CLIENT ALERT: Proposed IRS Rule Change Threatens 501(c)(3) Status for Many Independent Schools
Disclaimer: This content does not constitute legal advice. You should not act, or refrain from acting, based on the information provided without getting specific advice from your lawyer.
The Treasury Department and IRS have proposed new regulations that threaten to strip schools of their tax-exempt status, a move that would have wide-ranging and potentially significant effects for many private primary and secondary schools. The proposed rule is scheduled for publication on September 4, 2026. This move to make a dramatic change in the course of the nation’s private education system has already attracted extensive national attention, and we wanted to reach out with some thoughts and a call to action at this time.
Comments to the Treasury Department can be submitted before November 3, 2026. If finalized as it is expected to be proposed tomorrow, the rules would apply to school taxable years beginning after May 31, 2027. For most schools, this would be the year beginning July 1, 2027 (next school year).
Under the proposal, a private school could lose its Section 501(c)(3) tax-exempt status if it “discriminates” on the basis of race, color, or national or ethnic origin in admissions, scholarships, athletics, educational policies, or any other school-administered or supported program. The offending conduct does not take into account the purpose of the policy or program.
The Notice of proposed rulemaking states: “These proposed regulations would provide that all forms of racial discrimination in education, regardless of the intent behind or the legality of such discrimination (for example, where such discrimination is defended as serving remedial or diversity-related objectives), are against a fundamental public policy of the United States and thus preclude a school’s exemption from Federal income tax under section 501(c)(3).”
This proposed rule would turn what has been a shield of protections, in place since the 1970s, into a sword to attack those policies that are intended to promote diversity or remedy past discrimination, and would eliminate existing IRS guidance permitting certain race-conscious practices. Religious schools are potentially swept up in this potential attack; while the IRS’ news release announcing the publication states that 'Religious schools may continue to select students based on “genuine religious affiliation or membership,”’ religious schools would receive no exemption from the racial "nondiscrimination" rule. The loss of tax-exempt status would significantly curtail an independent school’s fundraising.
Schools should raise their concerns promptly: internally with their leadership, in the regional and national associations they are affiliated with, and strategically with their legal counsel. Schools will want to consider how their policies and programs may be implicated in the event this rule change goes through. The proposed rule encompasses a broad range of school activities: educational policy, admissions policy, scholarship and loan programs, athletic programs, and other school-administered or school-supported programs.
During the 60-day comment period, we will be working with many partners to formulate compelling arguments in an attempt to stop this rule. A coordinated, substantive submission representing numerous affected schools and associations is likely to be more influential than isolated or duplicative comments from individual schools.
We regret bearing this unfortunate news. But we believe this is an all-hands-on-deck moment where we can stand together in opposition. We are prepared to engage with our partners in full support of independent schools and the communities they create and sustain, to maintain the tax-exempt status for private primary and secondary schools. Please reach out to join us and share your thoughts.
In partnership,
Karen L Wolfe, Partner (kwolfe@commonslaw.com | 215-849-4403)
Independent Schools Policies & Bylaws
Peter T Commons, Partner (pcommons@commonslaw.com | 215-849-4401)
Independent Schools, Head of School Employment Contracts
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