“When you’re looking at trying to produce major tax reform, it’s very hard to say this one company that puts Tickle-Me-Elmo on a T-shirt, they’re tax-free, and this other company puts Fred Flintstone on theirs and we’re going to tax the bejesus out of them,” said Dean Zerbe, a former top tax counsel to Sen. Chuck Grassley, who is now in private practice. “Congress needs to look very hard at why we are letting an entity be tax-free when they walk, talk and look like another entity.”
Mr. Mintz, Sesame Workshop’s chief financial officer, points to the extra money the organization spends on researching programs to ensure that they will benefit early childhood development, a far different threshold from regular market research that other child-targeted entertainment companies use.
“Each year, we spent between 10 to 15 percent of our total budget on education and research to ensure our content achieves it curricular objectives and to create targeted initiatives that address specific needs such as our military families’ project,” he said.
Those differences should be crucial for determining exemptions for nonprofits, in order to encourage charities to stay “within the four corners of their work and not bleed into business enterprises,” Mr. Zerbe said.
“What you’ve got is a tax code that is antiquated and never envisioned these charities to have these expansive business operations,” he added. “But now you’ve got charities that are raking in huge amounts of money and competing with for-profit business that are paying tax. It’s right to take a look at it.”
Mr. Grassley, Iowa Republican, former chairman of the Senate Finance Committee and now ranking Republican on the Judiciary Committee, has spent years scrutinizing the nonprofit sector and has urged Congress to consider whether many of these organizations should continue to enjoy the same tax exemption as other types of charities.
Mr. Grassley’s colleague, Sen. Carl Levin, the Michigan Democrat who chairs the Senate’s Permanent Subcommittee on Investigations, has sponsored legislation that would close a number of tax loopholes related to hedge funds and has openly criticized tax-exempt organizations use of offshore corporations to invest in hedge funds.
Last year, House Republican lawmakers asked the IRS to explain how the nonprofit seniors group AARP was able to protect millions of dollars of its earnings from tax levies even though the group sells things such as health insurance and hearing aids and is making huge profits.
Tightening the rules on nonprofits could produce tens of billions of dollars over the next decade, Mr. Grassley estimates — real money that could be used to lessen the tax burden on individuals.
“Let me be clear I am not referring to those charities that are on the ground feeding the hungry, sheltering the homeless,” Mr. Grassley said at a 2011 hearing. “I’m talking about those charities which there may be no discernible difference between commercial, for-profit entities.”