House Democrats, state attorneys general, and law firms are urging the Treasury Department and the IRS to withdraw or narrow proposed rules that would deny tax-exempt status to private schools with race-based policies, including those meant to promote diversity.
Background
Under the proposed regulations (Preamble to Prop Reg REG-119986-25), published September 4, a private school would not qualify under IRC § 501(c)(3) if it “adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin” in admissions, scholarships and loans, athletics, or other school-administered or school-supported programs.
That standard applies to discrimination “for any purpose,” including, the preamble says, policies defended as “serving remedial or diversity-related objectives.” The agencies estimate that 18,000 private schools could be affected. Finalized rules would apply to tax years beginning after May 31, 2027.
The proposal would also delete language in Rev Proc 75-50, 1975-2 CB 587, stating that a school policy favoring “racial minority groups” is not racial discrimination when its “purpose and effect” is to promote the school’s racially nondiscriminatory policy.
House Democrats seek withdrawal
Representative Terri A. Sewell (D-AL), ranking member of the House Ways and Means Oversight Subcommittee, and eight other committee Democrats urged withdrawal of the proposal. The other signers were Democratic Representatives Don Beyer (VA), Judy Chu (CA), Danny K. Davis (IL), Lloyd Doggett (TX), Jimmy Gomez (CA), Gwen Moore (WI), Jimmy Panetta (CA), and Bradley Scott Schneider (IL).
The lawmakers said the proposal incorrectly seeks to broaden Bob Jones University v. United States, 461 U.S. 574 (1983), in which the U.S. Supreme Court upheld the IRS’ revocation of the university’s exemption based on three decades of evidence from all three branches of government.
“The Court did not give the IRS unilateral power to define fundamental public policy,” they wrote. “Here, all three branches of government have not spoken.”
“We should not punish schools that use diversity-based programs to support their nondiscrimination policies,” the letter said.
State attorneys general cite donor intent
A coalition of 20 attorneys general, co-led by California Attorney General Rob Bonta, Massachusetts Attorney General Andrea Joy Campbell, Minnesota Attorney General Keith Ellison, and New York Attorney General Letitia James, asked the IRS to withdraw the proposal “in its entirety.”
Private schools that administer restricted scholarships and endowments are generally charitable trustees under state law, and changing a gift’s purpose requires “the assent of State Attorneys General and often court proceedings,” the coalition said. Their offices’ cy pres litigation dockets “will exponentially increase,” the letter warned, diverting resources from fighting charitable fraud.
“[O]ur nation has no ‘fundamental public policy’ against private schools taking lawful steps to promote diversity, equity, and inclusion,” the attorneys general wrote. They also said the IRS does not explain why its 40-year interpretation of Bob Jones is now wrong.
Law firms challenge IRS authority
Writing on behalf of private colleges and universities, Stuart F. Delery, a partner at Gibson, Dunn & Crutcher LLP, said “[t]he IRS is the nation’s tax collector, not its civil-rights enforcer.”
Section 501(c)(3) disqualifies organizations only for private inurement, substantial lobbying, and political campaign intervention, and “Congress gave the IRS no power to add a fourth,” the letter said.
Delery cited IRC § 501(i), which denies exemption to social clubs with discriminatory governing instruments, as evidence that Congress acts expressly when it wants to. Under Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), and the major questions doctrine, he said, Congress must make that decision.
He also objected that one employee’s improper consideration of race could cost an entire school its exemption. Because the proposal never defines “school-supported,” the letter asked whether the IRS would hold a school responsible for “an individual faculty member, a student group, or an alumni volunteer.”
Other firms seek delay, grandfather relief
Diara Holmes and Meghan Biss, partners at Loeb & Loeb LLP, and Michael Desmond, a member of Miller & Chevalier Chartered, said in a joint letter that the proposal would delete scholarship protections in Rev Proc 75-50 without the reasoned explanation the Administrative Procedure Act requires.
In their view, the rules would “force schools into an untenable choice” between honoring donor intent and keeping their exemptions.
The firms asked that applicability be delayed to tax years beginning after May 31, 2028, that funds promised or contributed before September 4, 2026, be grandfathered, and that any final rules be limited to postsecondary admissions, consistent with Students for Fair Admissions Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023).
Reynolds T. Cafferata, a partner at Rodriguez, Horii, Choi & Cafferata LLP, wants the IRS to confirm that “pool and match” programs are permissible. Under that approach, a school sets each award without regard to race and then fills it from restricted funds.
“There is no zero-sum nature or advantage provided to any applicant at the expense of another on the basis of race in a pool and match scholarship system,” Cafferata wrote.
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