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It's Open Season On Nonprofits

News: Analysis & Commentary: NONPROFITS


They call it The Yuppie Y: eight gleaming floors of designer exercise machines, squash courts, an Olympic-size swimming pool, a virtual-reality golf course, and a multimedia Nautilus room right smack in the middle of downtown Washington. You can even get your Guccis polished while you work out. Down the block from the YMCA, editors at the National Geographic Society's posh headquarters stroll about lush gardens when they're not compiling the society's venerated magazine, mailed free to its 9 million members.

Welcome to the world of nonprofit organizations, where groups with a cause manage to do quite well, thank you, by profiting from their tax-exempt status. Internal Revenue Service figures show that from 1975 to 1990, the nonprofit sector grew from 6% of the gross domestic product to 10%, while revenues climbed 227%--more than four times as fast as the rest of the economy.

WHALE CHECKS. Behind the surge is clever marketing. To pull in dollars, nonprofit hospitals are establishing lucrative laboratories, nursing homes--even health clubs. Universities take in laundry from local restaurants. Museums open lavish shops selling designer ties. Environmental groups market affinity credit cards and bank checks imprinted with dolphins and whales.

Now, the spectacular success of nonprofits in the commercial arena is provoking a backlash from critics and new scrutiny from the federal government. The aim: to see if the organizations are abusing their tax-exempt status by hauling in big bucks that otherwise would go to taxpaying business competitors. Critics also are asking whether nonprofits are using their tax-free commercial revenue to lobby Congress for favorable legislation and more federal grants.

Not even the most powerful are exempt from the scrutiny. Senator Alan K. Simpson (R-Wyo.) held hearings on the giant 38 million-member American Association of Retired Persons on June 20. Simpson, who wants to tighten restrictions on tax-exempt enterprises, calls the AARP "America's most powerful sympathy-creating group." He blasted it for receiving $86 million in federal grants and for spending up to $36 million lobbying Congress for more aid for the elderly. Last year, more than half of the organization's annual revenue of $382 million came from the sale of goods and services such as insurance and pharmaceuticals, and much of that money escaped taxes.

The National Rifle Assn., one of the Clinton Administration's chief tormentors, also is under tough government scrutiny. The IRS is auditing the NRA to determine whether it used any of the tax-free $14 million from its profitable sideline activities--including magazine, gun, and insurance sales--to support the campaigns of politicians opposed to gun control and to lobby against gun restrictions.

Small businesses are pushing hard for further probes. Tax laws written in the 1950s were supposed to keep the playing field level for commercial businesses by taxing some of the nonprofits' take. But the rules haven't kept pace with the explosive growth in commercial activities. The General Accounting Office notes that 96% of charitable and social welfare groups now manage to avoid paying any taxes, even though 79% of their revenue is from commercial endeavors. That's because 501(c) organizations--generally educational, social welfare, religious, and charitable groups--aren't taxed on the sale of goods and services deemed "related" to a group's purpose.

NURSES IN NIKES? Thus, the National Capital YMCA pays no federal income taxes on revenue from its monthly dues, which run up to $98. Similarly, hospitals can call their fancy gyms "physical rehabilitation centers" and sell corporate memberships. "They use their tax-exempt status to offer added amenities like free towel service and `executive locker rooms,"' gripes Helen Durkin of the International Health, Racquet & Sportsclub Assn. "It's tough to compete with that."

The squeeze is on. The nation's 600,000 charitable groups, which receive 37% of their funding from government sources, are facing funding cutbacks from Washington's efforts to balance the budget. With pressure simultaneously mounting to modernize tax legislation dealing with nonprofits, life may never be so cozy again for the country's groups with a cause.


AARP Half of its yearly revenue now comes from the sale of such services as insurance. Congressional critics are probing how the AARP uses the money.

NRA The IRS wants to know if the NRA uses any tax-free money generated by commercial activities to lobby against gun laws.

SIERRA CLUB The feds want to overturn a court decision classifying the sale of membership lists and its logo as nontaxable.

UNIVERSITIES The IRS is auditing membership fees for campus golf and athletic clubs.By Paul Magnusson in Washington

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