In an age inundated with shocker headlines, the American public has become accustomed to sighing and shaking their heads with each additional report of corruption. So, when the headlines pointed at the Church of Jesus Christ this week (“Mormon Church accused of stockpiling billions, avoiding paying taxes” or ”Mormon Church has misled members on $100 billion tax-exempt investment fund, whistleblower alleges”), the takeaway for many readers was likely clear-cut.

But, the story beyond the headline merits a closer look. As you may have read, a whistleblower alleged this week that the Church of Jesus Christ of Latter-day Saints’ investment arm, Ensign Peak Advisors, potentially violated tax law by building a $100 billion investment fund, with minimal or zero “charitable” distributions. The whistleblower’s report also alleges that the fund made two “illegal” distributions.

This article is an analysis of the allegations, the facts as I understand them, and the pressing questions many are asking regarding these and other issues related to Church finances. In my estimation, despite the allegations, the facts and applicable law suggest that the Church has not evaded taxes or done anything illegal or improper.

Many, however, will still wonder whether the Church should distribute more of its reserves to charitable causes, publish more financial information, or if such a large endowment should be taxed. There are many reasonable perspectives on these issues. Below I discuss the potential trade-offs, benefits, and costs associated with such decisions.

Are the Church’s reserve funds illegal or somehow evading taxes?

For tax purposes, as an integrated auxiliary, the investment arm of the Church, Ensign Peak Advisors, is under no obligation to make minimum distributions. The allegations appear to stem from the whistleblower’s misunderstanding of tax law. For unknown reasons, the whistleblower apparently didn’t hire an attorney or a tax expert to help write this report.

One can only assume this is why so many of the conclusions in the whistleblower report diverge from the law. Not only does the whistleblower report misconstrue the definition of “charitable,” but it also applies something called the commensurate test (explained below) in a way never before applied by the IRS, and it fails to give enough evidence to demonstrate that two alleged investment disbursements were in fact improper.

For starters, the federal tax code does not have a minimum disbursement requirement for what are called “public charities,” a category of 501(c)(3) tax-exempt organizations. Churches are public charities by default.

There is a requirement that all 501(c)(3) entities carry out charitable activities that are “commensurate in scope with their resources.” This ostensibly means that a charity cannot merely accumulate assets and remain a charity. The law does not set a fixed threshold for this though, and the IRS instead takes it on a case-by-case basis, applying the commensurate test very rarely. But, even by the whistleblower’s own admission, each year the Church is in fact spending $6 Billion a year on its tax-exempt activities.

There is an interesting wrinkle in this case, though, that the whistleblower’s claim relies on. Ensign Peak Advisors, the legal entity where The Church of Jesus Christ of Latter-day Saints holds these investments, is exempt as a separate 501(c)(3) Supporting Organization. (Notably, the whistleblower also disputes this status, but without directly addressing how Ensign fails to meet the legal definition. He instead focuses on the “spirit” of the status.) As a Supporting Organization, Ensign is an independent nonprofit. The whistleblower claims that this requires Ensign to pass the commensurate test all on its own – and not as part of the larger whole of the Church.

But according to the IRS’s own definition, Ensign is also an “integrated auxiliary” managed by the Church, a legal treatment that combines their activities in certain ways. This is a critical detail that the whistleblower report only briefly mentions and seems to misunderstand.

If the Church directly held these investments, it would likely pass any legal tests without concern. Does it make a legal difference if Ensign does the investing for the Church as an integrated auxiliary? This difference—a relatively narrow and technical one—has never been questioned by the IRS or a court, according to Sam Brunson, a Latter-day Saint and Loyola law professor who specializes in tax-exempt organizations.

After looking at the facts and allegations involved, Peter J. Reilly, a non-Latter-day Saint CPA and tax specialist, observed in Forbes that “Ensign is not a private foundation. It is an integrated auxiliary of a church. And there is nothing in the tax law that prevents churches from accumulating wealth.” Reilly reached out to Paul Streckfus, another tax expert who runs a trusted publication focusing on tax-exempt organizations. He too concluded that the “matter does not merit IRS attention.”

Is saving $1 Billion a year for a “rainy day” fund wrong or abnormal?

What the whistleblower appears to be concerned about is the fact that the Church is investing $1 billion a year in an endowment fund and not distributing it or the interest earned. But, is building a reserve endowment illegal or wrong?

Maintaining large financial reserves is actually a common and encouraged practice among nonprofits and governments. Two similarly large organizations show somewhat how the IRS might consider the case. Both The Bill and Melinda Gates Foundation and Harvard University operate with endowments of around $50 billion, roughly ten times their annual budget. The IRS has not considered either one to be in violation of the commensurate test.

If the whistleblower numbers are correct, The Church of Jesus Christ is maintaining an endowment equal to about 16 times their annual budget, a ratio that is within typical practices for endowed 501(c)(3)s. Many private foundations annually distribute the minimum 5% of their total assets, making endowments equal to 20 times an annual budget very common. So, this practice of keeping a sizeable financial reserve is not likely to violate the commensurate test.

Why would the Church have a rainy-day fund?

Even if Ensign Peak were required to make distributions by law—and as mentioned above it appears that it is not—when the report says that Ensign Peak Advisors should be distributing its wealth for charitable causes, it appears to misunderstand what the law considers charitable.

Under the federal tax code, any religious purpose is a charitable one by definition, including saving against the Second Coming of Jesus Christ. Though thinly sourced, this was a rationale the whistleblower claimed that Ensign Peak Advisors was using to justify the endowment. As noted by Forbes commenter Peter Reilly, the IRS likely wouldn’t question the legitimacy of this religious purpose.

Of course, the Church likely has many other religious reasons to have an endowment fund and has publicly stated that it saves and makes prudent investments to uphold spiritual teachings. Such a fund might be built to prepare for heavy growth in third world countries (especially as membership is trending toward the global south and slowing in places like the United States). They might keep such a fund to help, as it often does, after natural disasters that could come with greater frequency due to climate change conditions. A source with first-hand knowledge says the Church thinks about such considerations.

Obviously, rainy day funds are also typically built to prepare for possible future economic downturns. Recently, some state governments have been building sizable “rainy day” funds that together now total more than $70 Billion. Some have wondered if such funds are adequate in the event of another downturn, climate conditions, or other circumstances.

There are even more reasons the Church may want to hold large reserves. Given that major party politicians, and others like the whistleblower, have stated with greater frequency that they would like to see the Church and other religions lose tax-exempt status, this is yet another reason why such institutions might want large reserves. The Church, having had its property confiscated in the 19th century in both Missouri and Utah, also has a historical rationale for building especially large reserves.

What about the two alleged distributions, those must be illegal, right?

The whistleblower alleges that Ensign Peak made large distributions to bail out a failing insurance company and to help fund City Creek Mall. First, there’s some question of whether Ensign Peak made the kind of payment to Beneficial Life Insurance that the whistleblower alleges. It’s more likely that they invested in Beneficial Life.

This is, in fact, the purpose of Ensign Peak, to make investments in various equity or other financial instruments which will, in turn, generate profit to support the Church’s efforts and mission. It’s not clear how such investments would be improper. As the Deseret News reported, the whistleblower alleges “that Ensign Peak delivered $600 million to Beneficial in 2009. Beneficial made full disclosure to the Utah Department of Insurance that Deseret Management Corp., its owner, provided $594 million to Beneficial during the 2008 financial crisis to strengthen its balance sheet. Those public filings are on file with the Utah Department of Insurance and the payment was reported in two articles published by the Deseret News at the time. Since 2009, Beneficial has paid dividends of almost a half-billion dollars back to Deseret Management Corp., according to public filings at the Utah Department of Insurance.”

The reporting continues: “The second payment challenged by the Nielsens (the whistleblower and his brother) was made as part of the Church’s City Creek development in Utah’s capital city. The Nielsens alleged that Ensign Peak Advisors improperly sent $1.4 billion from 2010 to 2014 to the Church entity funding City Creek, Property Reserve Inc. The Church did invest in the housing and parking elements of City Creek. Taubman Centers, Inc., a nationally recognized shopping center developer, owns and operates the shopping center.”

The whistleblower says the mall investment came from tithing funds, which contradicts what Church leaders said publicly, thus they claim the Church misled its members. However, even if initial tithing funds were used (and there’s no strong evidence available to claim that they were) there are good reasons that non-invested tithing funds might have been used as an intermediary step until invested assets could be liquidated at a prudent time. This claim, in other words, doesn’t engage in a very sophisticated analysis with regard to how reserve funds and returns might be managed in accordance with sound financial stewardship.

Because investing assets is legal, the remaining issue is that a charity can only invest its assets as long as it doesn’t provide what the law calls an “excess benefit” to particular people in the process. There is no evidence available or provided by the whistleblower, that these investments did this.

Last, an audit over any of these legal issues seems very unlikely. Congress requires the IRS to have a stronger case for auditing a church than for other nonprofits. This case doesn’t seem to satisfy that. The size of the endowment, relative to total activity involved, is common. The two “improper” disbursements can be easily justified as investment activities. Despite all 74 pages in the report, there’s just not enough there.

Are there other public policy concerns?

The technical, legal issues are not entirely the root of the controversy, though, even if the accusation is coming from a whistleblower. Not even the whistleblower limits the issues to tax law. The online version of his report is addressed not only to the IRS, but also Church leadership, members, Congress, and the general public of the United States.

It is clearly intended to raise policy and ethical issues, not just legal ones.

Other questions are:

Should a church hold $100 billion that could otherwise be spent on helping those in need? Should a church have the freedom to avoid transparency into its finances? Should a church, especially a wealthy one, pay taxes like the rest of us?

Should a church hold $100 billion that could otherwise be spent on helping those in need?

To answer question one—and taking the whistleblower figures at face value—it’s worth asking how the Church got that much money. Reportedly, it did so by saving and investing about 14% of the annual tithing payments of its members. Turning $12 billion in 1997, plus adding $1 billion per year, would only require a 7–8% annual return to get to $100 billion by 2019. It is not an unlikely scenario. This strategy simply reflects an approach charities use to build an endowment—or what anyone should do to build their savings.

And here’s the paradox likely unknown to most people: giving money away effectively is generally much harder than earning it. The problem is that people assume that all giving is good giving when that is not remotely true.

A recent study by my colleagues Curtis Child and Eva Witesman showed that in prosocial initiatives, people are prone to assume only good outcomes and not anticipate bad ones. This is despite the reality that unintended negative consequences and waste are a constant risk of philanthropic giving. Cutting edge organizations like GiveWell and ImpactMatters are tackling this very issue.

Distributing a huge amount like $100 billion in a way that has a reliable, positive impact would be very, very hard to do, and would require a kind of effort far beyond what people realize. The Gates Foundation in 2018 spent about $1 billion on operations to give away $3.7 billion. They are widely regarded as effective stewards of their assets and are having a commendable impact.

This isn’t to say that the Church shouldn’t do more than it already does, but to do it well would probably require increasing expenses for its staff and operations by $1–2 billion per year, which by the whistleblower’s numbers would be a 30% budget increase.

This is in spite of the already-existing Latter-Day Saint Charities arm that has spent $2 billion since 1984 on a wide range of projects including clean water, refugee assistance, and disaster relief. And, once again, by the whistleblower’s own estimates the Church is spending $6 billion on its total charitable, educational, and ecclesiastical efforts annually.

Expanding its efforts and spending—humanitarian or otherwise—isn’t a change that could happen immediately, but would take years of cultivating expertise and relationships. It appears that over the past several decades that’s precisely what the Church has been steadily doing: increasing its capacity for non-denominational humanitarian giving (in addition to its own internal Church welfare and other philanthropic efforts).

What the Washington Post article really tells us is that having a very large endowment is a relatively new phenomenon for The Church of Jesus Christ after over a century of financial strain. It undoubtedly has new lessons to learn in managing this opportunity. But immediately expecting a historically large and effective grantmaking engine is probably unreasonable.

Should a church have the freedom to avoid transparency into its finances and should it avoid “opening its books”?

What about the Church providing more transparency into its finances? Criticisms over transparency have dogged the Church for decades, particularly over its fiscal resources. Keeping these figures private from the public is entirely legal, a privilege Congress offers to churches in the spirit of the First Amendment. Disclosing this information would be a voluntary step.

There are of course reasons for Congress affording this privilege. Religions want the primary public focus to be its message, rather than its money. If people want to focus on money, that’s their prerogative, but churches, understandably, may like to keep the focus elsewhere. Of course, as human nature dictates, the more something is kept secret the more people and the press want to focus on it.

There are also legal considerations. Many organizations believe that, if you’re known to have money, you might become subject to frivolous lawsuits or solicitations of bribes by bad foreign actors in order to operate overseas. There are even fears—not unfounded—that missionaries in foreign countries could be kidnapped for ransom if Church finances are detailed. Of course, now that this information has been leaked, many of these concerns can’t be put back into the bag, since the numbers and the scope of holdings are now understood to be large. But that doesn’t mean the Church would want to assist in publishing its holdings to exacerbate such risks or provide exact figures that could create a certain kind of exposure.

No matter these other considerations, it’s also the case that some simply don’t believe that it’s right for so much financial power to be shielded from public accountability. And many feel that transparency, when appropriately applied, is important and comes with many benefits, like the aforementioned factors of reducing fraud and engendering public trust. There are many American churches that voluntarily disclose annual financial reports to their parishioners. For reasons the Church indirectly explains, it chooses to keep its finances confidential. This is surely a trade-off they have repeatedly considered and will continue to weigh.

Despite the lack of detail, there is other evidence over many years that the money is not being used nefariously or illegally, as alleged. Ask any Church employee or lay minister, and they can describe at length the culture of financial controls and of treating Church funds as sacred—only to be used with prudence and great care. It’s also fair to argue, as has often been said, that there are just too many CPAs and lawyers, internal and external, to let things get too far out of compliance.

Related to this, and arguably the most revealing is the fact that those who control these assets are not getting wealthy from them. Part-time volunteer Church leaders are not paid. Full-time Church leaders are given an annual stipend that is frequently much less than what they were earning prior to their ministry. It’s speculated that some or many of the wealthier full-time leaders simply donate much or all of their money back to the Church. The lack of transparency, whatever its motivation, doesn’t appear to be driven by greed.

Is asking the poor to tithe morally wrong?

The whistleblower’s brother, who co-wrote and publicized the report, says that maintaining such a large endowment especially deceives the poor people who give tithing at great personal cost—the widow’s mite praised by Jesus Christ. Why should they give when their gift isn’t needed by the Church?

First, the brother doesn’t acknowledge in the Washington Post article that the Church has one of the largest private welfare programs in the world, benefiting people in this exact situation. It’s very common that low-income people give what they can in tithing, but then receive through a local leader rent money or food assistance well in excess of the tithing paid.

Tithing is a religious principle viewed as an act of faith and sacrifice to God. This is a principle with ancient, biblical roots. But there are also pragmatic benefits to tithe, even for those with little means. In his book, Who Really Cares, Arthur Brooks shares research showing that charitable giving, including religious giving, increases the health and happiness of the giver. One of the ways it does this is by inducing gratitude in the giver—a state of being that psychologists praise for its emotional and physical benefits. Giving even appears to increase future income, by an average of $4.35 for every dollar given. Brooks notes that these are gains resulting from charitable giving, not just correlated with them. How the donation is used does not seem to affect these outcomes for the giver.

In truth, the whistleblower’s claim—repeated in the Washington Post headline and by many others—that the Church misled its member donors is not well supported. While some Church members do wonder about the need to tithe, the vast majority of Latter-day Saints primarily tithe as a personal sacrifice to worship God and offer thanks for his blessings in their lives. It is unlikely that many of them feel misled because the primary purpose was fulfilled the moment they donated.

One might hope that tithe payers would demand more transparency from their religious leaders if only to assure against fraud or waste. But Church members constantly see the results of their tithing in the form of new temples and chapels being built, budgets allocated for local congregations around the world, and large-scale disaster relief efforts in which they personally participate. Additionally, the Church is audited on a regular basis both internally and through external auditing firms. As far as many Latter-day Saints are concerned, the lack of fiscal transparency is overwhelmed by the rest of the evidence around them.

While some have expressed distress over the whistleblower revelations, many Church members have reacted to the Washington Post article with positive responses. Church leaders regularly encourage their members to follow prudent financial practices, avoiding debt and saving for the future. They see this endowment as the Church doing what it preaches.

Should wealth escape taxation because it’s owned by a church?

That’s a question that takes us to the United States Constitution itself. The Free Exercise Clause of the First Amendment guarantees freedom of religion from undue government burdens. And taxation is as fundamental a government burden as it gets. So, the question is whether a tax is truly justified.

This is an argument we’ve had for decades—one that goes beyond the federal income tax because churches are also generally exempt from property and sales taxes in every state. Even aside from First Amendment issues, the idea of tax exemption is that exempt entities create more value for a community than what the government could do in their place. That seems to be true of churches, including the Church of Jesus Christ. Strong evidence by a wide range of scholars indicates that regularly attending church services (of any kind) leads to better health, a stronger community bond, and more donations of time and money, including to secular causes.

What about just taxing the excess wealth of a church? If the money is just sitting around, why not have the government put it to better use?

The money, of course, is not just sitting around. It’s actually invested in lots of business and markets which in turn fuel the economy. Additionally, the idea that the money is ‘just sitting there’ challenges the very idea of an endowment (and personal savings for that matter), which is to have resources in reserve for growth or unexpected shortfalls.

If a government system could reliably cover every shortfall and fund every growth opportunity in exchange for taxing away a surplus, there might be room for arguing to forbid endowments. But, given the current realities, there’s little suggestion that such a plan would work since the federal government is running a significant deficit, and it’s unlikely the government would bail out a church.

Why not tax huge endowments, where the nonprofits have more than they could ever need?

The federal government is currently testing the idea by taxing large university endowments. While that tax does not apply to churches, public concern may lead to that outcome (First Amendment issues aside). How churches, including the Church of Jesus Christ, spend their money may be a factor in this discussion.

But the issue here also invites comparing the billions of dollars controlled by the Church with the billions of dollars controlled by individual billionaires or elite private schools. There are interesting arguments that no person or group should control such wealth. But, surely there’s at least some difference between a large church—that’s funded by and accountable to its 16 million members worldwide—and Jeff Bezos or others. It’s not unreasonable to trust a church—dedicated to explicit charitable and ecclesiastical missions—more than a single billionaire focused on building a business or simply personal wealth.

All of this said, just the idea of a $100 billion endowment held by a church will still offend some people. For some, it appears to contradict the humility and generosity that religion claims to foster. But considering all of the above, this may be a judgment made without full context. Moreover, such abundance is a relatively recent phenomenon for the Church, and time will tell how its leaders budget Church funds in the years ahead. They at least deserve the opportunity to prove themselves to be trustworthy stewards, as by many well-accepted measures they have been up to now. There are no scandals to date involving fraud or personal enrichment by Church leaders, just strong concerns about their frugality and transparency.

In the meantime, Latter-day Saints can appreciate the impressive arc of a church that was once on the cusp of financial ruin, and now, thanks to faithful tithing and prudent management, appears to have all it needs and more to carry out what they believe is a divinely-appointed mission.

Note: The Washington Post reporter commented on this analysis in a tweet here: https://mobile.twitter.com/dmac1/status/1208116843870851072