May a 501(c)(3) organization help to fund the restoration of a historic building that is owned by a person on the organization's board and stay in compliance with IRS self-dealing rules? The building restoration is consistent with the stated charitable purposes of the organization.
This is another situation where we need to know more before we can answer your question fully. Simply saying the organization is a 501(c)(3) charity is not sufficient. Is it a public charity or a private foundation? (See Ready Reference Page: “What Do We Mean When We Say Nonprofit?”)
Your use of the term “self-dealing” suggests that the organization is a private foundation because that is the term that the Tax Code uses to describe improper economic transactions between “disqualified persons” and the organization. A director is automatically a disqualified person with respect to a private foundation. If the organization is a private foundation, it would be self-dealing, and subject to tax, to use the foundation’s money for the director’s benefit as an owner. A grant would be clearly out of bounds. Even a lease of the property so that the organization could make the restoration and open the building to the public would be considered a self-dealing transaction if the foundation improves or pays rent for the building. (See Ready Reference Page: “Private Foundations Must Avoid Self-Dealing”)
If the organization is a public charity, however, its latitude is a lot greater. It might be hard to make an outright grant to the director because it could be considered private inurement or an “excess benefit,” the public charity corollary to self-dealing. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions”) But it might be possible to make a grant if you are in the business of making restoration grants to private owners of historic property in an historic district, for example, and you make such a grant to a director who would be otherwise qualified to receive a grant.
As a public charity, it would also be possible to lease the property from the director so long as the rent is reasonable and the director is not receiving more than fair market value for the property.
You are definitely right to be concerned with the situation, but what you can do depends on the tax status of your organization.