IRS Proposes Tax-Exempt Status Loss for Private Colleges
The U.S. Treasury Department proposed a rule that could strip federal tax-exempt status from private colleges engaging in diversity, equity and inclusion
Private colleges risk losing their federal tax-exempt status if they conduct diversity, equity and inclusion work. The U.S. Department of Treasury issued this proposed rule on Thursday.
The Treasury's proposal aims to align the IRS's definition of racial discrimination with a January 2025 executive order from President Donald Trump. That order declared DEI policies and programs to be violations of federal civil rights law. The IRS tax code currently denies tax-exempt status to private colleges that discriminate based on race.
Public comments on the proposal will be accepted until early November. After that, the agency will create a final rule set to go into effect in June.
A Shift in Longstanding Policy
If enacted, the rule would revoke a decades-old IRS provision. That provision allowed a college to favor racial minority groups in admissions, programming, and financial aid if it supported the college's nondiscriminatory policy for students. The use of race-conscious college admissions has been banned since a 2023 U.S. Supreme Court ruling.
The proposed rule seeks to establish that all forms of racial discrimination in education run contrary to U.S. Public policy. It cited Trump's executive orders directing federal officials to root out DEI in colleges and K-12 schools.
U.S. Treasury Secretary Scott Bessent said the rule would set a clear standard for tax-exempt colleges. Frank Bisignano, head of the IRS, added that schools continuing to engage in racial discrimination should expect to lose their status.
Permissible Actions and Immediate Criticism
The proposal states that colleges could still adopt policies intended to eliminate prejudice and discrimination. This is permitted so long as they do not discriminate on the basis of race, color, or national or ethnic origin. Religious colleges would not be prevented from admitting students based on religious affiliation.
Criticism was swift. Kara Freeman, president of the National Association of College and University Business Officers, said the proposal far exceeds the Treasury's authority. She urged policymakers to reconsider, stating any change with profound consequences should be firmly grounded in statute.
Vanessa Williamson, a senior fellow at the Brookings Institution, described the move as a deeply concerning effort to politicize tax administration. She warned that threats to the neutrality of the IRS should worry every American who supports the rule of law.
Broader Context and Potential Impact
The Trump administration has previously alleged that several high-profile private universities violated federal nondiscrimination laws. These institutions include Harvard, Yale, Duke, and George Washington universities, often cited for their campus diversity efforts. A loss of tax-exempt status would dramatically reshape each institution's financial standing.
The proposal also invokes the Supreme Court's 2023 admissions ruling. While that ruling only addressed admissions, the administration has sought to apply its logic to other areas like housing and graduation ceremonies. The Treasury's proposal, set for publication in the Federal Register on September 4, represents the latest broad attack on diversity work within higher education.
