How profitable firms operate as nonprofits
Since 1862, an obscure company called American Bureau of Shipping has been approving oceangoing vessels as seaworthy. The Houston firm reported $3.17 billion in revenue and just less than $600 million in profit from ship inspections from 2004 to 2010 and paid no U.S. income taxes on those earnings.
The Internal Revenue Service hasn’t had any complaints. That’s because the company has been registered as a nonprofit for 150 years,
Bloomberg Markets magazine reports in its December issue.
ABS routinely inspects independently owned ships on behalf of the U.S. Coast Guard, and one of its customers is the U.S. Navy. The company employs 3,028 people in 70 countries. ABS paid Robert Somerville, then its chief executive officer, $21.7 million from 2004 to 2010.
ABS shows how an organization that isn’t a charity, a school, a religious institution, a hospital or any other kind of body that commonly has nonprofit status can earn millions of dollars and legally avoid paying U.S. taxes.
Another such outfit is the U.S. Polo Association, which tells the IRS its tax-exempt status is allowed because its purpose is to govern the sport of polo in America.
In 1982, more than five years after clothing designer Ralph Lauren featured a player with a mallet on horseback for his Polo brand logo, the Polo Association began licensing its own line of merchandise — with a similar image.
‘A massive problem’
Today, the association’s brand, U.S. Polo Assn., has annual retail sales of $1 billion, placing it in the top 50 of all licensed brands. The association pays no income tax on its licensing income, its filings show.
At a time when the United States is struggling with a gaping budget deficit, nonprofit companies such as ABS and the Polo Association operate large-scale, profit-making commercial enterprises tax free.
“This showcases a massive problem of taxexempt companies that walk, talk and quack like tax-paying businesses but benefit from very favorable treatment under the tax code,” says Dean Zerbe, a lawyer who was tax counsel for the Senate Finance Committee until 2010. “Taxpayers are subsidizing them. It’s wild.”
Anyone can start a nonprofit. It’s as simple as incorporating in any state and correctly filling out an IRS application. Once that’s done, a company is tax exempt.
“It’s complete rubberstamping,” says Ken Berger, CEO of Charity Navigator, a watchdog group that is itself a nonprofit. “The IRS and the states are tremendously understaffed.”
For a company to get tax-exempt status, the IRS requires it to qualify in one of 28 categories, including charities, religious organizations and schools. The IRS says that some kinds of groups — such as trade associations, unions, agricultural organizations and social welfare groups — don’t even have to apply for nonprofit status.
Such groups, which include ABS and the Polo Association, can self-declare their taxexempt status, the IRS says. Federal law on tax-exempt companies is so lax and vague that organizations can legally skip taxes on hundreds of millions of dollars of profit, Zerbe says.
“The problem is growing because there is so little enforcement, and the laws are so looseygoosey,” he says.
Pro sports leagues
The roster of tax-exempt trade associations includes the National Football League and the National Hockey League. The NFL — which in 2011 negotiated $27.9 billion in television contracts over nine years for its 32 member teams — paid Commissioner Roger Goodell $11.6 million in fiscal 2011. It reported a loss of $52.2 million.
The NHL paid Commissioner Gary Bettman $4.6 million in fiscal 2011 and reported a $14.8 million loss. Broadcast and ticket revenues go to the teams, which are required to pay taxes on profits.
The United States has 1.63 million tax-exempt organizations, according to the Urban Institute. Nonprofit charities reported revenue of $1.51 trillion in 2010 from donations, government grants and contracts. Zerbe says the U.S. Treasury could collect tens of billions of dollars annually in taxes from nonprofits that make money essentially as for-profit companies.
Perks, hedge fund
One of the most profitable nonprofits is American Bureau of Shipping — a company whose members are the ship owners who use its services. ABS inspects 11,898 vessels annually. The IRS asks companies in its standard filing form to say why they are nonprofits.
ABS answers that question every year with this phrase: “To promote the security of life & property on the seas.”
ABS’ headquarters occupies an entire eightstory office building on the north side of Houston. Its reception area displays scale models of a schooner, an oil tanker and an offshore-oil-drilling ship.
The nonprofit company has earned hundreds of millions of dollars in profit in the past decade, lavished its executives with multimillion-dollar pay packages and perks, and purchased an offshore hedge fund, its IRS filings show.
“ABS’ status as a nonprofit organization allows it to achieve the necessary impartiality to fulfill its mission,” ABS spokeswoman Jean Gould says. She declined to make any company executives available for interviews.
ABS’ board has been generous with perks for its officers, directors and highly paid employees. The company checked off boxes on its 2010 tax return showing it had provided some of them with first-class or charter air service, travel for companions, health or social club dues, and personal services such as chauffeurs, chefs and maids.
Explanations lacking
In its filing, ABS wrote that those expenses were within company policy. The company declines to say who got which perks.
“Generally, some of these benefits are provided to employees on overseas assignments in foreign countries where company-provided services of this nature are typically standard business practice,” ABS says in its written response.
“My eyes popped out when I saw how many boxes were checked and their lack of explanation,” says Norman Silber, a professor who specializes in nonprofits at Hofstra University’s Maurice A. Deane School of Law. “It’s extremely opaque and cries out for explanation. If their answer satisfies regulators, we have a problem.”
IRS spokesman Dean Patterson declined to comment for this report.
One explanation for such lavish spending is that nonprofits sometimes have more money than they know what to do with — and one thing they don’t have to do is pay taxes.
“The problem with a nonprofit is, when you start grinding out money, what do you do with it?” says Jack Devanney, a retired executive of companies that own ships that used ABS services. “There are only so many fancy cars you can buy your top executives.”