Proposed IRS Rule Threatens Tax-Exempt Status for Some Colleges
A proposed regulation from the Department of the Treasury and the Internal Revenue Service threatens to strip private nonprofit colleges and universities of their federal tax-exempt status if they maintain what the current federal government calls “race-conscious” policies or programs. Higher education associations and legal analysts have raised alarms over this proposal, warning that it exceeds its authority and invites subjective, politicized enforcement against higher education.
Proposed IRS Rule Threatens College Tax-Exempt Status
Federal regulators issued the proposed rule to amend Internal Revenue Code regulations that deny exemption to any private school that adopts, maintains, or enforces policies that discriminate based on race, color, or national or ethnic origin.
The draft rule establishes that “all forms” of racial discrimination run contrary to public policy, regardless of intent. Under this framework, what the current administration thinks are “race-conscious remedial policies” and diversity initiatives are treated as disqualifying factors in college admissions, scholarships, loans, athletics, and other school-supported programs.
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Removing Legacy Guidance
The proposal removes long-standing guidance that allowed institutions to address historic disparities. In previous administrations on both sides of the political spectrum, the IRS allowed policies favoring certain groups in admissions, facilities, programs, and financial assistance, provided the purpose and effect promoted an overall racially nondiscriminatory policy.
The proposed regulation eliminates that exception.
Federal authorities cite the 1983 Supreme Court decision in Bob Jones University v. United States as their legal foundation. In that case, the Supreme Court ruled that an institution cannot qualify for tax exemption if its purpose contradicts fundamental public policy. Bob Jones University had enforced rules banning interracial dating and marriage, a discriminatory policy.
The administration also relies on the 2023 Supreme Court decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, seeking to include restrictions on what the current federal government believes are “race-conscious” admissions across every campus program.
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Forced by Executive Order?
As reported by Higher Ed Dive, the Treasury proposal aligns IRS enforcement with a January 2025 executive order from the current president (at press time) that attempted to declare diversity, equity, and inclusion programs violations of federal civil rights law.
Opposition across the higher education sector is strong. The CEO of the National Association of College and University Business Officers told Higher Ed Dive that the proposal “far exceeds” agency authority, arguing that changes carrying profound consequences for an institution’s tax-exempt status must be firmly grounded in statute and provide clear, fair, and predictable compliance standards.
Requests to Withdraw the Rule
The American Council on Education, submitting comments on behalf of more than 40 higher education associations, urged the IRS to withdraw the proposed rule entirely. The American Council on Education noted that the rule could affect as many as 18,000 private institutions from elementary schools through universities. The American Council on Education President told The Wall Street Journal that higher education has seen similar efforts before, with tax-exempt status serving as the newest weapon.
In comments submitted to federal regulators, the American Council on Education stressed that the administration misapplies the Bob Jones precedent. The coalition emphasized that the Bob Jones ruling established a high bar for revocation, applying solely to explicit, institutional policies of unlawful race discrimination in admissions.
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No Enforcement Framework
The American Council on Education also pointed out that the draft contains no investigative framework. It establishes no safe harbors, clear evidential standards, or notice-and-cure periods before the government moves to revoke an exemption. The American Council on Education notes higher education received an estimated $78.8 billion in charitable contributions in fiscal year 2025, with $49.5 billion for private nonprofit institutions.
In the 2024–25 academic year, undergraduate students received approximately $67.4 billion in grants. Endowments totaled $33.4 billion in 2025, with nearly half dedicated to student financial assistance.
In a legal analysis published by Hemenway & Barnes LLP, attorneys examined the measure’s practical and operational problems, noting the proposal applies across all tax-exempt private primary schools, secondary schools, colleges, universities, professional schools, and trade schools. Hemenway & Barnes LLP highlighted that while the draft suggests institutions can pivot to supposedly “race-neutral” criteria like family income, changing donor-restricted endowment funds is fraught with legal conflict.
Hemenway & Barnes LLP advised private educational institutions to immediately inventory all so-called race-conscious policies and prepare for IRS compliance audits should the measure pass. The public comment period concluded in early November. If finalized, the regulations are scheduled to take effect for taxable years beginning after May 31, 2027, setting the stage for legal challenges in federal court.
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About the author
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter/editor for Air Force Television News and the Pentagon Channel. His freelance work includes contract work for Motorola, VALoans.com, and Credit Karma.
Wallace is cofounder of Dim Art House in Springfield, Illinois, and spends his non-writing time as an abstract painter and filmmaker. Joe Wallace is the director of The Camera is Your Friend, a documentary about the Texas psychedelic experimental collective, Crevice. He also directed Cowgirls & Synthesizers, a documentary about the Texas synth-pop band, Hyperbubble.
