Turning Civil Rights Against Civil Rights: Compact 2.0 and the New IRS Threat to Higher Education
by
Angela Valenzuela, Ph.D.
September 14, 2026
In 1983, the Supreme Court decided by a vote of 8 to 1 that Bob Jones University could not hold a federal tax exemption while prohibiting interracial dating and marriage among its students. The reasoning was compact enough to state in a sentence: An institution may not claim a public subsidy while maintaining a policy that violates a fundamental public policy of the United States.
On September 3, 2026, the Treasury Department and the IRS proposed a rule that keeps that sentence intact and changes what it points at.
Under the proposal, a private school would lose its exempt status under section 501(c)(3) if it "adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin"—in admissions, scholarships, financial aid, athletics, facilities, or any other school-supported program.
In the interest of clarity, the new IRS proposal concerns private, tax-exempt colleges and universities and not public institutions such as UT Austin.
It thusly makes 501(c)(3) tax-exempt private college or university status contingent on a new interpretation of racial nondiscrimination that could affect admissions, scholarships, financial aid, and other race-conscious programs at private institutions. The IRS estimates that as many as 18,000 private educational institutions could be affected (Internal Revenue Service [IRS], 2026).
A rule against racial exclusion has become a rule against race-conscious inclusion. The doctrine built to keep a segregated university from drawing on the public purse is now aimed at universities trying to widen who gets in.
The hinge is the word "fundamental"
The Bob Jones holding depended on a prior determination: That opposition to racial discrimination in education was a fundamental public policy, settled, national, and not seriously contested. Justice Powell, concurring separately, was uneasy about precisely this. He worried about an arrangement in which the IRS decides which policies are fundamental without clear direction from Congress.
That concern has aged into the present tense. Whoever supplies the content of "fundamental public policy" controls the exemption. In 1983 the content came from Brown, from the Civil Rights Act, from two decades of national struggle. In 2026 the content comes from an administration that reads Students for Fair Admissions as having settled not just what universities may do in admissions but what the nation fundamentally believes about race.
The image we are invited to see here is the ouroboros—the serpent swallowing its own tail, the civil rights movement's own logic arriving at last at its conclusion, the circle closing itself. That is the entire argument for colorblindness compressed into a picture, and it is a seductive one, because it asks us to understand what is happening as completion rather than reversal.
But an ouroboros is a closed system. The snake acts on itself. This circle, however, is not closed at all; someone reached in and intervened. The doctrine did not turn on itself: It was turned, by an administration that did not write it, did not win it, and does not share its purpose.
The proposal would delete sections 3.02 and 4.05 of Revenue Procedure 75-50 and modify Revenue Ruling 71-447—the provisions that, for half a century, allowed schools to run programs favoring racial minority groups where the purpose was to create or maintain a racially nondiscriminatory educational environment. Schools may still consider income, geography, first-generation status, individual hardship, military-family status, or academic achievement. What they may not do is act on race, color, or national or ethnic origin.
So a university rule forbidding interracial relationships and a scholarship intended to increase the number of Black physicians are to be treated as the same kind of thing, because both notice race. One was built to preserve separation. The other exists because separation worked. Collapsing them requires ignoring purpose, history, and effect—which is to say, requires ignoring everything that made the original rule make sense.
Comments are due November 3, 2026. The regulations would apply to taxable years beginning after May 31, 2027. And in a dispute, the school would carry the burden of establishing its own compliance.
That last detail deserves more attention than it has received. Burden-shifting is not an administrative technicality: It is the mechanism by which a proposed rule starts operating before it exists.
The part nobody is discussing: national origin
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| Source: HACU |
In 2024-25, there were 645 Hispanic-Serving Institutions in the United States, enrolling 68.2 % of all Hispanic undergraduates. Roughly 200 of them are private (Hispanic Association of Colleges and Universities [HACU], 2026). The private nonprofits among those are 501(c)(3) organizations, and the rule reaches them directly.
I want to be careful here, because the precise claim matters. HSI status is not a preference. It is a federal designation based on enrollment composition—an institution qualifies at 25 percent Hispanic undergraduate full-time-equivalent enrollment. My own institution, the University of Texas at Austin, is an HSI. The IRS proposal targets what a school does, not what its enrollment happens to look like.
But consider what HSIs actually build: recruitment pipelines into predominantly Latino high schools; scholarship funds established by donors for students of Mexican American or Puerto Rican descent; bilingual advising; culturally sustaining curricula; mentoring programs; and summer bridge initiatives—many of them described, funded, and evaluated in explicitly ethnic terms because that is what they were designed to address. These are "school-supported programs." Under the proposed language, the relevant question becomes whether a private institution can defend each of them without reference to national origin.
And this is not the only pressure point. In June 2025, the State of Tennessee and Students for Fair Admissions sued the Department of Education over Title V grants to HSIs, arguing the 25 percent threshold is unconstitutional. The Department declined to defend the statutory provisions establishing the programs. Two of the three challenged Title V programs have since been defunded, and the case remains pending in the Eastern District of Tennessee (Meltzer Center, 2026).
Two tracks, then. One through the tax code, one through the grant programs. Neither requires Congress to pass anything.
Where Compact 2.0 comes in
The original Compact for Academic Excellence in Higher Education, circulated October 1, 2025, opened by naming what institutions receive from the federal government: "(i) access to student loans, grant programs, and federal contracts; (ii) funding for research directly or indirectly; (iii) approval of student and other visas in connection with university matriculation and instruction; and (iv) preferential treatment under the tax code." Institutions remained free to develop other models, the document said, "if the institution elects to forego federal benefits" (Trump administration, 2025).
Eleven months later, the fourth item has a proposed mechanism.
I am not claiming these are the same initiative or that they were coordinated. The IRS proposal has its own legal rationale and its own administrative track. What I am saying is narrower and, I think, harder to dismiss: an inventory of leverage was published, and we are now watching items on that inventory acquire operational form.
Against that backdrop, read Secretary McMahon's August 3 letter. It asks institutions to publish, by the end of 2026, a clear public statement of commitment across seven areas—admissions transparency, free speech, intellectual pluralism, affordability, academic rigor in the age of AI, research security, and American workforce priorities (U.S. Department of Education, 2026). University leaders were reportedly told there would be "no carrots and no sticks," even as a Department official described the goal as "radical reform" and suggested the government might prefer to work with institutions that share its priorities (Diep, 2026).
Francie Diep asked whether this is an olive branch or a gloved fist. I would suggest the distinction matters less than it appears. The letter arrives at boards that have just watched the fourth item on the Compact's list acquire a proposed rule. Whatever the letter intends, that is the room it is read in.
The governance of knowledge
This is what I mean when I talk about the governance of knowledge.
The state does not need to walk into a classroom and tell a professor what to teach. It instead adjusts the conditions under which knowledge-producing institutions survive, and lets the institutions do the rest. Three features make this work.
It aggregates the following: Research funding, Title IV aid, accreditation, visas, federal contracts, civil-rights enforcement, and tax status. Each of these is individually defensible, and each is litigated, analyzed, and debated on its own terms. But no provost experiences them one at a time. Legal analysis proceeds lever by lever. Governance is felt as a weight, anchored in accumulated experience—in what these institutions have already watched happen to others.
It anticipates. The comment period is open. The rule would not apply until taxable years beginning after May 31, 2027. Yet the scholarship reviews are happening now, in general counsel offices, this fall. When the burden of proof sits with the institution, preemptive retreat is not cowardice—it is the rational response to uncertainty.
The chilling effect is not a side effect of the policy. Under these conditions it is the policy, and it operates whether or not the rule is ever finalized.
It launders attribution. Because the university acts, the university is the actor of record. No one is ordered to close a program. The program simply becomes too risky to defend, and its closing appears in the minutes as institutional prudence. This is what makes the arrangement so difficult to contest politically. There is no defendant. There is only a series of ostensibly reasonable decisions made by people trying to protect their institutions.
None of this means federal oversight is illegitimate. Universities that accept public benefits are properly subject to law and to public accountability, and there are real questions about admissions, cost, and governance that higher education has been slow to answer for itself.
But there is a difference between the government enforcing a rule and the government making certain commitments feel too expensive to hold. The first is accountable. The second is practically invisible.
The public policy doctrine was built to stop an institution from claiming public support while practicing exclusion. If that same doctrine can be turned around to stop an institution from widening access, then it was never a protection. It was an instrument, and it belongs to whoever holds the pen.
That is bigger than DEI. It is a question about who governs knowledge in the United States, and by what means—and about whether the answer is now determined less by law than by the accumulated weight of what universities decide they can no longer afford to defend.
References
Diep, F. (2026, August 3). For higher ed, Trump's Compact 2.0 is either an olive branch or a gloved fist. The Chronicle of Higher Education. https://www.chronicle.com/article/for-higher-ed-trumps-compact-2-0-is-either-an-olive-branch-or-a-gloved-fist
Duehren, A., & Bender, M. C. (2026, September 3). Trump moves to strip tax exemption from schools that aid minority students. The New York Times. https://www.seattletimes.com/nation-world/nation-politics/trump-moves-to-strip-tax-exemption-from-schools-that-aid-minority-students/
Hispanic Association of Colleges and Universities. (2026). Hispanic-Serving Institutions across the nation total 645. https://hacu.net/hispanic-serving-institutions-across-the-nation-total-645/
Internal Revenue Service. (2026, September 3). Treasury, IRS move to end tax-exempt status for discriminatory practices in private schools (IR-2026-103). https://www.irs.gov/newsroom/treasury-irs-move-to-end-tax-exempt-status-for-discriminatory-practices-in-private-schools
Meltzer Center for Diversity, Inclusion, and Belonging. (2026). State of Tennessee et al. v. United States Department of Education et al. Advancing DEI Litigation Tracker, New York University School of Law. https://advancingdei.meltzercenter.org/cases/state-of-tennessee-et-al-v-united-states-department-of-education-et-al-district/
Trump administration. (2025, October 1). Compact for Academic Excellence in Higher Education. https://www.washingtonexaminer.com/wp-content/uploads/2025/10/Compact-for-Academic-Excellence-in-Higher-Education-10.1.pdf
U.S. Department of Education. (2026, August 3). U.S. Secretary of Education Linda McMahon issues national call to action to university presidents and governing boards. https://www.ed.gov/about/news/press-release/us-secretary-of-education-linda-mcmahon-issues-national-call-action-university-presidents-and-governing-boards
U.S. Department of Education. (2026, August 3). A national call to action to university presidents and governing boards. https://www.ed.gov/media/document/national-call-action-university-presidents-and-governing-boards-114351.pdf
U.S. Department of the Treasury & Internal Revenue Service. (2026, September 4). Racial nondiscrimination in private schools. Federal Register, 91, 56811–56819. https://www.federalregister.gov/documents/2026/09/04/2026-18127/racial-nondiscrimination-in-private-schools
