@GASpriggs Does it need to be longer than "Stupid"? — Sam Brunson (@smbrnsn) December 16, 2016

The LDS church generates a lot of poor publicly for its secret sacred finances, especially in disaffected Mormon circles. The last matter that I remember reading about was the alleged presence of LDS-associated business entities with the Panama Papers, in which — spoiler alert — both alleged businesses (Bonneville International and Deseret Investment Inc.) were found to have no relationship to the LDS Church.

However, notwithstanding that conclusion, you can see from Sam Brunson’s By Common Consent article (first link, above) that even if one or both of the companies were associated with the LDS church, that would not necessarily be a smoking gun for LDS church impropriety, because there are good reasons for tax-exempt entities to invest in offshore funds through blocker corporations.

…But I saw more than a few comments online immediately dismissing Sam Brunson’s explanation as little more than tax evasion apologetics.

At the very least, it shows something that probably any specialist of any technical field knows all too well — non-specialists often get details of a field very, very wrong.

Fred Karger’s latest crusade against the LDS church

This brings me to the subject of today’s post. Fred Karger, most well known (in LDS-related circles, at least) for his investigation into the LDS Church for its involvement in the anti-same-sex marriage Proposition 8 in California, is beginning a new initiative.

Karger announced his project, hosted at the site MormonTips.com, with a Huffington Post article that asks the bold question: Should the Mormon Church Pay Taxes? In this HuffPo article, Karger makes many claims regarding the church, such as the claim often noted in disaffected Mormon circles that the church uses its tithing (which are tax deductible as charitable contributions to members, and are exempt from income taxation to the church) to invest in politics, lobbying, and for-profit endeavors.

But there is one particular claim that Karger makes that has set my “specialist sense” tingling:

The Mormon Church also earns untold billions of dollars more each year from profits on its vast real estate holdings, banking, life insurance companies, law firms, its media empire, farms and ranches, shopping centers, hotels, restaurants, tourist attractions and the list goes on and on and on. The Mormon Church’s massive global business holdings are run as tax-free enterprises owned outright by the Church. Thus, the Mormon Church does not likely pay any federal, state or local taxes on all of its income and profits. The Mormon Church does not have to file a 990 IRS tax return like other charities, because of the religious exemption. There is absolutely no transparency from the Mormon Church.

The first thing I want to do is caveat that even though I work as a tax accountant, tax has several sub-fields, and non-profit taxation isn’t what I work on a day-to-day basis. I eagerly await (as I tweeted) Sam Brunson’s detailed investigation so I can either confirm or tweak my understanding here (and I will link that in whenever that comes about).

And finally, I want to note that Fred’s question is reasonable. He asks:

Is the Church of Jesus Christ of Latter-day Saints (Mormon Church) committing tax fraud by hiding its global business empire, massive financial holdings and worldwide political machine behind the mask of religion?

This is a reasonable question, and since I am not an expert on the LDS church’s finances, I ultimately cannot opine on what is actually going on. So his project to raise awareness and provide a space for people to anonymously provide instances that could violate certain laws — is ultimately commendable.

Additionally, since Fred makes several claims in the post (in addition to the one I have directed quoted above regarding the church’s global business holdings), there would need to be research into each of the different claims. So, it is possible that the church could be guilty of at least some of the things Karger is claiming. (I wouldn’t put it past the church to use tithes in its for-profit enterprises somewhere or another.)

…but, I don’t want to understate that if I am being charitable, then Karger’s accusations about its massive global business holdings being run as tax-free are either extremely cynical, extremely conspiratorial, or extremely misinformed.

Cynicism and Conspiracy

Without even waiting on a new article from Sam, I can start by quoting his older article regarding the Panama Papers allegations:

The church is exempt from tax under section 501(c)(3) of the Internal Revenue Code. Like other tax-exempt organizations, it generally doesn’t pay taxes on its income. There are a couple exceptions, though, where tax-exempts do pay ordinary income taxes. The big one is where they operate certain for-profit businesses; they must pay taxes on the income from those businesses. They also have to pay taxes on investment income they earn where they borrowed to fund the investment.

Brunson’s article for the Panama Papers addressed the second exception (investment income where the tax-exempt borrowed to fund the investment), and addressed why that was probably not meant to apply to non-profits (and thus, why investing offshore through blocker corporations is acceptable in both the letter of the law and the spirit of the law.)

But it looks like Karger’s new initiative is about that first exception. So, instead, we need to discuss what that is about.

When developing the law around the non-taxability of charitable organizations, the IRS (and then Congress) eventually realized that tax-exempt organizations could derive an unfair advantage by doing the same activities as for-profit organizations but without paying taxes on those profits. This became the foundation on the unrelated business income tax (UBIT) rules, which establish basically that activities that a charitable organization (or its subsidiaries) undergo that are not substantially related to the organization’s exempt purpose may be taxed at ordinary corporate income rates. (There are some exceptions to this, but I won’t go into those.)

So, when I say that Karger is either extremely cynical, conspiratorial, or misinformed for his accusations that the LDS church is running its real estate, insurance, banking, law firms, media empire, farms and ranches, etc., as tax-exempt, what I mean is this:

The church is tax- and business-savvy. There is no way that it is ignorant about the nuances and requirements of the UBIT provisions. So, to assert that a for-profit subsidiary of the church (like, say, Deseret Book, which is wholly owned by Deseret Management Corporation, the holding company that holds all of the church’s for-profit enterprises) pays no taxes is to say that the church knows the rules, knows that their activities do not meet any of the exceptions, but chooses not to pay taxes anyway (even though it has created an elaborate business structure that separates the for-profit companies underneath its own holding company.)

For-profit subsidiaries of non-profits

Karger argues that the church doesn’t have to file Form 990 (the standard information return required for most other charitable organizations), and that therefore, its finances are a mystery. But unrelated business taxable income (UBTI — that’s what you pay UBIT on) earned by the charitable organization is reported on Form 990-T, and as far as I know, there is no similar exclusion provision for churches here. So, if the church found itself with such UBTI, then to say that the church is explicitly failing to file the 990-T assumes the church either is not aware of that requirement or is somehow just finding a way to dupe the IRS. (Again, that might be true, but it is very cynical even if true.)

But as I mentioned before, the church keeps its for-profit subsidiaries in Deseret Management Corporation as a holding company. Why might that be?

Well, firstly, earning too much UBTI as a charity can threaten the charitable status of the entity. If my charity has a particular charitable goal, but really I’m spending all of my time on a for-profit endeavor, then the question is: what am I really doing as a charity? So, there are rules (that the church is doubtlessly aware of). However, the IRS generally doesn’t ding parent charitable organizations for the activities of separate legal entities, if things are set up properly.

So secondly, in the sections of the Internal Revenue Code that discuss what is or is UBTI to a charitable organization, certain items are explicitly excluded, including dividends.

So, if the church had profitable companies making fat stacks of cash, and then those companies paid a dividend to the church, then the church would not have UBTI, and thus would not owe UBIT.

Oh snaps, that’s the smoking gun, isn’t it! A worldwide empire of non-taxed dividends!

Misinformation

At this point, if you think I’ve just clearly detailed the church’s methodology for tax evasion, then you’ve fallen for my trap card.

The thing about a corporation (such as a holding company like Deseret Management Corporation) is that corporations are treated as their own entity, and thus they have their own taxation requirements. So, a for-profit corporation is itself required to file tax returns, and those tax returns aren’t just informational — they are the kind where you have to submit payments of your taxes to the IRS.

So, if the church is using this holding company for its for profit businesses, then that doesn’t mean that those businesses aren’t paying taxes. It just means that the taxes are incurred at the holding company, and then the holding company makes tax-free dividend distributions of the after-tax profits of those for-profit companies.

(If you are a nerd like me, then there’s even more exceptions to exceptions. Like, the above five paragraphs only work for dividends and not always for– say — interest or rents.)

I point this out to say one thing: taxes are complicated. There are doubtlessly nuances of non-profit taxation that I have no clue about because I do not work in that space every day. Just reading one section in the tax code may not be enough precisely because the next section may have the exception to the exception. If you haven’t watched the new Doctor Strange movie, then I apologize for giving you the punchline to a certain joke, but the warnings come after the spells.

Ultimately, I think that Fred Karger’s project could be worthwhile. If the church is doing anything untoward, I would like for those who are knowledgeable to be empowered to serve as whistle blowers.

But I think there has to be a certain level of understanding or knowledge to be effective.

I don’t want to sound like some sort of apologist for the church. I am not saying that the church can do no wrong. However, I would suggest that the church is sophisticated, so the wrongs that it does are generally going to have some sort of legally justifiable basis. Therefore, even if one wants to challenge the church, you have to be much smarter about it. I hope that Karger has such expertise on his team, but his Huffington Post article doesn’t inspire confidence.