Schools and lawyers challenge proposed IRS race-based tax rule

Rule would take effect for school years starting June 2027

The proposed regulations would apply to colleges as well as primary and secondary schools, and would bar schools from adopting, maintaining or enforcing any policy or practice that discriminates on the basis of race, color, or national or ethnic origin — including educational policies, athletics, scholarships and loans.

Critics say they oppose discrimination but warn that the government’s definitions of prohibited activity are too murky to navigate. They say they cannot determine whether any current scholarships, admissions policies, student groups or curricular choices would run afoul of the IRS and risk disastrous financial consequences.

“It’s so vague. It’s so unclear,” said Tom Stritikus, president of Occidental College in Los Angeles. “We should all be concerned about an interpretation of the law that extends well beyond what it was intended for, and it was essentially an overreach.”

The rules are the latest move by the Trump administration against private-sector diversity, equity and inclusion initiatives. The proposed changes raised alarms beyond major secular universities and progressive groups. Among those filing public concerns were Liberty University in Virginia, Portland Jewish Academy in Oregon and the National Association of Bond Lawyers.

After the Supreme Court’s 2023 decision against the use of race in college admissions, colleges changed their policies to fit within it, said Liz Clark, who was until recently vice president for policy and research at the National Association of College and University Business Officers. But she said the new rule leaves too many open questions: Can a school sponsor an Irish heritage festival? Can it honor a Latino student’s request for a Latino tutor? Can it offer courses on Native American languages?

“The ambiguity of the proposal is really problematic and the stakes are very high,” Clark said. “The challenge here is that we have an implementation date around something for which there is no law at this time.”

The regulations mark the government’s first attempt to broaden the reach of a landmark 1983 Supreme Court ruling, in which the court upheld the IRS’s decision to strip Bob Jones University of its tax-exempt status, determining that its ban on interracial dating violated fundamental public policy. That case has long been seen as a special case, and the IRS hasn’t attempted to use the “fundamental public policy” argument to constrain what tax-exempt groups can do.

The new rules use the Bob Jones precedent to extend the Supreme Court’s 2023 admissions ruling beyond colleges and beyond admissions. The regulations effectively declare that a ban on certain race-conscious activities in schools is a fundamental public policy.

Opponents warn that even a single inadvertent violation could risk loss of tax exemption. For a private school or college, losing tax-exempt status would be financially damaging: it could wreak havoc with tax-exempt bonds and prevent donors from claiming tax deductions.

School leaders said they weren’t sure which current activities would cross the line and would likely scale back anything questionable because the potential penalty is so severe, including changing scholarships and programs that had long been considered acceptable by the IRS.

“I see people starting to pull back pre-emptively, before any final rule takes place,” said Anne Stavney, executive director of the Independent Schools Association of the Central States. “It’s coming from a place of fear, and understandable, but this kind of pre-emptive compliance is what educators do, because we want to ensure that we’re doing things correctly.”

Christian schools, in particular, fear that a future administration would extend the rules beyond race and ethnicity to limit tax-exempt schools’ policies on gender and sexuality. Although the introduction to the regulations says it isn’t intended to prevent schools from furthering a religious mission or selecting students based on religion, that language isn’t actually in the rules themselves.

Don Russell, administrator of the 103-student Southview Christian School in Statesville, N.C., said a religious-liberty provision should be written clearly into any final rule. “We want to guard against any future expansion,” said Russell, who said his school and its associated church have traditional views of marriage and sexuality. “We just want that to be respected; you don’t have to agree with us.”

Not all public comments oppose the rule. “The IRS rightly responds to the unfortunate reality that racial discrimination in the form of DEI practices continues to infest many educational settings,” wrote a group of Republican state attorneys general, led by Indiana’s Todd Rokita.

Roger Colinvaux, a tax-law professor at Catholic University in Washington, D.C., said the widespread public agreement against anti-Black discrimination that was the core of the Bob Jones ruling doesn’t exist when it comes to scholarships created by donors and school programs that consider race or ethnicity. “I am seriously hopeful and maybe naive about this, that the administration just hears that there is widespread opposition on the political left and the political right and decides to withdraw the regulation,” he said.

If and when the administration issues a final rule and enforces it, lawsuits are likely.