We recently learned that our nonprofit board secretary and treasurer have been accepting reward points for years from the venue where we hold our annual conference. These points total thousands of dollars. They never disclosed to the board that these gifts were being offered to them. They converted reward points into cash and purchases for personal gain. What law have they broken, if any, since the venue does not offer these rewards to organizations? They've clearly profited from our nonprofit status.
I am not aware of any criminal statute that has been violated by the officers’ actions, especially since you say that the venue would not provide the reward points to the organization. But if they took the benefit of the points for themselves without notice to the organization, it certainly seems as though they have violated their fiduciary duty of loyalty and used their positions for personal gain. You may be entitled to recover the value of those points for the organization.
The officers may also have some personal tax issues to worry about. Although the IRS has announced that it will not seek to tax frequent flyer miles or other promotional items received personally in connection with business travel (Notice 2002-18), it said the rule did not apply to “other promotional benefits that are converted to cash.” In one more recent case, frequent flyer miles issued by a bank in return for opening a new account have been subject to tax. Where these rewards fall on that spectrum is impossible to tell from your description.
If your organization is either a 501(c)(3) charity or a (c)(4) social welfare organization, the officers may be also be subject to automatic excess benefit taxes if they were receiving these benefits for performing their official duties. Since the organization did not know of the benefits, it presumably did not report the benefits as income, and unreported income for disqualified persons such as the officers can be considered an automatic excess benefit. (See Ready Reference Page: “IRS Issues Tips to Agents on Collecting ‘Automatic’ Excess Benefits Taxes from Nonprofits”) If these are excess benefits that they do not repay to the organization promptly upon discovery, they can be subject to an additional penalty, beyond the standard 25% penalty, of twice the value.
This case shows the need for a clear conflict of interest policy and regular annual declarations by the officers and directors. (See Ready Reference Page: “Conflict of Interest Policies Help Avoid Problems”) Even if the officers were intentionally doing what they knew was wrong, they might not have been as likely to continue if they had to certify annually that they weren’t using their positions for personal gain. And if they had disclosed the situation, the organization could have dealt with it a long time ago.
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I have found that this happens very often not only in NFP's but also For profits. where the venue or organizations will not provide points directly to a not for profit. The founder of a FF Calendar here was found doing something similar to this practice. Some of the BOARD members KNEW about this and other financial issues, but ONLY when the public found out was anything done. Regrettably NONE of the board members who knew of these issues resigned. I came in to consult and my first suggestion was to ask for the resignation of those board members, and establish a yearly review of all contract, and stronger financial practices to restore the publics faith in the organization. I terminated my agreement when the board members refused to bring in "new outside" board members and fix the contract and other issues.
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