USC and Stanford Could Lose Tax Breaks Over Race-Based Aid, IRS Says

The Treasury proposal covers more than 18,000 private schools and colleges nationwide, including over 85 in California.

Private colleges and K-12 schools that award scholarships or admissions help by race could lose their federal tax exemption under a rule proposed on September 3, 2026. The Treasury Department's proposal would reach more than 18,000 institutions nationwide, the Los Angeles Times reported. How many of them run race-conscious programs today isn't known.

For a private school in Los Angeles, the exposure isn't only a tax bill. Donors who give to a school that loses its exemption also lose the deduction that lowers their own tax bill, and the Times reported that the change could cool giving long before any institution actually loses its status.

In California, more than 85 nonprofit colleges and universities fall inside the rule's reach, the outlet reported. USC and Stanford are on that list. Private K-12 schools across the state are covered too.

Public campuses like UCLA aren't.

The proposed regulation says a school that hands out benefits by race — in admissions, scholarships or facilities — can't square that with tax-exempt status. If the rule is made final, it wouldn't take effect until after May 2027.

Frank Bisignano, the chief executive of the Internal Revenue Service, framed it as a warning shot.

“Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status.”

The administration rests the proposal on a long-standing doctrine: a tax-exempt organization can't operate against fundamental public policy. Its justification walks through Brown vs. Board of Education, Bob Jones University vs. United States and Students for Fair Admissions vs. Harvard. The argument is that settled law now bars race-conscious school programs of any kind.

Brian Galle, a law professor at UC Berkeley, told the Times the proposal is “obviously illegal.” He predicted it wouldn't survive a court challenge. Its only real force, he argued, comes from presidents and general counsels who won't fight.

Steven Bloom of the American Council on Education said the rule would have a chilling effect, because few schools can afford to litigate. Denise Forte, president and chief executive of the advocacy group EdTrust, said threatening exemptions does nothing to make education fairer.

The group Defending Education, which has brought legal challenges against diversity programs, welcomed the move. Erika Sanzi, its senior director of communications, told the outlet that tax exemption is a benefit carrying obligations. A school that chooses to discriminate by race should forfeit it, she said.

Kristen Soares, president of the Association of Independent California Colleges and Universities, said the revision may create compliance burdens and legal uncertainty. Her group will work to protect the exemption, she said. Occidental College President Tom Stritikus said the administration appears to be imposing its own reading of a Supreme Court decision before the legal questions are settled. Representatives of USC and Stanford didn't respond to the Times' requests for comment.

California schools have already been under federal pressure, the Times reported. Federal agencies demanded nearly $1.2 billion from UCLA, in part over allegations that race factored into admissions. The University of California denies it. A federal judge blocked most of that settlement demand in November, and the Justice Department dropped its appeal in February. The department has also opened investigations into the medical schools at UCLA, UC San Diego and Stanford, alleging they favored Black and Latino applicants.

Comments on the proposed rule are expected to be accepted into early November.

Source: latimes.com, retrieved September 5, 2026.