organization under Section 501(c)(3) of the Code if it adopts, maintains, or enforces a policy or practice that discriminates based on race, color, or national or ethnic origin "for any purpose," including admissions, financial aid or scholarship decision-making, athletics, or any other school-administered program. The Treasury explains that this prohibition is intended to encompass all forms of race-conscious decision-making, even if undertaken for remedial or diversity-related objectives.
The backdrop of the Proposed Regulations has been building for several years. The Supreme Court's 2023 ruling in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College ("SFFA"), overturned decades-long precedent that had allowed colleges and universities to adopt affirmative action admissions practices, which took a candidate's race into consideration during the admissions process for the purpose of rectifying past discrimination. The proposed regulations also cite the longstanding principle that racial discrimination in education is contrary to public policy. As we discussed here, SFFA did not directly impact independent schools because they are generally not covered by Title VI or the Equal Protection Clause. The proposed regulations now seek to expand upon this long-standing federal public policy doctrine, effectively applying the holding of SFFA not only to independent schools’ admissions practices but also other policies, practices, and initiatives. If finalized, the regulations would eliminate a provision of Revenue Procedure 75-50 that provides schools with limited latitude to favor racial minority groups in admissions, programs, facilities, scholarships, and financial assistance when doing so promotes the establishment or maintenance of the school's racially nondiscriminatory policy.
Impact on Independent Schools
Admissions, Financial Aid, and Scholarships
Under the proposed rule, tax-exempt independent schools would risk losing their tax-exempt status if they use a candidate's race, color, and national or ethnic origin to influence the school's admissions and other significant decisions. This does not mean that independent schools must abandon all efforts to enroll students from varied backgrounds. The Treasury expressly recognizes that schools may seek to expand educational opportunities through race-neutral criteria, including family income, geographic location, first-generation status, individual hardship, military-family status, and academic achievement, for example. Schools seeking a diverse student body may therefore continue developing recruitment and admissions strategies designed to broaden access, provided individual applicants are not given or denied an admissions benefit because of factors the regulations deem discriminatory—race, color, or national or ethnic origin.
In addition to informing how schools may make admissions decisions, the proposed regulations would also affect other key aspects of independent school operations. Specifically, they would impact a school's general financial aid methodology and practices, as well as named scholarships, endowed funds, donor-restricted gifts, tuition-remission programs, summer-program assistance, and other financial benefits.
Independent schools nevertheless would retain substantial flexibility to direct financial assistance toward students who face financial or other barriers to attendance. Again, the proposed regulations identify income, geography, first-generation status, and individual hardship as permissible race-neutral considerations. Schools may therefore wish to consider whether existing race-conscious scholarships should appropriately be restructured around socioeconomic disadvantage, residence in underserved communities, first-generation status, demonstrated hardship, academic achievement, or other neutral criteria consistent with the school's mission and strategic initiatives.
Diversity, Equity, and Inclusion Programs and Practices
The proposed regulations do not expressly prohibit independent schools from maintaining all forms of existing diversity, equity, and inclusion ("DEI") programs. Such programs and policies intended to eliminate prejudice and discrimination remain permissible, provided they accomplish those objectives through means that do not themselves discriminate based on race, color, or national or ethnic origin.
Programs open to all students, such as cultural programming, instruction concerning different histories and perspectives, anti-bias initiatives, community-building programs, and efforts to ensure that all students feel welcomed and supported, would not appear to be prohibited merely because they advance diversity or inclusion objectives. By contrast, programs that condition eligibility, participation, benefits, leadership opportunities, or access to school resources on a student's race, color, or national or ethnic origin would present substantially greater risk under the proposed rule.
The proposed regulation further provides that religious schools could continue maintaining religious missions and programs and, where appropriate, make decisions based on genuine religious affiliation.
What Should Independent Schools Do Now?
Independent schools are advised to proceed thoughtfully while the proposed rules are pending and consider the following steps
- Auditing admissions practices. Review written admissions policies as well as actual decision-making practices, scoring systems, interview guidance, admissions committee instructions, recruitment initiatives, and other processes to evaluate whether race, color, national or ethnic origin are not being considered in admissions decisions.
- Reviewing financial aid and scholarship programs. Identify scholarships, grants, tuition assistance, endowed funds, and other financial benefits containing race-, ethnicity-, or national-origin-based eligibility requirements or preferences.
- Identifying donor restrictions. For endowed or restricted funds containing race-conscious criteria, review governing gift instruments now to determine the school's flexibility to amend eligibility requirements and whether donor consent, attorney general or court approval, or other steps may ultimately be necessary.
- Reviewing DEI and student programs. Examine affinity programs, mentorship opportunities, student leadership programs, awards, internships, enrichment opportunities, and other school-supported initiatives to determine whether eligibility or benefits are expressly allocated according to race, color, or national or ethnic origin.
- Evaluating race-neutral alternatives. Where a school seeks to advance access, socioeconomic diversity, or educational opportunity, consider whether it can achieve those objectives through criteria such as financial need, geography, first-generation status, individual hardship, academic achievement, or other individualized, race-neutral considerations.
- Training decision-makers. Admissions officers, financial aid personnel, administrators, and others responsible for allocating student opportunities should understand the distinction between pursuing diversity or inclusion as an institutional objective and granting an individual student an advantage or disadvantage because of race or ethnicity.
Any proposal threatening the tax-exempt status of independent schools must be taken seriously. At the same time, schools may wish to proceed deliberately while the rulemaking process remains underway and may be subject to challenge.
The Venable Independent School Law team will continue to monitor the proposed regulations and communicate additional guidance as the issue develops.