On September 4, the Internal Revenue Service published a proposed rule on the Federal Register that would allow the IRS to revoke the 501(c)(3) status of any nonprofit private school that “discriminates on the basis of race, color, or national or ethnic origin in administration of its educational, admissions, scholarship, athletic, or other policies, based on the fundamental public policy of the United States against such practices.” The IRS explanation of the proposed rule specifies that it “would further define race-based action for the purpose of ameliorating societal discrimination as a form of discrimination” (translation of the phrase from legalese to English: nonprofit schools with diversity, equity, and inclusion (DEI) policies and practices would lose their 501(c)(3) status if the rule is finalized).
The IRS anticipates publishing a final rule in the first five months of 2027 and that the rule would take effect for taxable years beginning after May 31, 2027. The IRS is accepting public comments on the proposed rule through November 3. The IRS will hold a public hearing on the proposed rule on December 2 at 10 a.m.
Based on our initial analysis of the proposed rule, the Center shares the following observations about its details and implications for nonprofit schools and other 501(c)(3) organizations:
The proposed rule would only apply to nonprofit K-12 schools and higher education institutions. It would not apply to early childhood education nonprofits, and it would not jeopardize the tax-exempt status of other 501(c)(3) nonprofits that provide services based on race, color, or national or ethnic origin of program recipients or that have DEI programs or practices in place. However, the Center is concerned that, if this rule becomes final, it could set a precedent that would enable the IRS to extend its application to other 501(c)(3) nonprofits, ultimately leading to a policy that DEI policies and practices are forbidden for 501(c)(3) nonprofits.
The text of the new proposed nondiscrimination requirement for nonprofit schools is: “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 purposes of this section, discrimination on the basis of race, color, or national or ethnic origin includes any discrimination on the basis of race, color, or national or ethnic origin for any purpose.” The two italicized phrases in the last sentence of the proposed definition (which we are italicizing here but are not italicized in the text of the proposed rule) are the parts that would jeopardize the 501(c)(3) status of schools with DEI practices or policies in place.
The IRS explanation of the proposed rule specifies that the rule would not prohibit nonprofit private K-12 schools or higher education institutions from having religious affiliations or from using religion as a factor in admissions or awarding financial aid.
The proposed rule avoids using the phrase “diversity, equity, and inclusion” and the “DEI” acronym. However, the IRS explanation of the rule makes clear that a wide range of programs and policies at nonprofit schools that would typically be classified as “DEI” could lead to the revocation of schools’ 501(c)(3) status.
In the IRS explanation of the proposed rule, the concept of a “fundamental public policy against racial discrimination” comes from the 1983 U.S. Supreme Court ruling in Bob Jones University v. United States where the Court found that the IRS could revoke a nonprofit private college’s tax-exemption under Section 501(c)(3) because its policy of denying admission to individuals in interracial relationships violated a “fundamental public policy” of eradicating racism in education. In the majority opinion in the Bob Jones decision, then-Chief Justice Warren Burger emphasized that the “fundamental public policy” of eradicating racism in education was established by three decades of federal court cases, statutory changes, and executive actions and was not merely recent legal or societal changes. In proposing to extend the fundamental public policy doctrine to prohibit nonprofit schools from having DEI policies and practices, however, the IRS does not cite decades of court rulings, laws, and executive actions but rather relies primarily on very recent legal developments, including the 2023 Supreme Court ruling in Students for Fair Admission v. Harvard (holding that the affirmative action admission policies of Harvard and UNC-Chapel Hill violated the Equal Protection Clause of the 14th Amendment and Title VI of the Civil Rights Act of 1964) and two anti-DEI executive orders (EO 14173 and EO 14280) that President Trump issued in 2025.
The proposed rule limits its nondiscrimination provisions to express use of race, color, or national or ethnic origin and would not prohibit nonprofit educational institutions from using other criteria – such as income and geography – in determining students’ eligibility for scholarships and loans, even if these other criteria may correlate closely to the students’ race. This is a narrower interpretation of anti-DEI policy than other guidance from the Trump Administration, most notably the July 2025 memo from the U.S. Department of Justice explaining that antidiscrimination provisions for nonprofits with federal grants prohibit these nonprofits not only from explicit use of race, but also from using proxies for race – including factors like geography and income – in providing programs and services.
