Senate Panel Wants IRS to Review Health Clubs

The Senate Appropriations Committee wants the Internal Revenue Service to make sure that charities that run health clubs or provide “fitness services” do not compete unfairly against businesses. But the panel’s wishes have drawn criticism from nine Senators who warn that the government could unfairly curtail valuable programs offered by non-profit groups.

The Senate committee put its demand for an I.R.S. review of the issue into an appropriations bill for the revenue service that is making its way through Congress. “Intensified competition has developed a market for profit- and tax-exempt health clubs,” the panel said. “With certain tax-exempt organizations moving away from their core purpose, questions arise as to whether they are engaging in commercial competition with the for-profit sector.”

Without identifying any specific groups about which it was concerned, the Appropriations Committee asked the service to review the “legal standards and precedential decisions the I.R.S. uses in determining when fitness services and activities of tax-exempt organizations” should be subject to unrelated business income tax. Charities must pay the tax, known as UBIT, on money-making activities that are unrelated to their missions.

The committee asked the Treasury Department to report to Congress by April 1 “on the statutory and regulatory changes that may be required to assure that tax-exempt health clubs are not unfairly competing against private-sector organizations.”

The panel’s action worried Sen. Ron Wyden, an Oregon Democrat, who said in a speech on the Senate floor that the request “could prompt a review that would have a chilling effect over the entire range of work” done by organizations — such as YMCA’s, YWCA’s, and Jewish community centers — that serve people of all ages and incomes. “I had thought the question of the tax status of these groups was settled law,” he said.

A 1984 ruling by the I.R.S. makes clear that fitness programs run by non-profit groups are charitable activities as long as the organizations serve a broad segment of the community, Senator Wyden and eight colleagues of both parties wrote the appropriations panel’s Subcommittee on Treasury, Postal Service and General Government.

What’s more, the senators said, “the statute and regulations on UBIT are very clear and prevent any charity from gaining a competitive advantage over a for-profit corporation.”

The senators asked the subcommittee’s leaders to make sure that the final appropriations bill passed by Congress does not lead to “unnecessary and overly burdensome government regulation.”

James J. McGovern, a former top charity regulator at the I.R.S., noted that the Appropriations Committee exerted similar pressure on the service last year when it requested and received a review of travel tours.

“The small-business lobby, frustrated by the lack of interest of the tax-writing committees to address what they perceive as unfair competition, has found an ally in the Senate Appropriations Committee,” said Mr. McGovern, who now works for KPMG Peat Marwick. “Expect that lobby to continue to pursue its agenda on an annual basis. The I.R.S. will be responsive — its funding is at stake.”