A new series of Internal Revenue Serive (IRS) proposed regulations would “amend existing regulations under 501(c)(3) to clarify that certain schools that discriminate on the basis of race are not operated exclusively for charitable purposes,” according to a notice from the U.S. Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs.
The specific proposed changes, Regulation Identifier Number 1545-BS05, are still under review by the federal Office of Management and Budgert (OMB) and have not been made public. There is no announced timetable for their release. However, in late September 2025, the U.S. Department of the Treasury issued its 2025-2026 Priority Guidance Plan.
Nestled among the 105 listed “guidance projects that are priorities for allocating Treasury Department and IRS resources during the 12-month period from July 1, 2025, through June 30, 2026” were two under the heading “SECTION 501(c)(3) ISSUES:
- Guidance on the application of the fundamental public policy against racial discrimination, including consideration of recent caselaw, in determining the eligibility of private schools for recognition of tax-exempt status under §501(c)(3).
- Guidance on the statutory prohibition in §501(c)(3) against participation or intervention in political campaigns (the “Johnson Amendment”).
Regarding the first point, Section 501(c)(3) calls for organizations to be organized and operate exclusively for tax-exempt purposes. But there is no language in the code that mentions admission, affirmative action, discrimination, diversity, equity and inclusion or public policy. The roots of “fundamental public policy” are found in the 1983 U.S. Supreme Court case Bob Jones University v. United States, which established that an alleged charitable organization is not, in fact, charitable if its purposes are contrary to fundamental public policy. The 8-1 Supreme Court decision also noted that Congress had given tacit approval to the existing statute by refusing to intervene.
In the Bob Jones decision, the Court also affirmed that racial considerations in education held a unique constitutional and statutory positions, as opposed to advocacy organizations, arts organizations, churches, environmental organizations, hospitals, museums and trade organizations.
However, in 2023, the Supreme Court decided Students for Fair Admissions v. Harvard, finding race-based academia admissions programs violated, among other things, the Equal Protection Clause of the Fourteenth Amendment. Given that the IRS’s Priority Guidance Plan refers to “recent case law” as grounds for its actions, along with the Trump Administration’s focus on opposing diversity, equity and inclusion practices in education and elsewhere, guidance from any part of the executive branch is likely to bend federal tax regulations to follow its anti-DEI priorities.
According to Jeff S. Tenenbaum, managing partner of the Tenenbaum Law Group, “One of the key questions the charitable community is anxious to learn is how narrowly or broadly OMB and Treasury will apply the proposed regulations, namely, whether they will be limited Bob Jones-type racial discrimination by private schools or expanded more broadly to other types of 501(c)(3) organizations.” Tenenbaum added that another key question is how significant the alleged racial discrimination needs to be to be a disqualifier for tax-exempt status, as not every violation of public policy destroys federal tax exemption.”
Regarding the second point, on March 31 of this year, a federal judge from the District Court for the Eastern District of Texas refused to certify a deal reached between the National Religious Broadcasters and the IRS. Had that settlement gone through, the Johnson Amendment — a tax law-based ban on political speech in places of worship — would have been lifted.
But shortly after the judge’s decision, on April 3 of this year, the U.S. Department of the Treasury announced it would “Provide Guidance to Religious Organizations.” That guidance would “clear, administrable standards for houses of worship, including how the law applies to certain communications made within the context of religious services.”
The promised additional guidance is concurrent with an appeal from plaintiffs the IRS and religious organizations led by the National Religious Broadcasters and Intercessors for America. The appeal was filed on April 22 in the Fifth Circuit Court of Appeals.
