The whistleblower allegation that Ensign Peak Advisors, has in its over 20 years of existence accumulated over $100 billion dollars in excess tithes and the investment returns thereon is generating some excitement. EPA is characterized as an integrated auxiliary of The Church of Jesus Christ of Latter-day Saints. I’ve decided to call the matter Ensigngate. We’ll see how that goes.
I have expressed the view that there is probably nothing for the IRS to investigate. Still much of what Lars Nielsen, the whistleblower’s brother, has to say in his long video is worthy of attention and I agree with some of the reforms that he proposes.
And he won my heart by closing with a Tolkein reference. So there’s that. If you don’t have the patience for the whole video check out the last five minutes or so.
Mr. Piersen wrote to me.
“My responsibility and allegiance is to the truth; we can’t get there without faithfully presenting every possible alternative and eliminating them with careful and transparent evidence. As you know, experts retained by the Washington Post and active on the issue for much longer and with access to primary documents disagree with your swift assessment. This is also true of others who have consulted with Paul Glader, as I’m sure you saw in his coincident breaking story in Religion Unplugged. But we would expect that in a preliminary and open forum of civic discussion. ”
The Washington Post Expert
I heard from Professor Phillip Hackney who was quoted in the Washington Post story.
“If you have a charity that simply amasses a war chest year after year and does not spend any money for charity purposes, that does not meet the requirements of tax law,” Hackney said in an interview. Hackney, who served in the IRS chief counsel’s office, has been retained by The Post to analyze the whistleblower documents.”
I wrote to Professor Hackney citing my article and soliciting his opinion. I wrote:
“My thinking was that if it was an integrated auxiliary of the church it is really the church accumulating and there is really no rule about that. I consulted with a couple of people who should know and that seems to be the common view.”
He responded:
Yes. I saw your piece. I actually generally agree with what you say. In some sense I think what we are witnessing is the asking and answering of different questions. Reality is the church likely has sufficient technical reasons to pursue the path it has pursued. But what I was being asked was whether the brothers raised legitimate concerns. I think they do and still think so…..
Now, Ensign will almost surely argue that it is an integral part of the church. Furthermore the church pays out lots of money every year from its tithing. If we view total expense in comparison to endowment if there were some payout requirement it would be met. That may be so and because of that the IRS would almost surely never challenge this situation. Nevertheless I do think that as a charitable tax law matter such an endowment that only ever invests money and never pays out raises real questions of the moral ought of the law. And I think that has to be the case even with a church. …
I thought when I reviewed the WB complaint it would be a nothing. In a very technical sense I think it is a nothing. But, I still thought and think now that the brothers raised legitimate concerns worthy of raising attention to…..
So if the question is will the church lose its status, the answer is almost surely no. But if the question is whether the brothers raised real and legitimate questions that touch seriously on tax law in its largest sense, the answer is yes. (Emphasis added)
Professor Hackney pointed me to Revenue Procedure 96-10 which indicates the sort of auxiliary organizations that share in the blessings of the church’s exemption from filing Form 990. Included is an organization is exclusively financing, funding the activities of or managing the funds of a church.
That is not definitive, but it indicates that you don’t evaluate Ensign in isolation. And there is really no provision that blows up the exemption of a church, because it has saved up too much money.
The Mormon Tax Professor
I also heard from Professor Samuel Brunson. He wrote a piece for By Common Consent. He notes that there are two bases for Ensign’s exemption. As a “supporting organization”, having the money going in but never going out is a problem.
There is this “commensurate in scope” test to be concerned about for a “supporting organization”.
If it is an “integrated auxiliary” though, it is a different story.
“There are no judicial or agency pronouncements I’m aware of applying the test to integrated auxiliaries. This is likely the first time this particular question has come up, at least to this degree. And, for what it is worth, under the Internal Revenue Code, integrated auxiliaries of churches are, like churches, treated differently from other tax-exempt organizations”
Professor Brunson was also interviewed by Paul Glader of Religion Unplugged.
Bottom Line
Of all the experts I have communicated with Professor Brunson is the one with most serious concerns about Ensign. So I looked to him for the bottom line on the chance that there will be a tab in the billions for Ensign to pay if the IRS takes the whistleblower complaint seriously. Here is our email exchange in interview format:
Reilly – Suppose there was no separate tax exempt involved. Is there any question about how much wealth the church could accumulate?
Brunson – No, not really. I mean, there may be moral/religious/ethical questions, but if it invested in-house, it would qualify under 501(c)(3) as an exempt org with a religious purpose. I suppose at some point, investment goals could swamp religious ones, but I’m not sure at what level that would be.
Reilly – It seems like the commensurate thing would be based on a charity that was formed to raise and invest to support the religion in general and never spent anything. Ensign has a problem there. But if it is integrated maybe it is just a pocketbook for the church which puts it back to the previous question.
Brunson -Right. I’m not completely sure how the commensurate-in-scope rule applies to integrated auxiliaries (or even if it does). In most situations, it would need to qualify as exempt on its own, but if it can rest its exemption on being really tightly connected to the Mormon church, then there’s probably not a problem.
Reilly – Assuming IRS were to revoke Ensign’s status, is there any chance at all that it would be retroactive? Or would they just turn the money over to the church and fade away?
Brunson – There’s always a chance, I suppose. But the law as it applies here seems ambiguous at best; to the extent Ensign Peak was on the wrong side of the line, I think it has a strong argument that it wasn’t deliberately there. I would think retroactivity would be really unlikely here.
There is another matter Nielsen raises that intrigues me.
Incomplete Return Prep
In his presentation, Mr. Nielsen makes much of the way Ensign had Form 990-T prepared. Ensign as an integrated auxiliary of a church would not be taxed on investment income such as interest, dividends and capital gains. But it also invested in partnerships which would generate unrelated business taxable income.
I could really nerd you out on how that question might be answered when the UBTI is being generated by partnerships, but the shortcut that Deloitte took of describing the trade or business as investing or investing in partnerships, rather than listing out the likely numerous businesses the partnerships were engaged in was probably reasonable.
Mr. Nielsen also focuses on the question about total book value of assets not being disclosed. You can figure out the correct tax without knowing that, but I do believe in answering all the questions. So he does have a point. It is just not that big a one.
Not answering a question is not the same as getting your tax wrong. The 990-T that is in Mr. Nielsen’s document package was signed by the preparer the day before it was due. My reading of the situation is that not much thought went into trade or business question. The blank where it says book value of total assets does seem indicative of management holding out, but choosing not to answer a question that is not required to compute the tax is not something that puts you on the eve of destruction.
On the other hand, if I was involved in that return and knew that the reason management did not give me the answer to the question was that management did not want the IRS to know what the total book value of its assets was, I would be pretty uncomfortable.
The Al Capone Syndrome
The Nielsens are raising very important issues that Mormons need to consider. Is it really OK for the church to not be transparent about its finances? Why doesn’t it just issue audited financial statements every year? And how much should the church be salting away for a rainy day?
They are also raising important policy issues. Why are churches treated differently when it comes to disclosure? (i.e. not being required to file Form 990). I have written about that here, here and here.
And what needs to be done about tax-exempts accumulating vast pools of capital that is never put to charitable use? The question usually comes up when discussing universities and donor advised funds. When it comes to churches, LDS may be sui generis in that regard.
Most financial scandals involving churches involve the people running them looting them, not the church saving up too much money. There is nothing in these allegations that indicates that LDS leadership is enriching itself.
I admire the Nielsens. My difference with them is in the expectation that there is a role for the IRS here given the current state of the law. I refer to this as the “Al Capone” syndrome – the notion that the IRS is there to right wrongs rather than collect taxes.
I have brought this up a number of times in my coverage of Scientology. Really the IRS does not have the resources to regulate the not-for-profit sector and it is not very good at it when it tries.
Some Words From Lars Nielsen
I heard from Lars Nielsen just as I was getting ready to wrap this piece up. He had an issue with something in my previous piece. I wrote:
“I don’t think David Nielsen will be able to retire on the reward from this case. That’s because there is not much of a case. The argument is that a private foundation is supposed to distribute 5% of its assets. 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.”
I probably oversimplified the Nielsens’ argument, which Mr. Nielsen characterized on the phone as an inadvertent straw-man argument. I guess my plea would be that it is really hard to boil this all down.
His other comment to me really gets to the hear of the matter.
“If it is true that EPA must be an active supporting organization commensurate in scope to its assets, then, in the history of supporting organizations there may have never been one with such a small numerator (zero) and such a large denominator (>$100 B).”
I’m sticking with EPA being an integrated auxiliary that does not have a distribution requirement.
Other Coverage
This story in the Salt Lake City Tribune by Jake Jenkins, LDS Church fund unlikely to face IRS backlash, experts say, features Professors Hackney and Brunson.
It is worth checking out this Reddit site to see some of the reactions to the story. Here is one particularly touching one.
“I remember sitting in dirt-poor people’s houses on my mission telling them that they needed to pay 10% or they wouldn’t get to see their family for eternity.
It makes me sick. I think about it ALL THE TIME.”
One of the complaints that seems to come up a lot is that LDS does not have paid janitors. I asked Professor Brunson about that. He wrote me:
“As for janitors: it’s within my lifetime that the church shifted from paid janitors to asking members to clean the church. (It is volunteer-driven, with only a couple levels of paid clergy, none of which are at the local congregation level). It’s been long enough that I can’t remember if it was framed as a cost-saving idea or as a way to ensure that members had a tighter connection/felt more ownership of the buildings.
Either way, the janitorial objection I find most compelling is that, by shifting it from paid to volunteer, we’re taking away one manner that we could provide jobs for people who aren’t able to find jobs. It’s not that paid labor is a welfare thing, but it is a useful way to make a living.”
And here is an hour long podcast interview with Professor Brunson by Gina Colvin.
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