Strings Attached: The IRS’s New Private School Rule Meets the Supreme Court’s Preschool Case

November 3 is a busy day for private schools. It’s the last day to comment on a new IRS proposal about race and private school tax exemption. It’s also the day the U.S. Supreme Court hears St. Mary Catholic Parish v. Roy, a challenge to Colorado’s exclusion of Catholic preschools from its universal pre-K program. Both ask the same question: when a private school accepts a public benefit, what strings come with it?

What the IRS proposed

Private schools have needed a racially nondiscriminatory policy to keep their 501(c)(3) status since the 1970s, and the Supreme Court upheld that requirement in Bob Jones University v. United States (1983). The September 4 proposal, a new Treas. Reg. § 1.501(c)(3)-2, changes how far “discrimination” reaches. It would include any race-based distinction “for any purpose.”

In plain terms, a school could no longer favor students of particular racial or ethnic groups in admissions or financial aid, even to support its nondiscriminatory policy, as IRS guidance (Rev. Proc. 75-50) has long allowed. A scholarship reserved by race or ethnicity, including one funded by a donor’s restricted gift, would put the school’s exemption at risk.

•       Religious admissions. The preamble says schools may still select students by religious affiliation, as long as the criterion is “based solely on religion.” That assurance appears in the preamble, not in the rule itself.

•       Paperwork. No new filings. The existing policy, publicity, and annual certification requirements stay in place.

•       Timing. The rule would apply to tax years beginning after May 31, 2027, which is the 2027–28 school year for a school on a July 1 fiscal year. Existing scholarships aren’t grandfathered.

What the Supreme Court is hearing

Colorado pays for universal preschool at public and private providers, but providers must enroll families regardless of race, religious affiliation, sexual orientation, gender identity, income, or disability. Catholic parish preschools that ask families to support Church teaching on sexuality and gender were shut out. The parishes argue that Colorado doesn’t apply the rule evenly, since it allows enrollment preferences for groups like children with disabilities and low-income families. The Tenth Circuit disagreed. It also held that Carson v. Makin, which barred Maine from excluding religious schools from its tuition program, didn’t apply because Colorado welcomes faith-based providers.

The Supreme Court will decide what it takes to show a rule isn’t “generally applicable” and how far Carson reaches. The answer will shape the conditions states can attach to voucher, scholarship, and pre-K programs.

Where the two meet

Tax exemption is a public benefit, too. The Supreme Court has called it “a form of subsidy that is administered through the tax system” (Regan v. Taxation With Representation, 1983). Both the IRS and Colorado are setting terms for support the government provides.

Race sits in its own category. In Bob Jones, a case about a religious university, the Court held that the government’s interest in ending racial discrimination in education “substantially outweighs whatever burden denial of tax benefits places on petitioners’ exercise of their religious beliefs.” St. Mary doesn’t ask the Court to revisit that.

Closer to home, the friction is religion. In Connecticut, Massachusetts, New York, and D.C., the public programs that pay private and faith-based providers are mostly pre-K and child-care subsidies, plus D.C.’s Opportunity Scholarship Program for K–12. None sorts enrollment by race. But Connecticut’s Early Start program and D.C.’s scholarship program bar participating providers from discriminating by religion. D.C.’s program protects a school’s religious identity, yet its religious exemption covers only sex discrimination. So a faith-based admissions preference the IRS accepts may still conflict with a program’s terms.

What to do now

•       Inventory scholarships and preferences. Flag any that use race, color, ethnicity, or national origin as a criterion, including donor-restricted funds.

•       Talk with donors early. Criteria like family income, geography, or first-generation status can serve similar goals. Without the donor’s consent, changing a restriction may take a court or attorney general process, and Connecticut offers no shortcut even for small funds.

•       Check program terms. If you take part in a state pre-K, child-care, or scholarship program, compare its nondiscrimination terms with your admissions policy, especially any religious preference.

•       Comment on the proposed regulation by November 3 at regulations.gov (search REG-119986-25). Two issues worth raising: the protection for religious admissions appears only in the preamble, and the rule doesn’t say how it applies to a school run as part of a church.

•       Watch St. Mary. A decision is expected by the end of the Court’s term, typically late June.

Neither development changes anything for your school today. But a scholarship inventory is far easier this fall than next spring. If you’d like help sorting through what you have, we’re glad to talk it through.

Sources

1.      Racial Nondiscrimination in Private Schools, 91 Fed. Reg. 56,811, 56,815, 56,818–19 (proposed Sept. 4, 2026) (REG-119986-25), federalregister.gov/d/2026-18127.

2.      Rev. Proc. 75-50, 1975-2 C.B. 587, §§ 3.02, 4.05, as modified by Rev. Proc. 2019-22.

3.      St. Mary Catholic Parish v. Roy, No. 25-581 (U.S. argued Nov. 3, 2026); below, St. Mary Catholic Parish in Littleton v. Roy, 154 F.4th 752, 764–65, 768–73 (10th Cir. 2025).

4.      Bob Jones University v. United States, 461 U.S. 574, 604 (1983).

5.      Regan v. Taxation With Representation of Washington, 461 U.S. 540, 544 (1983).

6.      Carson v. Makin, 596 U.S. 767, 779–80 (2022).

7.      Conn. Gen. Stat. § 10-550b(d); D.C. Code § 38-1853.08.

8.      Conn. Gen. Stat. § 45a-535e; Mass. Gen. Laws ch. 180A, § 5; N.Y. Not-for-Profit Corp. Law § 555; D.C. Code § 44-1635.

This post is for general information only and isn’t legal advice. Reading it doesn’t create an attorney-client relationship. Attorney advertising.