Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, May 28, 1995                   TAG: 9505260029
SECTION: HORIZON                    PAGE: G-1   EDITION: METRO 
SOURCE: DAVID S. HILZENRATH THE WASHINGTON POST
DATELINE: WASHINGTON                                LENGTH: Long

IT'S BIGGER THAN YOU THINK...A LOT BIGGER

The AARP took in $173.3 million - 45 percent of its revenue - by helping companies sell its members products as diverse as home, health and auto insurance; credit cards; mutual funds; car rentals; prescription drugs; vitamins; and shampoo. These commercial operations have been so successful that the group has become embroiled in a dispute with the Internal Revenue Service over whether it owes millions of dollars in taxes each year.

With 33 million members, the AARP is one of Washington's most formidable lobbies, and has vigorously defended seniors' Medicare health insurance benefits in the current budget battle. The association argues that Medicare should not be targeted to reduce the federal deficit.

Now, the AARP isn't just talking about the issues. It has become one.

Sen. Alan K. Simpson, R-Wyo., who chairs the subcommittee on Social Security and family policy, contends the AARP abuses its nonprofit status. He plans to examine its finances, including its fight with the IRS.

As Simpson described it, his inquiry is at least partly related to his strong disagreement with the AARP over Medicare funding. ``If you're going to distort the national debate, then I think people ought to know who you are,'' he said.

But describing the AARP is no simple matter. ``It's rather hard to put us in any category, given the size and complexity of what we do,'' said its executive director, Horace B. Deets.

In addition to its product endorsements, it publishes a magazine, Modern Maturity, that reaches twice as many households as Time, Newsweek and U.S. News & World Report magazines combined. It is studying the possibility of creating its own cable television channel. It recently began offering annuities and life insurance, and it is preparing to introduce dental and vision care plans on a test basis.

Although its name suggests it represents only retirees, it starts recruiting people when they reach the age of 50, and a quarter of its members work full time.

The AARP fulfills its social welfare mission most clearly through its ``programs and field services,'' which include efforts to help seniors avoid consumer fraud, cope with the death of a spouse and care for disabled relatives. These activities consumed $71.4 million of last year's budget.

The organization also takes credit for helping to place older workers in government and community-service jobs and for providing tax advice to seniors. But those activities were funded through $86.4 million in federal grants last year. AARP officials said they ended up subsidizing those programs with association resources.

All told, the AARP took in $382.4 million in 1994, not including the federal grants. After expenses, it finished the year $23.9 million in the black and had $43.3 million in its treasury.

AARP executives say most of its commercial activities are product endorsements that should not be taxed. The royalties from these endorsements help support the association's public service activities and the products enhance the quality of its members' lives, they say.

The IRS challenges that interpretation, and the AARP paid the agency $135 million last year to resolve an audit over tax returns for 1985 through 1993.

Though the AARP plans to pay another $15 million ``in lieu of taxes'' for 1994 to continue its dialogue with the IRS, the association has neither conceded the issue nor agreed to pay taxes on that revenue in the future, its executives said.

The revenue sources over which the AARP and the IRS have been fighting brought in $138.8 million in 1994, said Steven S. Zaleznick, the association's general counsel.

The AARP's economic clout is reflected in the marble lobby and mahogany-paneled elevators of its downtown Washington headquarters, where the majority of its 1,752 full-time employees work. It is reflected in the $3.6 billion that its members paid for AARP health insurance last year and the $11.8 billion they had invested in the AARP family of mutual funds.

When the association decided to settle with the IRS last year it had no trouble coming up with the $135 million. ``We wrote a check,'' said James A. Maigret, the AARP's chief financial officer.

The group owes its strength largely to the buying power of its members. To tap that market, companies such as Prudential Insurance Co. of America, ITT Hartford Insurance Group, American Express Co. and Amoco Corp. pay the AARP a percentage of sales in return for product endorsements and access to the AARP's mailing list.

While the AARP's 33 million dues-paying members make politicians sit up and take note, only one in seven members say they join the organization for its lobbying. Many more enroll for the special products and discounts made available with the AARP's endorsement, according to an association survey.

The AARP's nonprofit status enhances the value of its product endorsements because members ``have this cozy, fuzzy feeling of AARP as a large, benevolent, objective organization,'' said an insurance executive, whose company competes against the AARP endorsement.

The endorsement means the AARP considers a product to be the best value for its members, though not necessarily the cheapest, said Wayne F. Haefer, director of the membership division.

One of the few income sources the AARP agrees is taxable is its mutual fund venture. In the crowded world of mutual funds, the AARP's eight offerings through the investment firm Scudder, Stevens & Clark Inc. ``are sort of a mixed bag'' for investors, said analyst Mark Wright of Morningstar, which provides research on mutual funds.

The AARP generated less revenue from dues last year than it did from these various business relationships. Dues brought in $145.7 million; the AARP's cut of Prudential health insurance premiums alone totaled $101.7 million, and the premiums themselves, which the association collects for Prudential, generated another $17.7 million of interest while they sat on deposit with the association.

Simpson and other critics, such as the consumer advocacy group Public Citizen, say the AARP's business interests compromise the group's loyalty to its members.

``It's not an off-the-wall question,'' Deets, AARP's executive director, conceded. ``The potential may always be there ... that conflicts could arise.''

But the AARP's lobbying is guided by the members' interests, Deets said. ``We do not advocate any policy because it's going to generate economic advantage'' for the association, he said.

Deets said members ``vote with their feet and their checkbook'' when they decide whether to renew their $8 annual memberships.

Sidney M. Wolfe, who founded the Public Citizen Health Research Group with Ralph Nader, faulted the AARP for backing national health care reform proposals last year that would have preserved a role for private insurers such as Prudential. AARP members would fare better under a single-payer system, in which the government paid all the bills, Wolfe said.

AARP officials countered that only a minority of members supported the single-payer approach in association surveys. When the AARP's California organization fought for a single-payer initiative on that state's ballot last fall, AARP headquarters wasn't happy, but it did not stand in the way, executives here said.

In the Medicare debate the AARP arguably is lobbying against its economic self-interest. If Congress cut Medicare benefits, it could expand the market for the supplemental insurance policies the association offers its members.

To the senior senator from Wyoming, the AARP's dispute with the IRS is an open-and-shut case.

``It's my opinion they're not a nonprofit at all. They're a big profit - a big, big profit,'' Simpson said. If the AARP can succeed in claiming its revenue from product endorsements is tax-free, ``we are clearly in need of a complete overhaul of our nonprofit business tax enforcement,'' Simpson said.

Tax law on the subject leaves a lot of room for interpretation, legal experts said.

The IRS has ``probably interpreted it too tightly but the courts have probably interpreted too loosely, and clever lawyers can find the hole that courts have left,'' said tax lawyer Sheldon S. Cohen, a former IRS commissioner. ``The Congress doesn't know what it wants to do. They flinch when it comes to this issue and go both ways.''

The dispute involves areas of the tax code that other nonprofit organizations and the IRS have fought over privately and in the courts. Further complicating matters, tax law created several categories of nonprofit organizations, each of which has its own rules. As a ``social welfare organization,'' the AARP is held to a different standard than a charity, for example.

The IRS declined to comment on the AARP's case, citing taxpayer confidentiality.