Nonprofit key members' use of apartment.

• Author: Wise, Dan

The Service has increased enforcement against nonprofit organizations, particularly charities. In fact, a large portion of the Pension Protection Act of 2006 contained rules for charities. Thus, what are the ramifications of the following situation?

Facts

A large nonprofit organization's chief executive officer (CEO) has resided for years (along with his wife, who is a "significant employee" of the entity), in a town very close to the organization's headquarters. The CEO decides to move out-of-state, making it difficult for him to continue in his position. A board discussion ensues; in employment agreements, the entity affirms that it is willing to continue the CEO's and spouse's employment, if they (1) physically work at headquarters at least one week per month and (2) fulfill all other demands of their positions.

The board later discusses the entity's employee travel-expense reimbursement policies. It proposes to replace the current practice of putting visiting out-of-town, on-business employees in a hotel, with an ostensibly cheaper "corporate apartment" arrangement. The CEO, who will become a major user of the apartment, offers to donate furniture and furnishings, thus reducing the cost of outfitting the unit, and also offers to loan art to decorate it.

The chief financial officer (CFO) and his staff complete an economic analysis and discover that a suitably situated, moderately priced two-bedroom corporate apartment, rented from an unrelated party, would run about $1,500 per month, plus utilities. Given that the CFO'S staff, on average, has been reimbursing lodging costs at about $120 per staff-night for the local hotel, they conclude that about 14 staff-nights would break even with the apartment rent and utilities. The staff finds that, historically, there have been about seven nights of reimbursed hotel use per month. This, when combined with the CEO's intended use (i.e., another seven nights per month), yields 14. All of the business travel is assumed to be ordinary and necessary and the accountable plan rules are assumed to be met.

Issues

This situation raises a number of issues, including whether:

* In light of the IRS's publicized recent "nonprofit scandals," this arrangement will pass muster;

* The expected budget for the proposed apartment is fair and not excessive; and

* Any staff member who stays in the apartment beyond a business-related period should be charged for such use.

Conclusions

Generally, the above proposal would...