In his talk at the close of the April 2008 General Conference, President Monson talked about the blessing we had received, both as members of the Church and, specifically, over the course of the conference. He ended his talk with counsel: parents are to love and cherish their children, youth are to keep the commandments, those who can attend the temple should, and we should all be aware of each other’s needs.
But what if, in closing his remarks,[fn1] President Monson had said, “My dear brothers and sisters, I feel strongly that Mitt Romney is the best person to lead our country. I encourage each of you to campaign on his behalf and to donate to his campaign. We have also established the Perpetual Mitt Fund, with an initial investment from tithing dollars for $1 million in order. This fund will go toward his election and, if any money is left over, it will be transferred to Harry Reid’s next campaign. If you would like to support the PMF, you can use the donation slips. In the ‘Other’ category, please write ‘PMF.'”[fn2]
There was, unsurprisingly, an immediate backlash. Dozens of people sent letters to the I.R.S., demanding that it revoke the LDS church’s tax exemption. In its review, the I.R.S. determines that the Church’s actions were in flagrant violation of the anti-campaigning rules. Sick of tax-exempts pushing the envelope, the I.R.S. decides to make an example of the Church and revokes its tax-exempt status, a revocation that the courts affirm.
So what happens? I should note that I have no inside information about the Church’s finances, so I’m going to recreate what I assume are at least a few income streams:[fn3]
(1) Interest income. Like I said, I have no knowledge of the Church’s income. But I know that tithing and other offerings are deposited into a bank account on Sundays when they’re received. I would be absolutely shocked if these accounts weren’t interest-bearing. As a tax-exempt, the Church didn’t pay taxes on interest it earned. But once it lost its exemption,[fn4] it became taxable, including on interest from bank and other deposit accounts. The Church would pay taxes of 35% of its interest.
(2) Income from passive securities investments. I’ve heard rumors that the church has an investment account, managed by investment managers. And, frankly, I’d be offended if it didn’t. It doesn’t, AFAIK, spend all of its money immediately; to the extent it doesn’t, that money should be earning a return.
There are three major types of income it could earn here: dividends, interest, and capital gains. Dividends are payments a corporation makes out of its earnings and profits to shareholders. Interest here would be agreed-upon payments on bonds, and capital gains would be gains from the sale of securities. The Church would be taxable at a 35% rate on all three types of income (there’s no reduced capital gains rate for corporations).
(3) Dividends from operating companies. Same tax consequence as passive investments. The Church appears to own a couple for-profit corporations (such as Deseret Book). So DB earns income on its sale of books. DB pays taxes on its income when it earns that income, just like any for-profit corporation. The Church wouldn’t pay taxes on DB’s income, but, as a newly non-exempt organization, it would pay taxes when DB distributed its profits to the Church in the form of dividends.
(4) Income from real property. I know the Church has real property. I don’t know if it sells it or otherwise has income from the real property, but if it does, it would be taxable on that income.
(4) Donations (e.g., tithing, fast offerings, etc.). This is actually the hardest income source to categorize. There’s a decent argument that the donations, given with detached generosity, would be gifts to the Church. (It’s not a certain argument, but it’s probably a decent one.) For federal income tax purposes, the recipient of a gift doesn’t include that gift in gross income. Therefore, the recipient of a gift is not taxable on that gift. If donations were treated as gifts, the Church wouldn’t have to pay taxes on them.
However, gift-givers don’t get a deduction for giving the gift. Members of the Church in the U.S. would, therefore, not be to deduct their tithing, fast offerings, etc. Moreover, there is a tax called the gift tax imposed on people who give gifts. There’s an annual exemption amount–I think it’s currently around $12,000–and a lifetime exemption amount–about $1 million–but, to the extent a member made gifts in excess of these amounts, she would be responsible for paying the gift tax, which is imposed on the giver at a rate of up to 35% of the amount of the gift.[fn5]
—
[fn1] I almost feel bad about this, because the talk I’m going to use to launch into an alternate reality is really a lovely talk; I’m not trying to make fun of it, mock it, or disrespect it. The only reason I chose this talk is because it works chronologically. Also, I shouldn’t have to say this, but we have learned by sad experience that it is the nature and disposition of many internet denizens, as soon as they have read something, to misinterpret it and then argue about or spread the misinterpretation. So keep in mind that the situation I’m setting up is fictional. President Monson did not, in General Conference, endorse or oppose any candidate for office.
[fn2] Just one more reminder: this is fiction, at least until I get to the potential tax consequences.
[fn3] I’m just going to go with federal tax consequences here. I would guess that most states tie their tax exemption to the federal exemption, but I don’t know that. In any state that does, the Church would probably lose its property and sales tax exemption, but state tax laws are so varied and broad that I’ll leave the state component to your imaginations.
[fn4] Last time, I promise: this is in a fictional alternative reality, not the reality that I’m typing in. So for the record: the Church has not lost its exemption, nor has it done anything that would warrant, under current law, such a loss.
[fn5] A friend, reading one of my prior posts, asked me how many footnotes I would have to write cutting off possible off-topic discussions before writing the post wouldn’t be worth it. I told him you could never have too many footnotes. That said, for this post, five is probably one or two too many. So let me just say: I don’t know that or care if the Church’s position of political neutrality is caused by, influenced by, or completely unrelated to its tax-exempt status, and I’m not trying to imply any causal relation in this post. Instead, I’m trying to create a realistic view of a world in which the Church lost (or, for that matter, never had) an exemption from the U.S. federal income tax.
Of course, such an endorsement would be bad for Mitt Romney and apparently the church . . .
Thaks, Sam. I’m really enjoying your tax-related posts.
About (4), I’d point out that the loss of the gift-giving deduction would only affect church members who itemize their deductions rather than taking the standard deduction. My guess is that most American Mormons fall into the standard deduction category, but you’re the tax expert here.
Also, experience teaches that the repeated footnotes about the hypothetical nature of your post are, sadly, all too necessary.
Good point. In 2011, the standard deduction for a married couple filing jointly is $11,600. If your only itemized deduction were tithing–and you paid 10%–you’d have to earn more than $116,000 to take the (hypothetically removed) deduction. IRL, you’ll probably add that to your mortgage interest deduction (and whatever other itemized deductions you have).
I don’t know the numbers for Mormons specifically, but the Tax Policy Center estimates that, in 2010, approximately 30% of tax returns claimed an itemized deduction. [source]
I wonder if it wouldn’t be more likely that Pres. Monson would endorse Jon Huntsman… [GRIN]
At this point in time my head would explode and the tax consequences would be irrelevant :)
However, being a global church, rather than lose all the money to taxes I could see the church moving all funds out of the USA to countries/banks that are more favorable than the US would be at that point. I’d expect headquarters to remain in SLC, but that the finances would evaporate offshore. Thoughts?
Kent,
That’s actually what I initially wanted to do, but it would have made my story both contrary-to-fact and anachronistic for 2008. ;)
Jax,
Just moving the finances offshore without changing the Church organization wouldn’t make any significant difference in the tax bill, and rearranging the corporate structure of the Church (again, in my hypothetical post-loss-of-exemption world) could impose certain toll costs, if it were recognized at all. Ultimately, there would be ways to offshore the Church’s income and reduce its US taxes, but it would involve tradeoffs that the Church would have to take into account.
I’m afraid that gift treatment for tithing would be hard to come by in the scenario offered. I think the tithing payments are fees received in exchange for services provided at that point.
Of course, there are ways the church could be very supportive of Mitt while retaining its 501(c)(3) status for its religious activities. A separate entity 501(c)(4) or PAC could be set up and share some board members with the church, while retaining enough independence to satisfy IRS scrutiny. The $1 million seed money from the church would be hard to manage, and the members would have to donate separately to each organization.
DCL,
That’s certainly a legitimate characterization of tithing paid to a non-exempt entity. I’m curious–how do you conclude that fees-for-services is the better characterization?[fn1] The services provided seem a little attenuated to the payment of tithing to me, especially given that, if you ignore the temple, everybody can get the same services, whether or not they pay their tithing. The temple presents a slightly different problem–you can’t go if you don’t pay your tithing–but there’s still some separation: just because you pay more tithing than me doesn’t mean that you get more or better temple access than I do. So that’s roughly my analysis, although it’s more of a gut feeling than a careful analysis (I wouldn’t write that as a tax opinion).
As for 501(c)(4)s, that would be the way the Church could do it, but having the (c)(4) wouldn’t ameliorate Pres. Monson’s conference endorsement, which would be enough to revoke the exemption, although more often than not, the I.R.S. doesn’t seem to enforce the provision.
[fn1] I mean that question sincerely: I know it’s a legit analysis, but I’m curious how you get that as being the better answer.
Thanks for the footnotes which kept me from certain embarrassment. :-)
I am curious about the political behaviors among churches in my large midwestern metropolis. Here most church congregations are politically active, endorse candidates, and even invite them to speak in church meetings. Do they lose their tax exempt status?
The beauty and blight of internet discussions is the ability to anonymously opine/comment/rant on any topic at any time. Footnotes are helpful in steering the comments toward a more in-depth and hopefully fulfilling conversation. I enjoy your posts and most of the ensuing comments. I enjoy the footnotes and hope there doesn’t come a day when the burden of having to footnote an article censors what you write.
About the post itself. What of the Church’s education properties? As private institutions of higher learning would the BYU’s have any taxable income? Aren’t most universities are tax-exempt?
Also, based on what you suggest above, if tithes and other offerings were indeed still exempt, it doesn’t seem like the tax hit would be too big. Like you I don’t have any great insight into the church’s finances, but if tithing were anywhere north of 70% of the church’s operating budget and if we are indeed running a surplus then a 35% tax hit on the last 30% of income might mean only a 10% or so reduction in overall budget. Doesn’t seem like something we couldn’t absorb.
The flip side of the coin is that we could start deducting all our humanitarian effort from our income. Since the church would be a for-profit organization that doesn’t care about making a profit we could theoretically use our humanitarian spend to reduce our tax liabilities to zero.
Paul,
Great questions–there’s a lot of ambiguity at the edges about what behavior is permissible. The IRS has released some advice for tax-exempts to help them know what they can and can’t do. And ultimately, it because a question of the details. A candidate can speak at a church, at least under certain circumstances, and not cost the church its exemption. And ministers can endorse candidates, as long as they’re doing so as a private citizen and not as a minister. This IRS document presents 21 hypotheticals, and whether they violate the campaigning prohibition or not; I think it’s an interesting read.
Even if a church violates the prohibition, though, in order to lose its exemption, the IRS has to revoke the exemption. Angry taxpayers can demand that the IRS investigate, but they don’t have standing to force the IRS to do so. And, in practice, the IRS rarely revokes tax exemptions (especially of churches) for political campaigning.
Kunio,
Provided my analysis carried the day and tithing and other offerings didn’t constitute taxable income, the tax hit might be insignificant, and perhaps could even be reduced or eliminated through certain deductions.
As for the various BYUs, they would be their own entities and covered by their own exemptions. As a result, the Church’s losing its exemption would probably not affect their tax treatment.
I don’t know the numbers for Mormons specifically, but the Tax Policy Center estimates that, in 2010, approximately 30% of tax returns claimed an itemized deduction.
Nobody knows the numbers for Mormons specifically, but the percentage of itemizers in Utah is well above average (40%) as is the average charitable contribution deduction.
http://nccs.urban.org/statistics/images/CharGiv_07_1.pdf
I guess that should read “the percentage of Utahns who itemize.”
When Roman Catholic bishops deny communion to Roman Catholic politicians who are pro choice, and when they preach that it is a sin to vote for any candidate who is pro-choice, isn’t that tantamount to the Diocese endorsing the opposing candidate?
Last Lemming, thanks.
DavidH, those are good questions. The IRS guidance I linked to in 11 addresses your second question on p. 1424, although it’s unlikely to satisfy people who want a clear rule. (Note that I’m not suggesting that you should have read it; it just provides examples that are way too long for me to summarize in a comment.) As to the first question, I’d have a hard time seeing that as being violative of the prohibition–it seems like an internal church governance thing that the IRS wouldn’t get involved in–but it does create, at the least, some discomfort for me.
DavidH- As a Catholic for 20 years, I can say that 99.9% of Catholics don’t know who their Bishop is, and the wheel hits the road in a much more arbitrary don’t ask/don’t tell fashion on these things.
Just out of curiosity, what would be the implications if they treated it like Prop 8? What if there was no “official fund”, but members were strongly encouraged to give individually to Mitt Romney’s campaign? What if members were assigned phone banks, etc? What if letters were read to that effect on Sunday?
Could the Church still retain it’s current tax-exemption, and if not, what are the legal and tax implications for the difference between supporting a particular political proposition and a particular political candidate? Are the rules different?
Thank you for the insight to anyone who understands this more than I do.
David + Sam Re: 15 & 16:
I see a big difference between weighing in on moral issues than getting involved in party politics. Now I don’t know what the Catholic church does in this regard, but I think that’s the distinction our church draws. People of all parties can be opposed to abortion (or gay marriage) and/or in favor of it. It’s not an issue of coming out for or against a particular party, but rather on a particular issue with a moral question.
I think that’s a fine line a lot of people don’t agree with, hence the backlash at the church “playing politics” but in as much as you define politics as social relations, the church has no choice but to “play it”. If you define politics as supporting one political party over another, and actively getting involved in campaigning for one over another then that’s politics to me in the legal sense.
Mike S, take a look at my previous post: the Church–or any public charity–can engage in lobbying, as long as the lobbying does not constitute a “substantial part” of its activities (whatever “substantial part” means). But there is zero tolerance for endorsing or opposing an individual running for office. So telling members to contribute to Prop 8 fits within the guidelines of the tax law; telling them to contribute to Romney’s campaign, on the other hand, is clearly endorsing a candidate, and wouldn’t work. (This reply also works for chris.)
Sam, well the discussion is a little odd because, even given your hypothetical, the church would still find ways to funnel at least portions of tithes and offerings through a 501(c)(3) entity even if it had to split its political activities away from the charitable. But, going with the hypothetical, given that the services members receive are generally “funded” through their payment of tithing, I think there is a presumption that tithing is taxable income to the church, and the burden would be for the church to establish that tithing is a gift. Gifts to corporations are a little odd because, although I think the law is a little unsettled, the prevailing view is that a gift to a corporation is a gift to the shareholders of the corporation. I think the church has a harder time arguing that donative intent exists as to the church’s then private owners as opposed to being given in the expectation that the church will run certain programs for the members’ collective benefit.
Thanks DCL. And the question certainly constitutes a factual question and, given my imaginary world, the facts may be insufficiently clear. In my quick look, you’re right that there is some precedent that a gift to a corporation is a gift to the shareholders; there is a regulation under the gift tax that says this. However, gift tax precedent does not necessarily carry over to the income tax; even if it does, the reg (25.2511-1(h)(1) for anybody who’s interested) says that gifts to charitable organizations may constitute gifts to the entity, and not to shareholders. (And “charitable” =/= “tax-exempt”). Also, in dicta in Branch Ministries v. Comm’r, the DC Circuit has dicta that gifts to a no-longer-exempt church wouldn’t necessarily constitute taxable income.
All: if you thought that the tax law was boring or clear, I hope these posts are starting to dissuade you from that notion. And, with any luck at all, show how much fun the tax law is.
As I mentioned in my comment on your previous tax-the-church post, I think one of the biggest hits the Church would take would be in property taxes on its real estate, including Church offices, meetinghouses, temples, and church farms.
On the political activity of churches, back during the 2004 presidential elections, the Bush reelection campaign was soliciting churches to give them contact lists of their members, with names, addresses, and phone numbers, to be entered into their database for mailings and phone calls soliciting donations. As far as I know, the churches were allowed to selectively provide that information to one candidate’s campaign and not the other. I know our Church did not participate, although I am sure that, given the conservative bent of most US Mormons, the Republicans would have loved using such a list to complete their mailing list of people most likely to donate to a conservative candidate. Since that seems tantamount to having the Bush campaign hand out donation solicitations at the door after meetings get out, it is clearly a not very subtle implicit endorsement.
On the other hand, I am sure YouTube is chock full of video clips of Democratic candidates appearing at various African American churches and being greeted with a warmup speech by the pastor talking about the need for precisely the policies that the candidate is going to speak to. I don’t see any meaningful difference between this and the kind of hypothetical LDS endorsement you used in your example. After all, President Monson could have just invited Brother Romney to the pulpit to give a short talk about the divine Constitution and America as a Promised Land whose people God will hold accountable if they choose unrighteousness. My guess is that at some point in the course of serving as a bishop and then a stake president, Romney gave a talk on that topic, especially around the Fourth of July or some other commemoration of Boston’s role in the Revolutionary War.
Why would the IRS beat up on the Mormons but not the African Methodist Episcopal Church? Because the Mormons are a small minority in the country as a whole with little political clout nationally, and no one is going to take the IRS or the current administration to task for beating up on the Mormons, while the IRS taking on black churches that endorse Democratic presidential candidates would be accused of racism and there would be naked political retaliation, with lots of non-blacks jumping on the bandwagon. In most states where Mormons have any significant numbers, the majority of the population is already conservative (e.g. Idaho, Wyoming) so the Mormons don’t swing elections, or the majority is so liberal (e.g. California, Washington) that the Mormons don’t swing elections. In the political realm, the IRS will pursue the weak, like a predator picking off the calves in a herd.
My guess is that the hit the Church would take from losing its 501(c)(3) status would be big enough that it would be willing to litigate. At that point I cannot imagine that the blatant discrimination by the IRS in not taking action against many other churches would not be raised by the LDS Church in an argument that the action was solely motivated by religious discrimination.
And of course, the very real religious bias at play would affect the outcome in the courts. The Supreme Court’s religion cases are incoherent, and I believe that is largely due to the fact that religious biases exist but are not admitted to, and so they operate as a wild card, with the biased outcomes being articulated with other rationales.
I think it’s going to take a lot more than that to make tax law fun. When I took the basic tax law course, Mr. TaxProf Blog himself, although a great professor, only succeeded at actually making it fun once every week or two.
I do, however, find parts of it interesting, including these recent posts.
TSM gave Bob Bennett $1000 many years ago,check opensecrets.org if you don’t believe it. The sad truth is TSM is a neo con, oh well the LDS has been going down the drain for a while. Mitt is Satan’s little helper and so is many Mormons today.
Helaman 6:38
And it came to pass on the other hand, that the Nephites did build them up and support them, beginning at the more wicked part of them, until they had overspread all the land of the Nephites, and had seduced the more part of the righteous until they had come down to believe in their works and partake of their spoils, and to join with them in their secret murders and combinations.
RTS,
One reason I think that the IRS doesn’t go after churches often is that there’s basically no upside to it: there would be little, if any, additional government revenue (most tax-exempts would just cease operations, and churches can arguably automatically become exempt again immediately once they stop campaigning). Still, the IRS has investigated black churches, where I don’t think it has ever investigated the LDS church. But that’s why I made my hypothetical so blatant that the IRS would have little choice but to revoke the Church’s exemption.
SillConfused,
Two things: I’m going to assume your first question is sincere, and therefore answer it. If you look at the IRS document I linked to in 11 (and then referred to again in 16), you’ll see that the IRS recognizes the right of people–even pastors–to personally support individual candidates. There is no reason that, as an individual, President Monson can’t support, financially or otherwise, a particular candidate. The line would be crossed if he supported a candidate in his capacity as a Church representative.
On the other hand, where you quote scripture out of context in order to implicate that Mormons who participate in politics are wicked, well, that’s both off-topic and remarkably imaginative.[fn1]
[fn1] By this I mean, I’m desperately trying to be polite to you; please help me out by not making really offensive and pointless ad hominem attacks. Your question, phrased differently, is a really good question but, phrased as you’ve put it, I had to work really hard to read it in a constructive manner.
This paragraph made me think that I could really get to like you Sam, if you ever talked about anything other than taxes that is :)
Thanks Jax. [smiley face]
Sam, thanks for your response to #25. I’m trying really hard this month to be less mocking of others . . . so I really appreciate your answer.
These have been very interesting posts. I haven’t commented, but I am enjoying reading them and all of the input by everyone else.
Mike S., #18 – my thoughts exactly. I was going to write the comment, then read yours and realized it had already been precisely said.
Thanks, Ray. I’m glad you’ve enjoyed the posts so far. This is really a selfish endeavor on my part: I get to write about two of the three things I care most about–taxes and the Church. (The third–my wife and daughters–deserve privacy unless and until they decide to venture to the Bloggernacle themselves. Plus I get to write about them on our family blog, so ultimately, I get to write about my three things I care most about.)
(Also, I should point out that, although I mention taxes first, it’s a distant third in terms of things I care about. I do have some priorities :).
Sam:
Hi. By way of introduction I am a CPA currently licensed to practice tax in CA & UT, but currently live in Bangalore as a trainer for our outsourcing department here for one year. I am with a Big 4 firm.
Anyway, I’m curious about your point about gifts to the church. If the church is not tax-exempt, what would they be? A Corporation? A partnership? If a corporation, and as a tithe-paying member, is it not possible that contributions could be seen as in exchange for stock in the church? Or are you assuming the sole shareholder of the church is the prophet only and not the members? Of course, with the 80% control rule under Section 351, I suppose any contributions would be taxable to the church (but only if in-kind since cash does not appreciate), but not to its members making the contributions. Were we to become a partnership, the control rule does not exist under Subpart K, so then any donations, ie contributions, could be seen as tax-free to the church and its members. The church could then distribute income to the members to pay the flow-through tax from the K-1.
I think these scenarios would be preferable to any gift giving scenario, as many members give well over the $13K gift exemption ($26K if you split with your spouse). But then the issue of who owns the church becomes very sticky I guess. Who do you see owning the church?
Or is it possible the church could become a 990-PF and just pay a 2% tax? If I recall correctly, Private Foundations have more leeway in how much they can politic and whatnot, and in exchange pay a small tax on investment income for that benefit. Under this scenario, contributions are revenue to the church. Would that be a possibility? I’m curious what you think from your standpoint as a tax professor.
Sam nice article, great to see a fresh view on T and S. I am looking forward to reading you
#25, FWIW I understand your comment and I agree, however you need to understand the LDS mind set if you expect not to offend, if I was you I would look at the footnote in #26 and do a better job of explaining your views.
—-Root out
Welcome, Chadwick!
[Warning: this comment is, to some extent, inside baseball. I’ll try to footnote the terms, but, if you’re going to skip anything that I write, this may be the comment to skip.]
I don’t have time to do serious research, but a couple quick thoughts: first, I think that, upon losing its exemption, the Church would be treated as a C corporation.[fn1] But I don’t know what the ownership structure would look like. I assume that tithing wouldn’t constitute a contribution to capital or an exchange for shares, but that’s more of a gut thing–treating tithepayers as equity owners seems off. (Plus, the gift tax regs suggest that people can make gifts to corporations in some circumstances.)
As for the private foundation, I know that, upon losing its exception, a 501(c)(3) can’t convert into a 501(c)(4).[fn2] I don’t know if that carries over to conversions to other tax-exempt entities or not.
But, as you point out, if this were to happen, the Church would have several structuring choices. Assuming you believe the court in Branch Ministries, though, the easiest solution would be to simply stop violating the prohibition and become tax-exempt again.
[fn1] For those of you not immersed in the tax law, a “C corporation” is basically a normal, everyday corporation.
[fn2] 501(c)(3) and 501(c)(4) represent different types of tax-exempt organizations. Donors can deduct donations to (c)(3)s but not to (c)(4)s. On the other hand, (c)(4)s don’t face the campaigning prohibition.
Root, fwiw, StillConfused has been commemting on multiple LDS-themed blogs for quite a while. Understanding “the LDS mindset” isn’t an issue in this case. Calling people tools of Satan and supporters of murderous secret combinations is pretty straightforward and doesn’t need to be done with velvet gloves in order to understand better and not offend.
Seriously, there’s no way to say what was said and not have it be horribly offensive. That level of transparency usually isn’t present in SC’s comments, even though they nearly all are negative. Hence, the surprise and difficulty in constructing a response.
Pardon me (off the subject )…how does one become a guest blogger on Times and Seasons?
Why should I or anyone else assume President Monson would endorse a Republican? In any case, such an endorsement would be a kiss of death