IRS Proposes Regulation Expanding “Fundamental Public Policy Doctrine” for Tax-Exempt Status

What happened:
Unlike Congress, the administration is expected to be very active this fall. Tomorrow, the IRS will publish a proposed regulation in the Federal Register that would extend the “fundamental public policy doctrine” — the standard the U.S. Supreme Court applied in Bob Jones University v. United States to strip a university’s tax-exempt status over racially discriminatory admissions policies. Under the proposal, the IRS could revoke tax-exempt status from any private primary or secondary school, college, professional or trade school, or university that maintains any educational, admissions, scholarship or loan, athletic, or other school-administered or school-supported program found to discriminate on the basis of race, color, or national or ethnic origin. The proposal would also define race-based efforts to remedy societal discrimination as a form of prohibited discrimination for this purpose, potentially affecting tax-deductible donations for scholarships and similar programs.

Why it matters:
NCN had been closely monitoring this rulemaking out of concern that the IRS might extend the doctrine to all 501(c)(3) organizations — the proposal does not go that far and applies only to schools at this time. Even so, it lands alongside a broader pattern of administration activity: media reported last week that the White House is separately considering revoking tax-exempt status from nonprofits that have already faced politically motivated investigations, and the IRS is weighing changes that would require nonprofits to disclose more about federal grants, contracts, and fiscally sponsored projects, as well as whether top officials have certain criminal convictions. Together, these signal an active fall for IRS and administration action on nonprofit tax status even as Congress stays largely quiet through the midterms.

Where things stand:
The regulation is expected to take effect after May 31, 2027, with a 60-day public comment period opening when it is formally published tomorrow. NCN is reviewing the proposal’s scope with national partners and will share more detail in its September 8 Champion newsletter. PANO will pass along updates and any action opportunities as they develop. Read more here.

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