$5,000 and 2%: who Treasury's §25F rules bar from receiving an SGO scholarship

The §25F statute bars an SGO from awarding a scholarship to any "disqualified person," to be determined under "rules similar to the rules of section 4946," the self-dealing provision for private foundations. The proposed regulations Treasury and the IRS released on October 1, 2026 turn that cross-reference into a working list (our full breakdown of the rules covers the rest). For anyone building an SGO, it settles who on the board, the selection committee, and the donor list has to stay out of the applicant pool, and for how long. The rule is proposed, and SGOs may rely on it for 2027.

The four groups. Proposed § 1.25F-3(d) names them: substantial contributors to the SGO or to its §25F segregated account; officers, directors, and trustees, plus anyone with similar powers; "any individual participating in, including as a member of a committee, the selection of scholarship recipients or the determination of scholarship awards"; and the family members of anyone in the first three groups. Family means a spouse, the ancestors and descendants of the person or the spouse, the siblings of either, the siblings' descendants, and the spouses of all of those. Adopted children and stepchildren count as descendants.

The $5,000 and 2% test. A substantial contributor is anyone who gave more than $5,000 during the SGO's taxable year, if that amount is also more than 2% of the total contributions the SGO received that year. The proposed rule runs the test twice, once against the SGO's total contributions and once against its §25F segregated account alone, and meeting either one makes the donor a substantial contributor. Treasury chose a year-by-year test rather than a running total since the SGO's founding, and it kept the $5,000 floor after commenters responding to Notice 2025-70 warned that a 2%-only rule would fall hardest on small and start-up SGOs. Spouses count as one giver: an individual "will be treated as making all contributions made by his or her spouse." Status is fixed as of the close of the SGO's year and lasts for that year and the next.

Treasury's own examples show how the percentage cuts. A donor who gives $6,000 to an SGO that takes in $450,000 that year is at 1.33% and is not a substantial contributor. The same $6,000 given to an SGO that takes in $280,000 is 2.14%, so that donor is a substantial contributor for that year and the following one, and scholarships to the donor's family in either year would be awards to disqualified persons. The size of the SGO matters as much as the size of the gift.

No exception for blind selection, or for volunteers. Commenters asked Treasury to let relatives of board members receive scholarships when an SGO uses blind or anonymized selection. Treasury declined, saying the self-dealing rules prefer "categorical prohibitions" to case-by-case inquiries, and pointing out that §25F's required priority for returning students and their siblings makes truly blind selection impossible. It also refused to exempt unpaid committee members with no financial stake: "The relevant concern is not whether an individual has a financial interest in or compensation from the SGO, but whether such individual has the ability to confer a financial benefit on themselves or a family member by influencing scholarship awards." Officers, directors, and committee members who step down stay disqualified through the end of that year and the following year.

A safety valve for late gifts. Because status is fixed at year end, a donor's later gift could reach back and taint an award made months earlier. The proposed rule protects that award if, on the award date, the recipient would not have been disqualified based on contributions received so far, and the SGO "did not know and did not reasonably expect" the recipient would become one. In Treasury's example, a donor gives $7,000 in February, the donor's daughter receives a scholarship in August, and a second $7,000 gift in November brings the donor to 2.15% of the year's contributions. The August award stands, but the donor is a substantial contributor for that year and the next, and the family's awards in the following year are treated as awards to a disqualified person.

Two more details. A multistate SGO applies the test organization-wide and again for each state's §25F account, and disqualification at the account level applies only to that account. And the rule does not bar board members or major donors from having financial ties to the schools recipients attend; Treasury left those conflicts to existing scrutiny under section 501(c)(3) and section 4958. Treasury estimates the rules will reach 70,000 to 80,000 disqualified persons a year. The text is in our archive of the proposed regulations, and the related spending rules are in our 90% rule guide.

What to do now. Write the four groups into your award policy, keep a current list of board members, officers, and everyone who reviews applications, and track each donor's giving through the year against both your total contributions and your §25F account so you can see the 2% line before an award goes out. Be direct about the trade-off when you recruit major donors: a family whose gifts cross the line makes its own relatives ineligible for that year and the next. Our free SGO Builder covers the governance documents, and the SGO directory shows who is already operating.