I have been told by the IRS that the person in charge of day-to-day operations (the President) of our nonprofit organization cannot be on the board of directors, and the President, Vice-President, and Treasurer/CFO may not be related. I am (currently) the treasurer and my wife is Founder/President of the organization. The IRS says this is improper and even if I quit, my wife cannot be President and Director. The IRS agent gave me an involved explanation that the Board of Directors represents the community and even if my wife had founded the organization, that did not give her any right to have a say at the Board level!
The agent also told me that expenses (like buying a ream of paper from Staples) incurred by a board member could NOT be reimbursed. She said that the board member could not even ask the nonprofit to consider these as donations (and give a letter acknowledging the donation) because it was "inurement" and would result in loss of 501(c)(3) qualification. Then she added that even if the board member did not seek reimbursement, this was illegitimate mingling of accounts with a board member and therefore inurement. I explained that I get a discounted price on internet services by piggybacking on my existing home network account, but that the nonprofit would be considered a new account and would be charged the full price if it signed up separately. This was inurement and illegal commingling and the nonprofit MUST get its own account and pay more if that was what it took, she said.
Are there IRS employees who are certifiably nuts and should be avoided?
Let’s take these one at a time. On the governance issues, there is no tax rule that prohibits the CEO from being on the board or that prohibits related individuals from serving on the board at the same time. The IRS is often skeptical of such situations, but has no specific basis for saying it can’t be done. Some states have provisions in their nonprofit corporation law requiring a certain number or percentage of unrelated people on a board, and New York has recently amended its Not-for-Profit Corporation Law to provide that an employee may not serve as chair of the board, but I am not aware of any that says the CEO can’t be on the board. The idea that the board represents the community is quaint and some people believe it, but I am not aware of any law that the founder can’t serve on the board.
The agent is also wrong on the reimbursement of expenses. A director is entitled to be reimbursed for legitimate expenses, or to claim a deduction for stuff purchased on behalf of the organization and given to it. Assuming that your organization is a public charity, the internet arrangement is also OK. The issue could be different if you are a private foundation. The IRS has been very wary of package deals like the package you describe if the individual ends up getting a lower price on the individual’s services than he or she would get by purchasing alone. That issue came up with bundled investment accounts where the individual and the foundation both got lower rates, but the IRS questioned whether the individual was using his or her position to get an indirect benefit.
The IRS has been under siege for several years and has juggled lots of people around as its total staff has dwindled. It is not surprising that they have some people in place who are not fully trained in their current area of responsibility. I wouldn’t say that they are necessarily nuts, but I would agree that they should be avoided if possible.