Trump targets private school tax-exempt status over race-based aid. California takes notice

The Trump administration is proposing a new rule that would strip private colleges and private grade schools of their tax-exempt status if they provide targeted help to students based on their race, a significant escalation in the White House’s campaign to eradicate diversity programs directed at Black, Latino and other minority students.

Critics call the move blatantly illegal and shortsighted, saying it does “nothing to make education fairer.”

The Treasury Department proposed the change Thursday in a new regulation that, if made final, would take effect after May 2027. The rule is broadly aimed at ending any policies or programs that help students because of their race, and it specifically says such benefits in admissions, scholarships and facilities “would be incompatible” with the rule.

It’s the latest attempt by the Trump administration to pressure schools and colleges to end diversity, equity and inclusion policies that President Trump vowed to eliminate. Trump officials have used civil rights laws to unwind the policies, saying they discriminate against white and Asian American students.

“Private educational institutions that promote discriminatory practices will no longer be afforded the benefits of federal tax-exempt status,” said IRS Chief Executive Frank Bisignano. “Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status.”

The proposed change would not only impose a tax bill on schools, but also could discourage donors who would lose the advantage of deducting the donation to lower their taxes. A public comment period is expected to last until early November.

Trump targets tax exemptions to end DEI policies

In California, the proposed changes would cover more than 85 nonprofit colleges and universities, among them Stanford and USC. The proposed rule also affects private K-12 schools — in all, more than 18,000 institutions nationwide.

Public colleges, such as UCLA, and public school districts would not be affected, although Trump has separately threatened to pull their federal funding over race-based assistance.

The action is antithetical to the cause of civil rights, said Denise Forte, president and CEO of EdTrust, an advocacy and research group.

“Students of color continue to face real and persistent barriers to accessing educational opportunities,” Forte said. “Threatening the tax-exempt status of institutions for recognizing those barriers does nothing to make education fairer.”

But the proposed rules were hailed by the group Defending Education, which has filed legal challenges against DEI-related programs.

“This is exactly the kind of clear standard that is needed,” said Erika Sanzi, the group’s senior director of communications. “Tax-exempt status is a benefit and benefits come with certain obligations. One of those obligations is to abide by federal civil rights law. If an institution chooses to discriminate on the basis of race, it only makes sense that they also forfeit their tax-exempt status.”

The proposed regulations would have a “chilling effect,” said Steven Bloom, assistant vice president of government relations at the American Council on Education, which represents colleges and universities.

“There aren’t a lot of institutions that have the resources to litigate these matters,” Bloom said.

UC Berkeley law professor Brian Galle said schools should hold their ground and predicted that the proposed IRS rules would not come close to surviving a legal challenge.

“This rule is obviously illegal,” Galle said. “The only reason that this proposal will have any effect is if university presidents, their boards, and their general counsels are afraid to stand up for themselves in court.”

“This is a thing that the administration is probably doing because they’re losing to universities that are fighting the illegal efforts to intimidate higher ed,” he added. “Those universities are winning in court, so the administration is trying something else to further browbeat them.”

The administration has put forward a lengthy justification for its action, moving in chronological order through a list of legal citations: Brown vs. Board of Education — which outlawed segregation; Bob Jones University vs. United States — in which a university lost tax-exempt status for banning interracial dating; and Students for Fair Admissions vs. Harvard, which banned racial preferences in admissions.

To change the long-standing IRS rules, the administration is relying on a legal doctrine of under which a tax-exempt organization cannot operate contrary to a “fundamental public policy.” The administration argues that this doctrine now encompasses all race-conscious school policies because there is broad and long-standing agreement that race-based programs in any form are illegal.

But Galle said there is clearly no long-settled consensus on what the Trump administration wants to do, especially related to education programs that have not been found to be illegal.

Still, schools are likely to feel pressured to prepare for the worst, especially given the conservative majority of the U.S. Supreme Court.

How California colleges are reacting to the rule

Assn. of Independent California Colleges and Universities President Kristen Soares said the proposed revision “may create significant new compliance burdens and legal uncertainty for institutions.” She said her organization “will work vigorously to protect this status, preserve the diverse missions of our institutions, and ensure they can continue expanding opportunity for students from all backgrounds.”

Representatives from USC and Stanford did not respond to requests for comment.

Occidental College did not appear inclined to give in preemptively.

“This action appears to be an attempt by the administration to impose its interpretation” of a Supreme Court decision “before the legal questions surrounding that interpretation are fully settled,” said Occidental College President Tom Stritikus. “We remain committed to our institutional values and to ensuring access and opportunity for students from all backgrounds.”

Todd Wolfson, president of the American Assn. of University Professors, called the federal move “outrageous” and a weaponization of the IRS.

Pressure on many fronts from Trump

California’s public higher education systems have been targeted in the administration’s wider campaign against race-related programs. Since last year, federal agencies have investigated UC admissions and hiring and demanded nearly $1.2 billion from UCLA in part over allegations of the use of race in admissions — which UC denies. The administration also ended grants that sent tens of millions of dollars a year to Cal State and community college campuses that provide academic and mentoring support programs that serve a high percentage of Latino students.

A federal judge blocked most of the Trump administration’s settlement demand in November, and the Justice Department dropped its appeal in February. But other actions, including lawsuits and investigations against the UC system over alleged used of race in admissions, are pending.

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Nationally, scores of universities have shut down or rebranded their diversity, equity and inclusion offices and ended scholarships and clubs designed for minority students under pressure from the White House. In a statement announcing the proposed rules, Treasury Secretary Scott Bessent suggested that even policies no longer under the banner of DEI could be targeted.

“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” Bessent said.

Although California campuses have taken fewer measures to reduce diversity measures than those in red states, federal and legal pressure has still hit the state’s schools. Within weeks of a Feb. 14, 2025, Education Department letter threatening schools’ funding over race-related programs — such as themed dorm room floors, graduation ceremonies and scholarships — USC closed its freestanding diversity office website and folded it into a culture team.

In March 2025, UC regents ended a requirement that faculty applicants submit diversity statements. In October, a private foundation rebranded the Black Alumni Scholarship Fund at UC San Diego to make it open to students of any race after a right-leaning nonprofit sued over it.

Trump has seen tax-exempt status as another lever to pressure colleges that he describes as bastions of “wokeness.”

The Justice Department has opened investigations into UCLA, UC San Diego and Stanford medical schools, accusing them of favoring Black and Latino students in admissions. Trump officials say any such favoritism violates the Civil Rights Act of 1964, a federal law that forbids discrimination in education and other public places and was created to fight segregation and its effect.

At the same time, laws forbid the IRS to target individuals and organizations for ideological reasons, and federal officials are not allowed to direct IRS investigations.

To maintain nonprofit status, organizations must follow IRS rules on lobbying, political campaign activity and annual reporting requirements, as well as other obligations.

Blume and Kaleem are Times staff writers. Binkley writes for the Associated Press. AP writer Annie Ma contributed to this report.