Follow up: Experts at AARP hearing say questions raise bigger implications about tax code

Two panel experts were called by the health and oversight subcommittees of the House Ways & Means Committee at Friday’s hearing to investigate whether, based on its earnings, structure and business practices, AARP deserves to retain its nonprofit 503(c)4 tax-exempt status.

The GOP witness — William Josephson (PDF), a retired partner of the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, who said he mainly dealt with corporate, trust and tax issues involving federal income-tax-exempt organizations during his practice — noted right away: ”I am not a health care person.”

Josephson said he was not given enough time to review the “Behind the Veil” report prepared by Reps. Wally Herger (R-Calif.) and Dave Reichert (R-Wash.) or its corresponding documents and thus only spoke generally.

Among the report’s troubled findings include AARP’s organizational structure; Republicans have expressed a concern over a commingling of power therein. AARP, Inc., is run by 22 board members, but seven of those members also serve on the board that governs AARP Services, Inc., (ASI), which is a “for-profit” affiliate that directs royalties made from endorsing insurance policies back to AARP, Inc.

In his prepared statements for the subcommittee, Josephson said: “The complexity of the AARP organizational structure … is unprecedented in my experience. It is not uncommon for an Internal Revenue Code section 501(c)(4) tax exempt organization like AARP, Inc. to have a for-profit subsidiary and/or to have a related Code section 501(c)(3) tax exempt organization. But it is uncommon for such a tax exempt organization to have eight affiliates, some for profit and some tax exempt.”

He concluded that an IRS investigation into AARP’s legal and accounting issues is warranted but specified that he was basing his answer on a hypothetical.

The main issue for him was that Congress never defined the term “royalty,” which is where the bulk of AARP’s revenue comes from. Josephson said that in his estimation, what AARP calls royalties seem closer to “commissions.” And if that change were to be made, he said that could have more of an effect on how AARP and other organizations are classified in the tax code.

From Josephson’s testimony:

While further investigation is required, the impression I have from reading the Investigative Report is that the income AARP receives from its insurance business, which it treats as UBI tax exempt royalties, is not necessarily measured by production or by gross or taxable income, but is, in fact, more like flat fee commissions paid on each insurance policy sold. If so, there would be a substantial issue as to whether or not such commission income is properly excluded from UBI tax as a royalty under the Sierra Club line of decisions or more properly included as income under the Texas Farm Bureau line of decisions.

The Democrats’ witness, University of Miami law professor Frances R. Hill (PDF) pointed out that most 501(c)(4) organizations have grown since the 1960s, when tax-exempt status was given to lobbying groups so that they would have be able financially to complete projects such as turning empty lots into playgrounds.

Hill said that AARP is not alone in its high revenues and complex leadership structure — she pointed to universities and hospitals that have the same structure. However, she said new tax reporting forms could change how these “powerful money raising machines” are classified in the future.

Hill said based on the report, she did not think AARP was guilty of wrongdoing.

Read The Independent’s report on the first half of today’s hearing on AARP.

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