Claire H. Topp

On September 4, 2026, the Department of Treasury (“Treasury”) and Internal Revenue Service (“IRS”) published proposed regulations under § 1.501(c)(3)-2(b) (the “Proposed Regulations”) that, if finalized, would significantly change the existing rules on the racial nondiscrimination requirements for tax-exempt private schools. This includes the approximately 18,000 primary and secondary schools, colleges, universities, professional schools, and trade schools in the United States that currently qualify for tax-exempt status as organizations described in Sections 501(c)(3) and 170(b)(1)(A)(ii) of the Internal Revenue Code of 1986, as amended (the “Code”). The Proposed Regulations adopt an absolute rule that 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 administering any educational, admissions, scholarship or loan, athletic, or other school-administered or school-supported policy or program, clarifying that discrimination “for any purpose” is disqualifying. The stated basis for the rule change is that there is a fundamental public policy of the United States against racial discrimination in education, and that schools engaging in such discrimination are not eligible for section 501(c)(3) status. The preamble to the Proposed Regulations cites various antidiscrimination laws as well as U.S. Supreme Court cases such as Bob Jones University v. United States, 461 U.S. 574 (1983) and the more recently decided Students for Fair Admissions v. President and Fellows of Harvard College, 600 U.S. 181 (2023), as demonstrating this fundamental public policy. The Proposed Regulations would apply to tax-exempt private schools in taxable years beginning after May 31, 2027. Existing Nondiscrimination Requirements The IRS’s current racial nondiscrimination requirements for private schools are described in Revenue Procedure 75-50, 1975-2 C.B. 587, as modified by Revenue Procedure 2019-22, 2019-22 I.R.B. 1260 (“Rev. Proc. 75-50, as modified”). The Revenue Procedure establishes guidelines and recordkeeping requirements for private schools to ensure they have and operate under a “racially nondiscriminatory policy as to students.” Under Rev. Proc. 75-50, as modified, a “racially nondiscriminatory policy as to students” means: the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. Section 3.02 of Rev. Proc. 75-50, as modified, clarifies that “discrimination on the basis of race” includes discrimination on the basis of color and national or ethnic origin. In addition, if a school selects students on the basis of membership in a religious denomination or unit, the school will not be deemed to have a discriminatory policy as long as membership in the denomination or unit is open to all on a racially nondiscriminatory basis. Most notably, Rev. Proc. 75-50, as modified, allows favoring minority groups to promote nondiscrimination. The second sentence of section 3.02 provides: A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance will not constitute discrimination on the basis of race when the purpose and effect is to promote the establishment and maintenance of that school’s racially nondiscriminatory policy as to students. To this end, the third sentence of section 4.05 of Rev. Proc. 75-50, as modified, states that scholarships and loans that are made pursuant to financial assistance programs favoring members of one or more racial minority groups that are designed to promote a school’s racially nondiscriminatory policy will not adversely affect the school’s exempt status. Similarly, the fourth sentence of section 4.05 provides that financial assistance programs favoring members of one or more racial groups will not adversely affect tax-exempt status if they do not significantly derogate from the school’s racially nondiscriminatory policy. The requirements under Rev. Proc. 75-50, as modified, are currently enforced by requiring existing tax-exempt private schools to maintain certain records and information showing compliance with the requirements and to annually certify compliance in Schedule E to IRS Form 990, Return of Organization Exempt From Income Tax. New tax-exempt private schools must demonstrate fulfillment of the requirements in Schedule B to IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, to receive tax-exempt status. What’s Changed The key difference in the Proposed Regulations from the existing nondiscrimination requirements set forth in Rev. Proc. 75-50, as modified, is what actions count as “racial discrimination.” The Proposed Regulations contain an absolute rule that 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 administering any educational, admissions, scholarship or loan, athletic, or other school-administered or school-supported policy or program, clarifying that discrimination “for any purpose” is disqualifying. According to the preamble, a disqualifying purpose includes race-based policies or programs with the intent to ameliorate the effects of past racial discrimination, a practice that is expressly permitted by Rev. Proc. 75-50, as modified. In addition, the Proposed Regulations would delete the allowances in Rev. Proc. 75-50, as modified, for minority-favoring policies and scholarships/loans by deleting the second sentence of section 3.02 and the third and fourth sentences of section 4.05 of Rev. Proc. 75-50, as modified, described above. Of note, the Proposed Regulations leave the exception for religious denomination intact, providing that selecting students based on religious affiliation or membership is not race discrimination if the criterion is based solely on religion and not on shared ancestry or ethnic characteristics. Further, the Proposed Regulations still permit private schools to consider characteristics such as first-generation status, individual hardship (demonstrated financial or personal struggle), family income, and geographic location. Finally, similar to Rev. Proc. 75-50, as modified, the Proposed Regulations apply to schools as described in Section 170(b)(1)(A)(ii) of the Code and not those exempt as a governmental unit or under Code Section 509(a)(2). If finalized, the standard set forth in the Proposed Regulations is intended to bind tax-exempt private schools effective for tax years after May 31, 2027. This means schools’ tax-exempt status, including eligibility for tax-exempt bonds, could be impacted as early as fiscal year 2028. What’s Still Unclear The Proposed Regulations leave many unanswered questions for tax-exempt private schools. Eliminating Prejudice and Discrimination Standard The preamble to the Proposed Regulations indicates that tax-exempt private schools may continue to take actions or adopt policies intended to eliminate prejudice and discrimination; provided that the organization achieves these purposes by means other than actions or policies that discriminate on the basis of race, color, or national or ethnic origin. This is an important carveout, since the definition of “charitable” for purposes of section 501(c)(3) of the Code includes eliminating prejudice and discrimination. See Treas. Reg. 1.501(c)(3)-1(d)(2)(ii). What’s unclear under the Proposed Regulations, however, is how the elimination of prejudice and discrimination may be accomplished by private schools given that decades of IRS rulings expressly permit practices that are now considered contrary to the Proposed Regulations. Revising Eligibility Criteria The preamble to the Proposed Regulations acknowledges that private schools may revise eligibility criteria for scholarships and loans to conform to the Proposed Regulations, including using geographic or income-based criteria in lieu of racial or ethnic criteria to accomplish substantially similar outcomes. It generally minimizes, however, the compliance costs and impacts making these changes would have on private schools, stating the Treasury Department and the IRS do not have “readily available parameters or models” to assess these things. It is therefore unclear how far private schools must go under the Proposed Regulations to revise eligibility criteria of existing programs to be considered in overall compliance with the requirements and whether there could be circumstances where the IRS would consider such changes a proxy for race-based determinations. There is also virtually no acknowledgement of the competing donor considerations in making such changes. Such considerations include, but are not limited to, laws regarding respecting donor intent such as the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and donor free-speech rights under the First Amendment. State Law The preamble states that the Proposed Regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of Executive Order 13132. Nowhere in the document, however, do the Treasury Department and the IRS acknowledge that States may have antidiscrimination laws for private schools that are contrary to the Proposed Regulations or that State laws could impact the ability of private schools to revise eligibility criteria in the manner suggested by the preamble. Fundamental Public Policy The stated basis for the rule change is that there is a fundamental public policy of the United States against racial discrimination in education, and that schools engaging in such discrimination are not eligible for section 501(c)(3) status. The fundamental public policy standard stems from the U.S. Supreme Court’s decision in Bob Jones University v. United States, 461 U.S. 574 (1983) where the Court upheld the IRS’s revocation of tax-exempt status for schools that maintained racially discriminatory policies promoting racial segregation based on a fundamental public policy in the United States against such practices. Citing Students for Fair Admissions v. President and Fellows of Harvard College, 600 U.S. 181 (2023), the preamble to the Proposed Regulations states that all forms of racial discrimination in education, regardless of intent, are now against a fundamental public policy of the United States and preclude tax exemption. The question is whether the Treasury Department and the IRS have the authority to announce, through these Proposed Regulations, what a fundamental public policy of the United States is, and then use that fundamental public policy standard to make decisions on tax-exempt status. The fundamental public policy standard does not appear in Section 501(c)(3) of the Code and goes beyond the Bob Jones University decision involving the practice of racial segregation. The use of this standard to deny tax-exempt status also potentially raises First Amendment concerns, a discussion of which is beyond the scope of this update. Enforcement Neither the Proposed Regulations, nor the preamble to the Proposed Regulations address how the IRS intends to enforce the requirements under the Proposed Regulations. Presumably, tax-exempt private schools would continue to be required to show compliance on IRS Form 1023 and Schedule E to Form 990. The IRS also could create an audit initiative or campaign to address the new requirements. Given the procedural safeguards built into the Code, any such audits could take years to play out. What’s Next A number of groups have already publicly announced they intend to challenge the Proposed Regulations on a variety of grounds, such as statutory authority, administrative law, and constitutional claims. It is also possible that Congress could take action in this area. In the meantime, tax-exempt private schools should review existing policies and programs to determine whether any changes would be needed to comply with the Proposed Regulations. This could include review of educational program criteria and policies, admissions criteria and policies, scholarship or loan-related agreements and application documents, donor and gift agreements, athletic programs and policies, website information, and existing records to show compliance with racial nondiscrimination requirements. Schools should also continue to monitor the status of the Proposed Regulations and potential challenges, any changes to IRS forms related to reporting compliance with the nondiscrimination requirements, and any IRS audit initiatives for private schools. The Treasury Department and the IRS have asked for comments on all aspects of the Proposed Regulations. All comments should be submitted in writing, either electronically or by paper, to the Treasury Department and the IRS by November 3, 2026, following the procedures provided in the notice. For schools that wish to submit comments or that have questions or need assistance regarding the Proposed Regulations, please contact Katrina Wessbecker or Claire Topp from Dorsey’s Nonprofit and Tax-Exempt Organizations practice group.

On May 26, 2023, the Governor of Minnesota signed into law Minnesota bill HF 402 to increase government oversight of health care transactions that occur in Minnesota or involve Minnesota-based health care entities. A general overview of the new law’s oversight provisions can be found in a previous Dorsey Health Law blog post. The new law also contains provisions specific to nonprofit health care organizations, including additional transaction requirements and extension of the moratorium on certain conversion transactions. Given the prevalence of nonprofit health care organizations in Minnesota, we expect this new legislation to materially impact both payors and providers in the State. This blog post summarizes those provisions, all of which have already gone into effect. Additional Transaction Requirements for Nonprofit Health Care Entities In addition to the general notice requirements now effective under this new law and summarized in our previous post, HF 402 imposes further requirements on (1) nonprofit health care entities that are either incorporated under the Minnesota Nonprofit Corporation Act or organized as a Minnesota nonprofit limited liability company, and (2) the subsidiaries of such nonprofit entities, regardless of their incorporation or organizational status. These entities are now required to ensure the following before proceeding with a transaction: The transaction complies with the Minnesota Nonprofit Corporation Act, the charitable trusts statutes, and other applicable laws; The transaction does not involve or constitute a breach of charitable trust; The transferring nonprofit entity will receive the full and fair value for its public benefit assets, unless the discount between the full and fair value of the assets and the value received for the assets will further the nonprofit purposes of the entity or is in the public interest; The value of the public benefit assets to be transferred has not been manipulated in a manner that causes or has caused the value of the assets to decrease; The proceeds of the transaction will be used in a manner consistent with the public benefit for which the assets are held by the nonprofit health care entity; The transaction will not result in a breach of fiduciary duty; and There are procedures and policies in place to prohibit any officer, director, trustee, or other executive of the nonprofit health care entity from directly or indirectly benefiting from the transaction. Currently, it is not entirely clear how or to what extent these additional transaction requirements for nonprofit health care entities will be reviewed in conjunction with the general notice requirements for health care entities. Moratorium on Conversion Transactions A moratorium on conversion transactions involving nonprofit health plan entities operating under the Minnesota Nonprofit Health Service Plan Corporations Act or Health Maintenance Act that was set to expire July 2023 has been extended through July 2026. The moratorium was initially enacted in response to concerns of some lawmakers that nonprofit assets could be transferred to for-profit carriers in a merger or acquisition. These nonprofit health plan entities “may only merge or consolidate with; convert; or transfer, as part of a single transaction or a series of transactions within a 24-month period, all or a material amount of its assets to” an entity that is incorporated under the Minnesota Nonprofit Corporation Act; “or to a Minnesota nonprofit hospital within the same integrated health system as the health maintenance organization.” A “material amount” is defined as the “lesser of ten percent of an entity’s total admitted net assets as of December 31 of the previous year, or $50,000,000.” The moratorium does not apply if the nonprofit health plan entity files an intent to dissolve due to insolvency of the corporation or if insolvency proceedings are commenced. Related Study and Recommendations HF 402 requires that the Minnesota commissioner of health study and develop recommendations on the regulation of conversions, mergers, transfers of assets, and other transactions primarily affecting Minnesota-domiciled nonprofit health maintenance organizations (HMOs). These recommendations must address the following: Monitoring and regulation of Minnesota-domiciled for-profit HMOs; Issues related to public benefit assets held by a nonprofit HMO, including identifying the portion of the organization’s assets that are considered public benefit assets to be protected, establishing a fair and independent process to value the assets, and determining how public benefit assets should be stewarded for the public good; Providing a state agency or executive branch office with authority to review and approve or disapprove a nonprofit HMO’s plan to convert to a for-profit organization; Establishing a process for the public to learn about and provide input on a nonprofit HMO’s proposed conversion to a for-profit organization; and Issues, including statutory language and regulatory implementation, related to a potential statutory requirement that nonprofit HMOs licensed under Minnesota Statutes chapter 62D, and health systems organized as a charitable organization, upon the sale or transfer of control to an out-of-state or for-profit entity, return to the state’s general fund an amount equal to the value of any charitable assets the HMO or health system received from the state. The commissioner is required to seek public comment on the regulation of conversion transactions involving nonprofit HMOs no later than October 1, 2023. A final recommendations report must be submitted to the appropriate legislative committees by June 30, 2024. If you have any questions regarding HF 402 and how your organization or transaction may be impacted, please contact the authors or your regular Dorsey attorney. Summer Associate Lindsey VerMurlen provided substantial assistance researching and drafting this blog post.