by

Okay, not actually a mailbag. But a couple months ago, somebody asked a question on my tax blog:

LDS mission presidents’ compensation/tax advice? Sam, are you aware of the tax advice in the mission presidents handbook – that living expenses for self & family (housing, food, transport, medical, etc.) are paid by the Church, but are not to be reported as income?

Honestly, I wasn’t aware of it but some quick Googling indicates that, yes, the church disclaims any employer-employee relationship with mission presidents and advises them that they’re not taxable on reimbursements from the church.

Could that possibly be right?

Before we dig into the specifics of mission president finances and taxes, though, a couple prefatory remarks.

First, just in case you weren’t aware of it, the church provides housing for mission presidents and reimburses them for a wide range of living expenses. If you’re shocked by that (and a quick Google search suggests that, in fact, a number of people claim to be shocked by that), you’ve never really thought about the economics of being a mission president.

Look, everybody here who could support themselves and their families for three years without earning income during that time, and with a roughly six-month lead time to save up, raise your hands. Me neither. Seriously, unless you want mission presidents called only from the ranks of the tremendously wealthy,[fn1] you have to assume some sort of financial support from the church.

Second, I’m not providing legal or tax advice here. Basically, I’m trying to reverse-engineer the advice that the church gives its mission presidents, and I’m doing it with a blog-amount of research. If I were actually advising somebody on whether or not reimbursements represent taxable income to them, my research and analysis would be far more thorough, and I wouldn’t start the research assuming the reimbursements weren’t taxable. Rather, I’d see where the law took me.

Third, and related to the prior point, the tax law is not black and white. A lot of students come into my Federal Income Tax class assuming that, after a year of constitutional law and contracts and torts, finally they’re in a class where the questions have one clear answer. They’re quickly disabused of that idea. As long as it is, the Internal Revenue Code can’t anticpiate every financial transaction that every U.S. person does. I’m entirely sure that Congress has never once thought about the appropriate way to tax volunteer mission presidents.[fn2]

That is to say, we’re not talking about the church trying to game the tax system (because, frankly, the tax consequences to mission presidents doesn’t really affect the church: most people, I suspect, accept the calling before they’ve taken the time to evaluate the tax consequences of accepting it). Instead, the advice represents the church’s efforts in determining the appropriate tax treatment.

Finally, note that everything I’m saying is U.S.-specific; the non-U.S. tax consequences of these reimbursements may be entirely different, and a mission president would, I think, do well to get independent tax advice if he serves in or is from another country.[fn3]

The Tax Landscape

We have to start with a couple broad tax rules. The first is, if you are a U.S. citizen or resident, you are subject to U.S. tax law. It doesn’t matter if you’re living in another country or if all of your money comes from another country; we have a worldwide tax system. So even if you were a mission president in Mozambique, as long as you’re a U.S. citizen, you’re subject to U.S. tax laws.

Second, “income” for tax purposes is defined pretty broadly. There are a couple consitutional(-ish) limitations on income, but other than those, if you get something of value, you have to include it in your income unless it is explicitly excluded.

Which is to say, there’s no underlying reason why reimbursements to a mission president couldn’t be included in income. So why does the church advise (and why do I agree) that they’re not?

Revenue Ruling 62-113

In 1962, the IRS released a revenue ruling (basically, a relatively formal administrative statement of where the law lies) that, though it doesn’t mention the LDS church, basically dealt with three tax consequences associated with LDS missionaries.[fn4]

The revenue ruling concerns church, called from congregations to spend their full time as missionaries for a defined period of time, whose “traveling and living expenses entirely or partially reimbursed or paid from a church fund maintained for that purpose.”[fn5]

Ultimately, the IRS determines that such reimbursements don’t constitute gross income for the missionaries.

But wait! you may be thinking. Missionaries and mission presidents are totally different.

Ah, but for these purposes, they’re not. The missionaries to whom the revenue ruling is directed are individuals called from congregations to spend their full time as missionaries. That applies, I would think, equally to mission presidents as it does to 19-year-olds.

Which, speaking of: 19-year-olds are subject to the tax law. Heck, 1-year-olds (think baby models and kids in movies, who are clearly compensated) must pay taxes on their income. The U.S. income tax doesn’t apply differently to the young than it does to the old.

But what about the fact that our missionaries pay their own way?

But they don’t. Sure, we say as missionaries that we’re paying our own way. But we’re not. We paying into a central fund, and that fund disperses monies to missionaries as needed. There’s a huge amount of attenuation between what we pay and what we get. I was in Brazil in the 90s; though I paid the same amount monthly as missionaries who went to West Africa and Hong Kong, I suspect that my monthly allowance was significantly different.

Do mission presidents pay a monthly amount? I doubt it. But paying that monthly amount is unrelated to the amount received by missionaries. Though it feels right to say missionaries pay their own way, in reality, the (potentially deductible) contribution they make to the church is transactionally separate from the amount of reimbursement/monthly allowance they receive.

Which is to say, ultimately, that, as best as I can figure out, mission presidents don’t pay U.S. taxes on their reimbursements for the same reason missionaries don’t: because the IRS determined that such reimbursements didn’t feel like what we think of when we think of income. And so it’s excluded.

—

[fn1] I think this would be a really bad idea; it would mean that the non-wealthy wouldn’t get the growth and blessings associated with being mission presidents, and would set up a wealth-based tiering system for who could fulfill what calling.

[fn2] And, in fact, I’d argue that creating a specific regime for them wouldn’t really be worth the time or complexity. Look, the church currently has 405 missions, each of which (I assume) has a mission president. Assume that all 405 mission presidents are U.S. taxpayers, that the value of what they receive is $100,000 annually, and that they pay taxes at a flat 25% rate. (They don’t: $100,000 does land you in the 25% tax bracket if you’re married filing jointly, but because of the progressive tiers, you’ll be paying tax at a rate of less than 25%. Still, treating it as a flat rate works for this example.)

Put this all together: jointly, the mission presidents would have $40.5 million of income. If they paid taxes at a flat 25% rate, that would supply the government with $10.125 million annually. In 2013, the government raised more than $1.3 trillion from the individual income tax, making te potential amount raised by explicitly addressing this would increase federal revenue by about 0.0008%.

[fn3] Frankly, I think a mission president from or in the U.S. would do well to get independent tax advice, too. I think the church’s advice is accurate, but I don’t think, for penalty purposes, a mission president can rely on it, though I’d need to think through that more than I will for this post.

[fn4] Though it applies with equal force to any missionaries who meet the factual predicate there.

[fn5] The relevant portion of the revenue ruling: