On September 4, 2026, Treasury and the IRS published proposed regulations (REG-119986-25) adding a new §1.501(c)(3)-2 that would deny tax exemption to a private school that discriminates by race, color, or national or ethnic origin in any educational, admissions, scholarship, athletic, or other program, and would delete the parts of Rev. Proc. 75-50 that let a school favor racial minority groups. Comments close November 3. The rule would apply to school tax years beginning after May 31, 2027, and it expressly preserves religious mission and religious-affiliation admissions.
On Friday, September 4, 2026, the Treasury Department and the IRS published a notice of proposed rulemaking titled “Racial Nondiscrimination in Private Schools” at 91 FR 56811. It carries docket number REG-119986-25 and RIN 1545-BS05, and it would add a new §1.501(c)(3)-2 to the income tax regulations. Written or electronic comments and requests for a public hearing are due by November 3, 2026, on regulations.gov under IRS-2026-1189. The rule would apply to the taxable year of any private school beginning after May 31, 2027.
The operative sentence is short. Proposed §1.501(c)(3)-2(b) says 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.” A school that fails that test is not an organization described in section 501(c)(3) for the years the rule covers. The words “scholarship or loan program” are in the regulatory text itself, which is why this proposal is worth reading closely in a year when a new federal scholarship pipeline is about to open.
Most of what the rule says has been the government's position since Bob Jones University v. United States in 1983 and Rev. Rul. 71-447 before it. The genuinely new part is the phrase that follows: discrimination on those grounds “includes any discrimination on the basis of race, color, or national or ethnic origin for any purpose.” The preamble is explicit about what that reaches, saying the bar applies “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).” To make that stick, the proposal would modify Rev. Proc. 75-50 as modified by Rev. Proc. 2019-22, deleting the second sentence of section 3.02 and the third and fourth sentences of section 4.05, which are the provisions that had allowed a school to favor racial minority groups in admissions, facilities and programs, and financial assistance. Everything else in Rev. Proc. 75-50 stays.
For religious schools, and for the many scholarship organizations whose students attend them, the preamble goes out of its way to draw a line. “For the avoidance of any doubt,” it says, the 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.” It adds that a religious 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,” provided the criterion rests solely on religion. Schools may also still adopt policies meant to eliminate prejudice and discrimination under the existing regulation, so long as they get there by means other than race-based ones.
Now the part that decides who actually has to read this. Proposed §1.501(c)(3)-2(c) defines “private school” as an organization described in section 501(c)(3) and classified as an educational organization under section 170(b)(1)(A)(ii), which is the regular-faculty, regular-curriculum, enrolled-student-body definition. Governmental units and their instrumentalities are excluded. A scholarship granting organization is not that. An SGO is a grantmaking charity, not an educational organization with a faculty and a student body, so this rule does not by its terms regulate SGOs. §25F puts its own 501(c)(3) test on the SGO rather than on the school: §25F(c)(5)(A) requires the organization to be described in section 501(c)(3) and not be a private foundation, and the statute defines a qualified expense by cross-reference to section 530(b)(3)(A), which says nothing about the recipient school's exempt status.
So the honest description is not that this rule changes who can receive an EFTC scholarship. It does not. It is a condition on the school at the other end of the pipeline, and it bites through the school's own exemption, its donors' charitable deductions, and in many states the property and sales tax treatment that rides on federal exempt status. A school that administers a scholarship program funded by SGO dollars is squarely inside paragraph (b), because the paragraph names school-administered and school-supported programs, and a scholarship funded from outside is still administered by the school when the school decides who gets it.
The calendar is the other reason to pay attention. §25F applies to contributions made in taxable years beginning after December 31, 2026, so the first donations are collected in calendar 2027 and the first scholarships are spent on the 2027-28 school year. This rule applies to a school's taxable year beginning after May 31, 2027. Most private schools run a July-to-June fiscal year, which means their 2027-28 year is both the first year they receive federal scholarship money and the first year they are subject to the new regulation. Those two things arrive together, and a school with a race-conscious tuition-assistance set-aside has until the start of that year to look at it.
There is one more thing worth naming, because it is a fact about the docket rather than a prediction. This is a Treasury rulemaking about private schools that published while the §25F rule itself has not. Treasury put the §25F regulations on its Unified Agenda for the fall under RINs 1545-BR97 and 1545-BS17 and has said it expects proposed regulations no later than the end of September. As of today neither RIN appears at OIRA, and a significant tax rule normally clears OIRA review before it publishes. That does not mean the deadline will slip. It does mean the window has narrowed to weeks, and states that said they were waiting for federal guidance before opening SGO certification are still waiting.
If you run or are forming a scholarship organization, nothing here changes your own compliance work, and the useful response is to know the rule exists so you can answer the question when a partner school asks. If you work with private schools, the version to read is the regulatory text at the end of the notice rather than the preamble summary, and the comment period runs to November 3. Our guide for private schools covers how the credit reaches a school, scholarship eligibility covers who may receive an award, and the SGO directory lists the organizations already operating.
