Selection Committees and Disqualified Persons: The Family Cost of an SGO Committee Seat

Section 25F prohibits SGOs from awarding scholarships to disqualified persons, determined under rules similar to the private-foundation self-dealing framework of Section 4946. That sentence sounds like boilerplate. It is not. Combined with what Treasury signaled in its June 2026 guidance preview, it means the people an SGO seats on its scholarship selection committee are choosing to make their own grandchildren, children, and siblings' children ineligible for scholarships from that organization.

For school-community organizations — where the natural committee candidates are exactly the respected local leaders whose families fill the member schools — this is a governance decision with a family cost, and it should reach the board before the first committee member is recruited, not after.

What Treasury Previewed

Treasury expects the proposed regulations to provide that a member of the SGO's selection committee, or a member of that person's immediate family, is a disqualified person with respect to that SGO. Substantial contributors are disqualified as well, along with the other categories familiar from Section 4946.

Read the phrase "with respect to that SGO" carefully. Not "with respect to that state account." The SGO is the whole legal entity. For a multistate organization — one entity operating segregated accounts in many states — the natural reading is that a committee member's family is disqualified everywhere the entity operates, in every state, from every account.

Whether that organization-wide reading is correct is genuinely unresolved. IRS Notice 2025-70 explicitly asked whether the self-dealing requirement for a multistate organization should be analyzed across all states on whose lists it appears, or state by state. Treasury asked the question and has not answered it. The June preview says most operational requirements apply per state account while certain organization-wide rules apply to the entity as a whole — without saying which side of the line disqualification falls on. The September proposed regulations should settle it. Until then, design for the conservative reading.

Can One Committee Serve Every State?

Yes. Nothing in Section 25F or the guidance requires state-specific committees — or, strictly, a committee at all. The statute regulates outcomes: who may receive awards, in what priority, funded from which account. It does not prescribe governance architecture.

And if disqualification does attach organization-wide, splitting into per-state committees buys nothing. A committee member in one state would still disqualify their family in every state, while the organization would now be running thirty conflict-of-interest processes, thirty training cycles, and thirty sets of minutes. Under the organization-wide reading, the single national committee wins outright: the disqualification footprint is the same, and the fixed costs — which must survive contact with the 10% administrative allowance — are dramatically lower. Only if Treasury lands on state-by-state analysis does the per-state committee become a live trade-off.

One Committee, Many Dockets

What a single committee cannot do is make a single national decision. Because the operational requirements run per state account, the committee must produce a separately documented award decision for each state:

• No national ranking. The committee cannot rank all applicants across states and fund down the list. Section 25F's priority waterfall — first to students who received a scholarship from the organization the previous year, then to siblings of prior recipients — runs inside each state's applicant pool. A stronger first-time applicant in one state must never displace a returning recipient in another; they are not competing for the same dollars in the first place.
• No moving money. Contributions are designated, tracked, and matched to scholarships within their state. The committee's award decisions in each state are constrained by that state's account balance, full stop.
• Separate compliance checks. The requirement that scholarships reach ten or more students who do not all attend the same school must be satisfied — per account, if that test turns out to be per-state, which is another question the Notice flagged and the regulations must answer.

The workable design is one standing committee voting on state-segregated dockets: separate minutes, a separate priority waterfall, a separate multi-school check, and a separate funding constraint for each state. Done well, this audits better than thirty committees would — the annual programmatic audit is furnished to every covered state, and one consistent methodology applied thirty times documents far more cleanly than thirty local methodologies applied once each.

Two Design Safeguards

Separate screening from deciding — and keep screening ministerial. A multistate SGO will want regional staff assembling dockets: verifying household income against the area median income threshold, confirming enrollment, establishing priority status. Keep that work purely rules-based, with zero discretion over who wins. If screeners exercise judgment about outcomes, they risk being treated as selection committee members themselves — re-expanding the disqualified class the committee structure was designed to contain.

Use blind review — for the right reason. Anonymized application review does not cure disqualification; that status turns on who a person is, not on what the committee knows about them. But blind review is strong audit evidence on two requirements a programmatic auditor will actually probe: that awards were made at arm's length and that no contribution was earmarked for a particular student. An SGO that can show its committee scored applications without names attached has a materially better answer than one relying on attestations alone.

The Substantial-Contributor Trap

There is an adjacent landmine in the same body of rules. Treasury is considering defining "substantial contributor" for Section 25F purposes as anyone who has contributed more than 2% of the total contributions the SGO has received since inception — without the dollar floor that exists in the private-foundation rules.

Run that against a new SGO's first year. When cumulative contributions are small, 2% of them is a very small number. An early major donor — often exactly the committed grandparent or business owner a school community leans on to seed a launch — could cross the threshold with a single generous gift and disqualify their own family from ever receiving a scholarship from the organization. The exposure is largest precisely when the organization is newest.

Until the September regulations define the term, the prudent move is to model the threshold before the first campaign, warn major donors of the possibility, and — where a donor's family may need scholarships — consider whether their support belongs in general operating funds rather than the qualified-contribution accounts. That decision has other consequences under the safe harbor, so it should be made deliberately.

Raise It Before They Discover It

None of this makes committee service unattractive — it makes it a decision that must be informed. The worst version of this issue is the one where a committee member's daughter-in-law applies in year two and the organization discovers the disqualification rule in front of its auditor. The best version is the one where every candidate is told, before accepting a seat: this role means your immediate family does not receive scholarships from this organization, likely in any state we operate in.

Committee architecture is expensive to unwind once people are seated and awards are made, and the rules here are previewed rather than final. This is one of the handful of Section 25F questions that genuinely belongs in front of an exempt-organizations tax attorney before an organization commits — and a well-run SGO should treat that consultation as part of formation, not as a remediation cost later.