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Republican Lawmakers Question AARP’S Tax-Free Profits From Product Endorsements

December 27, 2011

Three House Republican lawmakers are asking the IRS to explain how nonprofit seniors group AARP is able to shield hundreds of millions of dollars from tax levies even though, they say, the group is effectively in “day-to-day control” of products offered by private firms with the AARP stamp of approval.

Rep. David Reichert, R-Wash., said companies that use AARP’s brand to sell everything from health insurance to hearing aids are helping the seniors’ group make huge profits. All the while AARP’s profits gain tax-exempt status.

“They’re really trying to manage these companies to increase their revenue,” said Reichert, one of the House Ways and Means Committee GOP members to sign onto a letter sent to the IRS.

Republican critics note AARP’s income from United HealthCare alone skyrocketed from 2007 to 2009, even as the recession was hitting, leaping from $284 million to $427 million during that time, a 50 percent jump. In 2010, those revenues soared even higher — to $670 million.

“Those increases, I think, are dramatic,” Reichert told Fox News.

A longtime Democratic tax lawyer says “royalties,” or “passive income” are a common tool for nonprofit groups to earn revenues, and pointed to the Sierra Club as another beneficiary of “arms-length” arrangements.

“That is the classic royalty situation where the Sierra Club in effect simply makes its mailing lists available to other charities in return for royalty,” said attorney Bill Josephson. “I don’t have any problem with that, nor does anybody else.”

But Republicans say AARP’s deal with United HealthCare is different, and in the letter to the IRS, they point to what they say are several examples of AARP’s daily influence over the business, including its “authority over United’s ‘operating plan’” and its ability to “approve, modify on a line-by-line basis, or provide specific direction to United.”

Josephson said if that’s indeed the case, “the kinds of hands-on relationships (AARP) has with its supposedly arms-length insurance companies are hardly passive.”

And if it’s not passive, lawmakers contend, the income is taxable.

AARP did not make anyone available for an interview, but did send a letter to Fox News from Kevin Donnellan, AARP executive vice president and chief communications officer, who wrote that AARP’s chief aim is upholding its standards, and its actions are a detailed commitment to quality control on products offered in its name.

“We have spent more than five decades proving our commitment to helping older Americans obtain quality, affordable health so, of course, we take seriously how others use our name,” Donnellan wrote. “We are disappointed that this work should be the subject of congressional criticism.”

AARP makes the majority of its revenues from United’s supplemental insurance policies to seniors, including what is known as Medigap, which covers things for which Medicare does not pay. One of AARP’s many ads tells seniors that the insurance can help them protect themselves “from some of what Medicare doesn’t pay.”

“Save up to thousands of dollars in potential out-of-pocket expenses with an AARP Medicare Supplement Insurance Plan,” the ad says.

Donnellan wrote that the group’s supplemental plans “help many of the sickest and most disadvantaged seniors who would otherwise be denied insurance by accepting more than 99 percent of applicants, which is far higher than the market standard.”

But AARP’s support for the Obama administration’s new health care law, which calls for $500 billion in cuts to Medicare, critics say, makes it all the more likely people would need supplemental insurance, something AARP stands ready to provide.

“That move alone, as seniors began to go to Medigap insurance, increases AARP’s revenue over a 10-year period by $1 billion. And we think that’s just a little bit suspicious,” Reichert said.