Tax

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 February 12, 2026, the U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) released IRS Notice 2026-15 (the “Notice”), which provides guidance on the “material assistance” rules enacted as part of the One Big Beautiful Bill Act (the “OBBBA”). Among other things, the OBBBA introduced a series of restrictions that disallow certain tax credits otherwise available under Sections 45Y, 48E, 45X, 45Z, 45U, and 45Q of the Internal Revenue Code (the “Code”) where a “prohibited foreign entity” (each, a “PFE”) is involved. Like credits under Sections 45Z, 45U, and 45Q that face strict entity-level disqualifications if the taxpayer is a PFE, credits under Sections 45X, 45Y, and 48E face the same strict entity-level ban, as well as an additional “material assistance” restriction. This restriction disallows tax credits if the taxpayer receives material assistance from PFEs, meaning that the “material assistance cost ratio” (“MACR”) is below certain specified threshold percentages, which vary by product and over time. This Notice is the first formal guidance on the PFE-related rules but is limited to the narrow issue of “material assistance” applicable only to Sections 45X, 45Y, and 48E by (a) explaining how to calculate MACR and (b) clarifying the use of three “interim safe harbors”. A. MACR Calculation Section 3 of the Notice outlines a four-step framework for calculating MACR. As a general matter, taxpayers are required to calculate a separate MACR for each qualified facility and each energy storage technology (“EST”) it operates, or for each eligible component it manufactures. Step 1: Identify the types of manufactured products (“MPs”) and manufactured product components (“MPCs”) included in qualified facilities and ESTs, or the types of constituent elements, materials, or subcomponents (“Constituent Materials”) incorporated in the production of eligible components.1 Step 2: Track (a) the “Direct Costs” of each MP or MPC, or the “Direct Material Costs” of each Constituent Material, and (b) whether each MP, MPC, or Constituent Material is mined, produced or manufactured by PFEs (“PFE-Produced/Sourced”). Unless relying on certain exceptions, taxpayers are required to track each MP, MPC, and Constituent Material on an individual basis. a. De Minimis Exception: This exception permits taxpayers to assign MPs or MPCs of the same type among multiple qualified facilities or ESTs placed in service during the same taxable year, if the Direct Costs of all MPs and MPCs represent less than 10% of the total Direct Costs of each qualified facility or EST. b. Averaging Exception: This exception permits taxpayers to (a) track the average Direct Cost/Direct Material Cost of MPs, MPCs, or Constituent Materials of the same type, and (b) determine whether an MP, MPC, or Constituent Material is PFE-Produced/Sourced by calculating the percentage of such items of the same type that are PFE-Produced/Sourced across qualified ESTs or eligible components produced during specified time periods. The “averaging exception” further suggests that a taxpayer may divide a taxable year into multiple “specified periods” and calculate a separate MACR for each period. c. Binding Contract Exception: The Notice confirms a critical statutory grandfathering rule under Section 7701(a)(52)(D)(iv) of the Code. Upon a taxpayer’s election, the cost of any MP, MPC or Constituent Material, acquired pursuant to a binding written contract entered into prior to June 16, 2025, is entirely excluded from the MACR calculation. Nonetheless, this exclusion is subject to specific timing requirements, including construction commencement and place-in-service deadlines for qualified facilities, and sale deadline for eligible components. Step 3: Determine the “Direct Costs” of all MPs incorporated into the qualified facility or EST, or the “Direct Material Costs” of all Constituent Materials used in the production of the eligible component. a. “Direct Costs” of MPs for Qualified Facilities and ESTs: If a taxpayer purchases an MP, the Direct Costs of such MP are simply its acquisition costs (excluding purchaser’s labor costs). In contrast, if a taxpayer manufactures any MP or MPC itself, then the Direct Costs should consist of both the direct material costs and the direct labor costs. b. “Direct Material Costs” of Constituent Materials for Eligible Components2: These are costs that a taxpayer paid or incurred for materials that become an integral part of the eligible component and/or that are consumed in the ordinary course of producing the eligible components. Under this principle, Treasury and the IRS take the position that freight-in costs and tariffs should be included in the calculation of Direct Material Costs. In addition, the Notice provides guidance on calculating Direct Material Costs in the contract manufacturing context. Step 4: Determine the “PFE Direct Costs” of all MPs incorporated into the qualified facility or EST (which should include the cost of all MPCs in each MP), and the “PFE Direct Material Costs” of all Constituent Materials used in the production of the eligible component. The Notice clarifies that whether an MP, MPC or Constituent Material is PFE-Produced/Sourced depends on the PFE status of the supplier as of the taxable year during which the taxpayer paid the Direct Costs/Direct Material Costs of such MP, MPC or Constituent Material. a. “PFE Direct Costs” of MPs for Qualified Facilities or ESTs: The Notice provides specific guidance on how to calculate “PFE Direct Costs” when an MP includes both PFE-Produced/Sourced and non-PFE-Produced/Sourced MPCs. b. “PFE Direct Material Costs” of Constituent Materials (for Eligible Components): The Notice clarifies that, if the direct supplier of a Constituent Material is merely a reseller, then the taxpayer should apply the definition of “PFE” (as defined in Section 7701(a)(51) of the Code) to the entity that actually mined, produced, or manufactured the Constituent Material for all costs associated with those Constituent Materials. This clarification may be read to suggest that the use of a non-PFE to resell PFE-Produced/Sourced Constituent Materials cannot circumvent the material assistance rules. B. Interim Safe Harbors The OBBBA and the Notice provide for several “interim safe harbors” which make the MACR calculation less onerous for taxpayers. a. Identification Safe Harbor and Cost Percentage Safe Harbor The Identification Safe Harbor: It allows taxpayers to use the “2023 - 2025 Safe Harbor Tables”3 to identify MPs and MPCs of a qualified facility or EST, or Constituent Materials of an eligible component. The Cost Percentage Safe Harbor: It allows taxpayers relying on the Identification Safe Harbor to apply a prescribed cost percentage to each MP, MPC and Constituent Material for the calculation of Direct Costs/Direct Material Costs, PFE Direct Costs/PFE Direct Material Costs, and MACR. The Notice imposes certain limitations on taxpayers’ eligibility to use the Identification Safe Harbor and the Cost Percentage Safe Harbor. A taxpayer operating a qualified facility or EST may use these two safe harbors only if such qualified facility or EST is listed as an “Applicable Project” in the 2023-2025 Safe Harbor Tables. A taxpayer manufacturing an eligible component may use these two safe harbors only if such eligible component is listed in Section 4.01(3)(d) of the Notice. To the extent that a taxpayer is eligible to use the Identification Safe Harbor and the Cost Percentage Safe Harbor, it may identify the relevant MPs, MPCs and Constituent Materials (as well as their respective cost percentage) by table reference and disregard any items used in actual production that are not listed in the applicable 2023-2025 Safe Harbor Table. In addition, if the applicable table lists any MP, MPC or Constituent Material that is not used in actual production, such item could also be disregarded for purpose of calculating MACR. b. Certification Safe Harbor The Certification Safe Harbor allows taxpayers to determine whether an MP, MPC or Constituent Material is PFE-Produced/Sourced so that taxpayers do not need to independently conduct an exhaustive supply-chain analysis. In addition to certain formality requirements (including providing the supplier’s EIN and signing under penalties of perjury), a valid certification from a direct supplier should be structured as a written attestation that includes one of the following: Option A: The supplier may provide a broad certification that the MP, MPC, eligible component or Constituent Material (as applicable) it supplied was not PFE-Produced/Sourced, and that it does not know (or have reason to know) that any prior supplier in the chain of production is a PFE; or Option B: Instead of providing the broad certification described in Option A, the supplier may alternatively certify the total Direct Costs/Direct Material Costs of the non-PFE-Produced/Sourced MP, MPC, eligible component or Constituent Material (as applicable). However, taxpayers and suppliers should be aware that the abusive use of this safe harbor may result in penalties and could expose them to significant financial and legal risks.  C. What Happens Next? a. Rules that Treasury and the IRS Expect to Include in Future and Present Clarifications Treasury and the IRS indicate that they will include comprehensive rules in forthcoming regulations regarding the “Application of foreign-influence entity rules.” However, Section 5.01 of the Notice already provides an immediate, critical guidance on “effective control.” The Notice states that the statutory control provisions operate independently. For example, if a taxpayer makes a payment to a Specified Foreign Entity (each, an “SFE”) under an IP licensing agreement related to a facility or eligible component, and that agreement was entered into or modified on or after July 4, 2025, the SFE exercises effective control, automatically rendering the taxpayer a Foreign-Influenced Entity. Further forthcoming regulations will include rules to “prevent entities from evading, circumventing, or abusing the application of the PFE restrictions”, which may further clarify the scope of the OBBBA’s anti-circumvention provisions. b. Comment Period and Process Taxpayers are encouraged to submit comments to Treasury and the IRS on general issues relating to PFE and material assistance, as well as on certain specific questions set forth in Section 7.01 of the Notice, by March 30, 2026. c. Reliance on the Notice Taxpayers may rely on Sections 3 and 5.01 of the Notice until the date that is 60 days after the publication of the forthcoming regulations and may rely on Section 4 of the Notice until the date that is 60 days after the publication of the forthcoming safe harbor tables. Dorsey & Whitney can continue to monitor developments and provide updates and analysis regarding this Notice and forthcoming regulations addressing PFE issues. 1 “MP” is defined in Section 3.01(2)(c) of Notice 2023-38, “MPC” is defined in Section 3.01(2)(d) of Notice 2023-38, and certain additional definitions could be found in Section 3.01(2) of Notice 2023-38. 2 Taxpayers relying on Section 45X integrated components rule should be aware of new statutory limitations. 3 “2023-2025 Safe Harbor Tables” include: (a) Sections 5.05, 5.06, 6.02, and 7.02 of Notice 2025-08, (b) Section 3.02 in Notice 2024-41 for a Hydropower Facility or a Pumped Hydropower Storage Facility, and (c) Section 3.04 in Notice 2023-38 for an Offshore Wind Facility. The guidance contained in IRS Notice 2026-15 is interim in nature and precedes the issuance of comprehensive proposed regulations by the Department of the Treasury. Consequently, the interpretation and enforcement of the OBBBA are rapidly evolving. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their specific facts and circumstances, particularly regarding the complex supply chain and ownership restrictions imposed by the OBBBA. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change without notice.