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.
Wheat & Tares 
Andrew,
I disagree that “this is a reasonable question.” It is an allegation disguised as a question, and is an allegation without any evidence. It is not an honest question in a spirit of honest intellectual inquiry.
It would be the same if someone wondered aloud if you had murdered your sister, and gave others a safe space to share their evidence.
A question can be a lie. We see many examples of this in the New Testament.
Let Mr. Karger provide his evidence to the proper authorities. They are competent to handle it. But I suppose Mr. Karger really doesn’t care about taxes — he simply hates the Church of Jesus Christ of Latter-day Saints and is continuing his endeavoring to embarrass or destroy it, — as you said, his latest crusade, right?
ji,
To the extent that the question is just a front for the allegation, then I agree with you completely.
But let me look at that last paragraph you have — if you agree that the appropriate thing for Karger to do is provide his evidence to the proper authorities, then what would be the issue with soliciting to see if anyone has any corroborating data, and then submitting one complete package? My understanding is that his project is to do just that: collect others’ stories of wrongdoing with what he (thinks he) has already found, and then submit an IRS complaint so the IRS can investigate.
But I totally agree that Karger isn’t neutral in this. He just sees taxes as yet another area where the LDS church is doing what he thinks is bad stuff.
I don’t think it’s a problem for someone who hates what the church is doing to try to get the church to stop those activities. However, my suspicion is that the effectiveness of this movement may be hampered if the submissions don’t understand what the law does and doesn’t allow.
Puh-lease. I’ll wait until Sam Brunson is convinced there’s wrongdoing before I get too excited. I think this statement sums it up for me: “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.” The church, like Mitt Romney, doesn’t pay a penny more than tax law requires. Ultimately, I think guys like this Fred Karger would spend their time more wisely by seeking to alter the tax laws for non-profits rather than wasting time assuming wrong-doing. But whatever gets you through the night I guess.
Fred Karger is pretty open about having a vendetta against the church: http://www.sltrib.com/home/4690644-155/lgbt-activist-plans-ad-blitz-targeting
However, curiosity about a tax-exempt religious organization making a lot of money in for-profit ventures is entirely reasonable, especially when that church has refused to publicly disclose anything about it’s finances since the early 1960s. Here’s a 2012 Bloomberg article that goes a bit deeper into the business side of the church: https://www.bloomberg.com/news/articles/2012-07-18/how-the-mormons-make-money
I think the guy has a point in the general sense. The Church should pay taxes just as a lot of non profits should IF they cannot demonstrate through very open books they are not benefiting members with their money. Maintaining business and having church employees all over the world does not cut it. If a good percentage goes to humanitarian service then they should be excempt otherwise they should pay taxes. This would force the Church to finally be open in the U.S.
Mike, the thing is, open books aren’t a criterion of tax exemption; neither is not benefiting members. In fact, most tax-exempt organizations (from museums to NPR to churches) provide at least an incidental benefit to the people who donate to it. There’s a (fuzzy) line, of course, but there’s not absolute prohibition.
There are a clear set of criteria for tax exemption under section 501(c)(3) (including being an entity, having one of a set of particular charitable purposes and mostly engaging in those, and avoiding personal inurement). There is no requirement for any kind of humanitarian aid in the exemption. (If there were, most museums, the jazz radio station I listen to, many universities, the NCAA, fraternities, labor unions–note that the last couple are exempt under other 501(c) sections–and all sorts of other organizations) would not be exempt.
I mean, you can argue that, as a normative matter, tax exemption should only be available to humanitarian organizations. But that would represent a significant change from current practice, and would demand some sort of solid justification. It’s a justification that I don’t believe exists, based on my view of tax exemption, but I’m open to the idea that there may be compelling arguments on the other side.
Sam I agree that is not the law now. I am arguing for a change.
This definitely seems to be a common thread in discussions surrounding this topic. People aren’t as interested in regard the law allows our doesn’t allow, because they are instead motivated by a sense of what they think the law should be. And I’m ok with people having different ideas of what the law should do, but Karger is not making a case about changing the law.
I’m kind of laughing about the whole thing because I remember doing a project as an accounting student at BYU some years ago. We essentially had to do a walk through of a company and how the business worked. We did one of the church owned businesses (the controller or someone like that was the dad of a guy in my group). I remember him saying how they were essentially broken up into two groups, the for-profit side and the non-profit side. Items were sold for a profit and others were donated. I don’t remember alot of the specifics of what he said, but it was essentially that yes they do pay taxes. Not on everything as they do give a lot of things away for free, but if it is a for-profit portion of the business they follow the law. They know and understand the laws and rules of accounting and follow accordingly.
Andrew
“I don’t think it’s a problem for someone who hates what the church is doing to try to get the church to stop those activities.”
You are right, but I think the real issue that people take here is the method that he is employing. He is assuming wrong doing, then trying to prove what he has already assumed. And, to top it off, the wrong doing he assumes doesn’t seem to be the actual activities that he wants to end, but rather a back door to get what he wants because he knows he can’t get it any other way.
What I mean by this is that he wants to end the religion as a religion, but since he can’t do that he is going to try and get the government to shut it down through these allegations. It is like the one loosing a debate trying to get his competition disqualified rather than actually trying to beat them in honest discourse.
Another problem is he (and others) assume too much power by the IRS. Sure, it’s a big scary agency, but it doesn’t have the ability to shut down a religion. The Religion Clauses of the First Amendment basically ensure that.
And honestly, the church could continue to function if, against all odds, it lost its tax exemption. The D.C. Circuit, in talking about another church loss-of-exemption case, asserted, in dicta, that it wasn’t such a big deal, because as soon as the church in question stopped opposing a candidate for office, it would instantly be exempt again. It’s not clear to me that the court was right, but the IRS didn’t disagree.
Moreover, if the church were to become taxable, it would also be able to take a number of deductions that it doesn’t currently take. Would these deductions zero out its tax liability? I suspect they’d come pretty close, at least for the next several decades (based on real property depreciation). So the worst-case scenario is that the church would owe some marginal amount in US taxes.
I agree with others that the church has a smart legal team that will make sure it is fully complying with the law, but their lack of transparency makes it easy for them to be viewed with suspicion. Even when individuals or corporations fully comply with tax laws, their use of loopholes can still appear unethical for people predisposed to dislike them ( Trump’s 1995 loss declaration). Based on the Trib article, Karger doesn’t have solid legal evidence against the church – he’s hoping for whistleblowers to come out and build a case over the next year or two. At this point, if he can paint the church’s actions as unethical (even if they aren’t *technically* illegal), he has a better chance of getting people to come forward with real evidence of illegality (if it exists). It’s like with the Doctor Who… er… Trump tactic of suggesting a prominent female leader isn’t looking well. Planting the idea is sometimes all it takes to ultimately get the result you want.
Good article (as always, Andrew S) and good discussion in the comments. As a tax attorney who does practice in the nonprofit sector, I often find these kinds of discussions with laypeople intolerably frustrating.
The original twitter comment of “stupid” sounds spot on. karger claims the LDS Church makes money off of its law firms. Excuse him? Churches can’t and don’t own law firms. This would actually be the easiest allegation to disprove. Last time I checked the LDS Church, just like everyone else, lost money that it pays to lawyers. Pro tip. It’s unethical and arguably illegal for non lawyers to share any moneys they earn with non lawyers so…again I think I will go with the stupid comment as the simplest and most explanatory comment.
Great article and analysis. Thank you.
Let us presume the charges are true. Whistle blowers come forward and present evidence. So then what? The federal government or IRS has to do what?
Is the ultimate goal to make the LDS Church non-exempt?
To publish everything?
It is obvious why. To expose donors, collect information and campaign against the Church in any action that those that oppose it’s views which is mostly political.
For those trying to change the law their way be careful of unintended consquences. Also the opposite effect can result by a law change.
Now let us presume no whistle blowers come forward and the charges are not true. Then what? Basically nothing changes and accusations can be endlessly hurled to generate clicks. The law abiding entities continue their work and the false accusations also continue in their work since it is speculation without evidence of tax fraud in the court of public opinion.
The accuser has no need to prove anything and the accused can only endure without recourse by law since there is only speculation without proof.
Ultimately the original cause for the accuser’s political campaign against the LDS Church is over. Marriage has been federally redefined. The political fight has already moved on to the extent of religious liberty to declare certain human behavior a sin without government punishment or reprisal for non-compliance. That legal fight is nearly settled as well.
So the whole endeavor to get the federal government involved or make the finances of the LDS Church transparent is politically moot.
Accountability.