IRS Proposed Nondiscrimination Rules Impact Schools and Donors

The IRS today proposed regulations that may cause a school to lose its tax-exempt status. Scholarships and donors are impacted as well.

These proposed regulations would provide that all forms of racial discrimination in education, 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), preclude a school’s exemption from Federal income tax under section 501(c)(3).

The proposed regulations may affect the distribution of scholarship and loan funds among the population of students. The Treasury Department and the IRS expect that donors may continue to donate to private schools using alternative criteria, such as income, geography, or first generation student status.

Note: Although the proposed rule prevents donors from granting scholarships based on race, ethnicity, or national origin through schools, these donors retain the ability to fund other scholarships.