Gown vs. State
It is no secret that the Administration[i] is not pleased with many tax-exempt organizations, especially those “elite” private colleges and universities that, according to the White House and other observers, are hostile toward individuals and organizations that express conservative opinions or openly support “Western values.” The same institutions are often accused of promoting what has been described by some as virulent “anti-Americanism.”
At one point, the Administration threatened that, unless these schools changed their behavior and policies, it would strike at that which many believe the schools hold dearest; specifically, the tax-favored status that they and their benefactors have enjoyed under the Code and that has enabled these organization to amass substantial wealth and influence.
Early Rounds
To-date, the Administration has not been able to carry out this threat.
Having said that, it has applied other forms of economic pressure. It has, for example, suspended or eliminated various contracts, programs, or projects to which the offending school was a party with, or a beneficiary of, the Federal government.[ii]
In addition, it has “guided” through Congress the imposition of: (1) an excise tax on the investment income of certain well-endowed colleges and universities;[iii] (2) another excise tax on any tax-exempt organization (including schools) in respect of certain “excess” compensation paid to any employee;[iv] and (3) additional limitations on the ability of a taxpayer to deduct the value of a charitable contribution for the year in which it is made.[v]
The Next Level
However, the Administration seems to have latched onto a judicially-created test, one that is often overlooked, but the satisfaction of which is a condition to the recognition of an organization’s tax-exempt status.[vi]
Before we consider the manifestation of this new approach in recently Proposed Regulations that seek to codify only one application of this test,[vii] let’s review what’s at stake for the organizations at which these new rules are aimed.
Tax Benefits, Public Subsidies
Since the inception of the Code, Congress has sought to use the Code to encourage and support the work of nonprofit, charitable[viii] organizations that satisfy certain criteria.[ix]
The most significant tax-related benefits bestowed by Congress on a qualifying organization are: (1) an exemption from the imposition of federal income tax upon most forms of income realized by the organization;[x] and (2) eligibility to receive contributions from private individuals and businesses (members of the “general public”) for which the contributing taxpayer is entitled to claim a deduction for purposes of determining their Federal income tax liability.[xi]
Exclusively for Exempt Purposes
In order to enjoy these economic benefits or incentives – the lost tax revenues from which constitute a public subsidy of its activities[xii] – an organization must be organized and operated exclusively for one or more of the exempt purposes specified in Section 501(c)(3).[xiii]
If an organization fails to meet either the organizational test or the operational test, it is neither exempt from income tax nor eligible to receive “tax deductible” contributions from the general public.[xiv]
An organization is regarded as being operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in Section 501(c)(3).[xv]
An organization is not treated as organized or operated exclusively for one or more of exempt purposes unless it serves a public rather than a private interest.[xvi]
Public Policy
In addition to the foregoing statutory and regulatory requirements, there is another, judicially created test the satisfaction of which is often taken for granted.
This test is implicit in the common law concept of what it means to be “charitable”; it is a corollary to the public benefit principle upon which many of the benefits granted to charitable organizations are predicated.
Specifically, the activities of a charitable organization must not be so contrary to an “established public policy” as to undermine any public benefit that might otherwise be conferred by the organization, and which formed the basis for its tax exemption.[xvii]
According to the Supreme Court, the IRS is responsible for reviewing an organization’s activities and for determining whether there is a public policy against a particular activity (or set of activities) conducted by the organization.
Next, the agency must ascertain whether that public policy is so fundamental that the organization, by virtue of such activity, can no longer be deemed to provide a public benefit worthy of “charitable” status.
If the IRS reaches this conclusion, it is required to deny or revoke the exempt status of the organization[xviii] notwithstanding the organization also fulfills a legitimate function that would otherwise have secured its tax-favored status.
Policy Underlying the Proposed Regs
As stated above, the IRS recently proposed regulations[xix] that, if adopted, would represent a limited codification of the “not contrary to established public policy” test.
Specifically, the regulations would add Reg. Sec. 1.501(c)(3)-2, pursuant to which a private school would not be described in Section 501(c)(3) of the Code if it failed to satisfy the “nondiscrimination requirement” in education that was identified by the Supreme Court in Bob Jones as “an established public policy.”
In the Preamble to the Proposed Regulations, the IRS explained that this public policy is evidenced by (1) Federal antidiscrimination laws, such as the Equal Protection Clause of the Fourteenth Amendment and the Civil Rights Act of 1964, (2) U.S. Supreme Court case law (some of which is summarized below), and (3) actions taken by the Executive Branch of the Federal government to ensure racial nondiscrimination is instituted throughout the country.
According to the Preamble, the Proposed Regulations are intended to ensure that a school’s Federal income tax exemption does not benefit racially discriminatory practices in education. The Preamble asserts that by clarifying the law applicable to qualification for the Federal tax exemption of private schools, the Proposed Regulations would give the IRS the administrative certainty that the agency needs for the consistent application of the nondiscrimination requirement across all private schools.
Private School
For purposes of this test, the term “private school” means an organization that is (1) described in Section 501(c)(3) of the Code, determined without regard to the proposed regulatory nondiscrimination requirement (see below); (2) classified as an “educational organization” – i.e., one which maintains a regular faculty and curriculum, and has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on[xx]; and (3) not a governmental unit, an agency or instrumentality of a governmental unit, or an organization that is owned or operated by such an agency or instrumentality of a governmental unit (i.e., a public school).
Thus, the term includes any private (1) primary or secondary school, (2) college, (3) professional or trade school, or (4) university.
Nondiscrimination Requirement
According to the Proposed Regulation,[xxi] a private school is not operated exclusively for exempt purposes if it adopts, maintains, or enforces any policy or practice that discriminates “on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program.”
For Any Purpose
Significantly, for purposes of this rule, policies or practices that discriminate on the basis of race, color, or national or ethnic origin include policies or practices that discriminate on such basis “for any purpose.”
Thus, all forms of racial discrimination in education, regardless of the purpose or intent behind such discrimination – for example, where such racial discrimination is defended as serving remedial or diversity-related objectives – are against a fundamental public policy of the U.S.[xxii] and, therefore, would preclude a school’s exemption from Federal income tax under Section 501(c)(3) of the Code.
Religion
However, the Proposed Regulations would not preclude a private school from maintaining a religious mission, curriculum, or program of observance, or from selecting students on the basis of religious affiliation or membership.
Use of a religiously based selection criterion does not become discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may also share ancestry or ethnic characteristics, so long as the selection criteria are based solely on religion and not on shared ancestry or ethnic characteristics.
Consequence of Failure
An organization that fails the nondiscrimination requirement would be treated as not being “described in section 501(c)(3)” of the Code; it would not be exempt from Federal income tax.
In addition, by reason of the overlapping definitions found in Sections 501(c)(3) and 170(c)(2) of the Code, such an organization should not be eligible to receive contributions for which the contributing taxpayers intend to claim an income tax deduction.[xxiii]
Demonstrating the “Established” Public Policy
Although the text of the Proposed Regulation is a model of brevity and is easily understood, the IRS went to great lengths in the “Background” section of the Preamble to the proposed rule to review the legal history, or evolution, of what it describes as the “established U.S. public policy” against racial discrimination in education on which the Proposed Regulation avowedly is based.[xxiv]
The Preamble focuses on the development of Supreme Court precedent on the use of race in education, beginning with Brown v. Board of Ed.,[xxv] describes several of the Court’s subsequent decisions holding that a private school was barred from discriminating against applicants and students based on their race, then considers the holding in Bob Jones, in which the Supreme Court stated that:
“[a]n unbroken line of cases following Brown v. Board of Education establishes beyond doubt this Court’s view that racial discrimination in education violates a most fundamental national public policy, as well as rights of individuals,” specifying that “[t]he right of a student not to be segregated on racial grounds in schools . . . is indeed so fundamental and pervasive that it is embraced in the concept of due process of law.”
An Evolving Public Policy
Perhaps most significantly, especially when one considers the historical context in which the Regulation has been proposed, the Preamble reviews other decisions in which, over a period of time, the Supreme Court limited the “progressive” use of race in admissions.
For example, in Regents of the University of California v. Bakke,[xxvi] the Court prohibited using race as the basis for excluding persons from participation in federally funded programs, and stated that the use of racial quotas in university admissions constituted such an exclusion; in Grutter v. Bollinger,[xxvii] although the Court reiterated that maintaining the diversity of a university’s student body was “a compelling state interest” which could justify race-conscious admissions policies, it also noted that race-conscious admissions policies should be limited in time since “[a] core purpose of the Fourteenth Amendment was to do away with all governmentally imposed discrimination based on race”;[xxviii] in Fisher v. University of Texas,[xxix] the Supreme Court held that the race-conscious admissions program in question was lawful under the Equal Protection Clause because it was narrowly tailored with the goal of providing the educational benefits of a diverse student body[xxx]; and in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College,[xxxi] the Court held that the admissions policies of Harvard did not survive strict scrutiny because they “lack sufficiently focused and measurable objectives warranting the use of race, unavoidably employ race in a negative manner, . . . , and lack meaningful end points.”[xxxii]
A Leap of Sorts?
From these decisions, the IRS somehow ascertained that any form of race-based discrimination[xxxiii] in education – not just in admissions, but also with respect to scholarship, loan, athletic, or other school programs – for violated fundamental public policy, and warranted the denial or loss of the offending private school’s tax-exempt status.
In doing so, the IRS seems to have ignored those cases in which the Court held that race-conscious programs may be lawful if they were narrowly tailored to achieve an educational benefit.
In other words, it forecloses the opportunity for the agency to consider what may be a school’s legitimate purpose for distinguishing among applicants or students and thereby eliminates the exercise of any discretion in assessing whether the program violates established public policy.[xxxiv]
Observations
If finalized, the Proposed Regulation (which will apply with respect to the taxable year of any private school beginning after May 31, 2027) will represent the highest administrative authority issued by the IRS on the nondiscrimination requirement, and will have the “force of law.”[xxxv]
I imagine it will be challenged in the courts by private schools and other groups on the grounds that it constitutes the exercise of a legislative authority that Congress has not bestowed upon the IRS, and that the agency has improperly tried to unduly restrict, by regulation, the application of the common law’s “established public policy test” as articulated by the Supreme Court.
Stated differently, should, or how could, the IRS, have granted itself the authority (by regulation) – or, perhaps more accurately, denied itself the discretion – to make such decisions?
Assuming it survives these challenges, query how the regulatorily codified nondiscrimination requirement of the common law will be enforced.
Let’s start with the IRS’s current practice.
Certification
Based on its experience with private schools, the IRS previously concluded there was a need for more specific guidelines to ensure a uniform approach to the determination of whether a private school has a racially nondiscriminatory policy as to students.
Thus, under current guidance, a school must show affirmatively that (1) it has adopted a racially nondiscriminatory policy as to students that is made known to the general public, and (2) since the adoption of that policy, it has operated in a bona fide manner in accordance with such policy.
Toward this end, private schools that claim exemption from Federal income tax under Section 501(c)(3) of the Code are required[xxxvi] to provide the IRS with an annual certification of racial nondiscrimination.
If the organization is required to file Form 990, Return of Organization Exempt From Income Tax,[xxxvii] the certification must be made on Schedule E;[xxxviii] otherwise, it is made using IRS Form 5578.[xxxix] (Note that the definitions used by the Proposed Regulation bear a striking resemblance to those used on these forms.)
Post-Adoption
Presumably, these reporting requirements will remain in effect. The question, then, is how will the IRS use this information – which it has already been collecting for many years – following adoption of the Proposed Regulation?
As we saw above, the Proposed Regulation’s facial prohibition on race-based discrimination in education is absolute, which provides the IRS the “administrative certainty” that the agency has stated it needs for the consistent application of the nondiscrimination requirement across all private schools.
Is it reasonable, then, to expect that the IRS will use the data collected from private schools[xl] to summarily threaten – after adoption of the Proposed Regulation – to revoke the exempt status of any school that discloses a program for which the consideration of a student’s race is a factor?
Stay tuned.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
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[i] Unless the context requires otherwise, references to the “Administration” include both terms of the Trump Presidency.
[ii] https://www.usnews.com/news/national-news/articles/trumps-higher-education-crackdown-visa-revocations-dei-bans-lawsuits-and-funding-cuts.
[iii] IRC Sec. 4968. Added by P.L. 115-97; amended by P.L. 119-21 to replace the original flat rate with a tiered rate structure.
[iv] IRC Sec. 4960. Added by P.L. 115-97; amended by P.L. 119-21 to expand the tax to cover all qualifying employees. https://www.taxslaw.com/2023/11/activities-contrary-to-public-policy-revoking-the-tax-exempt-status-of-universities/#_ednref5.
[v] https://www.taxslaw.com/2025/12/obbba-and-the-self-imposed-tax-known-as-charitable-giving/.
[vi] In a November 2023 post, I proposed the application of this test to revoke the tax-exempt status of colleges and universities (including my alma maters) that implicitly supported faculty- and student-organized pro-Hamas demonstrations on their campuses following the attacks of October 7, 2023. https://www.taxslaw.com/2023/11/activities-contrary-to-public-policy-revoking-the-tax-exempt-status-of-universities/#_edn5.
[vii] To nondiscrimination in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program.
[viii] In the tax world, when someone refers to a “charitable” organization, it is likely they are using the term in its generally accepted legal sense to include not-for-profit corporations or charitable trusts that are organized and operated “exclusively” for religious, charitable, scientific, literary, educational, or other specified purposes. Reg. Sec. 501(c)(3)-1(d)(2).
[ix] P.L. 119-21
[x] IRC Sec. 501(a), Sec. 501(c)(3), Sec. 509(a), and Sec. 511 et seq.
[xi] IRC Sec. 170(a) and Sec. 170(c). The foregoing donor-side tax benefits facilitate a public charity’s solicitation of significant gifts.
[xii] Over the years, members of the public, and many of their elected representatives, have sometimes questioned whether the benefits that tax-exempt organizations “bestow” upon society are commensurate with the publicly-subsidized economic benefits enjoyed by such organizations. They argue that, in exchange for the tax-related benefits described above, the “beneficiary” organization must apply the economic value of such benefits to further its charitable mission and activities. If the organization fails to do so, it should lose its tax-favored status – there should be an expressly stated (and enforced) quid pro quo.
[xiii] Almost every organization described in IRC Sec. 501(c)(3) is also described in IRC Sec. 170(c), and vice versa. There are minor exceptions.
IRC Sec. 501(c)(3) includes:
“Corporations . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
IRC Sec. 170(c)(2) includes:
“A corporation. . . (A) created or organized . . . under the law of . . . any State . . . ; (B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals; (C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; and (D)which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
[xiv] Reg. Sec. 1.501(c)(3)-1(a).
In addition, no substantial part of the activities of the organization may be carrying on propaganda, or otherwise attempting, to influence legislation (with a limited exception), and it must not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
[xv] An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. If an organization has been recognized as tax-exempt by the IRS, it must engage in activities primarily in pursuit of the tax-exempt purposes constituting the basis for its tax exemption if it hopes to retain such status.
[xvi] To meet this requirement, it is necessary for the organization to establish that it is not organized or operated for the benefit of private interests or persons controlled, directly or indirectly, by such private interests (i.e., private inurement).
[xvii] https://www.taxslaw.com/2023/11/activities-contrary-to-public-policy-revoking-the-tax-exempt-status-of-universities/.
[xviii] Bob Jones University v. United States, 461 US 574 (1983) (“Bob Jones”). As we’ll see shortly, in Bob Jones, the Supreme Court found that racial discrimination in education is contrary to settled public policy. The fact that an otherwise exempt organization fulfills a legitimate educational function cannot be isolated from its discriminatory practices in the hope of maintaining its tax-favored status.
[xix] Prop. Reg. Sec. 1.501(c)(3)-2. https://www.federalregister.gov/documents/2026/09/04/2026-18127/racial-nondiscrimination-in-private-schools.
Comments and requests for a public hearing must be received by November 3, 2026.
[xx] This is an organization described in IRC Sec. 170(b)(1)(A)(ii) of the Code.
[xxi] Prop. Reg. Sec. 1.501(c)(3)-2(b).
[xxii] In effect, that is what the Proposed Regulations state.
[xxiii] IRC Sec. 170(c)(2). A clear statement to that effect would be welcomed. Take a look at https://www.law.cornell.edu/uscode/text/26/501 and https://www.law.cornell.edu/uscode/text/26/170.
[xxiv] The discussion of this public policy begins with a statement from the current regulation under Section 501(c)(3) of the Code, which states that the term includes the “promotion of social welfare by organizations designed to . . . eliminate prejudice and discrimination.” Reg. Sec. 1.501(c)(3)-1(d)(2)(ii).
[xxv] 347 U.S. 483 (1954) (state-sanctioned racial segregation of public schools violates the Equal Protection Clause of the Fourteenth Amendment).
[xxvi] 438 U.S. 265 (1978),
[xxvii] 539 U.S. 306 (2003).
[xxviii] The Court further stated that “racial classifications, however compelling their goals, are potentially so dangerous that they may be employed no more broadly than the interest demands,” so a permanent justification for racial preferences would be contrary to the principle of equal protection.
[xxix] 579 U.S. 365 (2016).
[xxx] However, the Court noted that it “remains an enduring challenge to our Nation’s education system to reconcile the pursuit of diversity with the constitutional promise of equal treatment and dignity.”
[xxxi] 600 U.S. 181 (2023).
[xxxii] The Court added that “ameliorating societal discrimination does not constitute a compelling interest that justifies race-based state action.”
[xxxiii] Or discrimination based on any of the other criteria enumerated in the Proposed Regulation.
[xxxiv] For example, what if a school decides to use economic status as a criterion for admission? It’s no secret that Black and Hispanic Americans experience higher poverty rates than White and Asian Americans; in other words, there’s a strong correlation between the two characteristics, although the express use of only one of them is suspect in the context of education. Would the IRS rely on the Proposed Regulation’s seemingly absolute nondiscrimination requirement to conflate race and economic status to defeat the defensible use of the latter in admissions?
[xxxv] Of course, the Supreme Court’s opinion in Loper Bright overturned “Chevron deference,” which may complicate matters.
[xxxvi] Under Rev. Proc. 75-50. https://www.irs.gov/pub/irs-tege/rp1975-50.pdf. See also IRS Form 1023, Sch. B.
[xxxvii] Basically, a private school other than a parochial or other church-related school.
[xxxviii] https://www.irs.gov/pub/irs-pdf/f990se.pdf. For the instructions: https://www.irs.gov/instructions/i990se.
[xxxix] “Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax” https://www.irs.gov/pub/irs-pdf/f5578.pdf..
[xl] Especially from the elite schools with which the Administration has clashed over several issues.
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