[Note: this is the third (yes, third) part of a many-part series. You can read Part 1 here and Part 1.5 here.]
[Note #2: A friend points out that I left some information out of this post that is helpful in understanding what I’m talking about. That information is in Part 1, but it’s been a long time since I posted Part 1, so I’m adding some clarifying details in bold. Thanks, SG.]
Pop quiz: when you think “Mormons” and “US Supreme Court,” what do you think? (The correct answer is, of course, Reynolds.[fn1])
For many of us, though, another less-known case impacts our lives, at least while we’re missionaries or while we’re supporting missionaries, nearly as much: Davis v. United States.
Brother and Sister Davis had at least two sons, Benjamin and Cecil. In 1979, Cecil was called to the New York Mission, while in 1980, Cecil was called to the New Zealand-Cook Island Mission. In 1981, the Davis paid $4,135 for Benjamin’s mission and $1,518 for Cecil’s.[fn2] And when they filed their tax return, Brother and Sister Davis took a deduction for the $ 5,653 that they donated toward their sons’ missions. Just like today.
Except.
Except that, in addition to paying for the actual costs of a mission, parents and others who supported missionaries gave the money directly to the missionaries: in the case of the Davises, they transferred the money into their sons’ checking accounts.
So wait: they took a deduction for money they paid to their sons? Seriously? But a parent can’t deduct the value of, for example, Christmas presents they give to their children, or piano lessons, or clothes or food or virtually anything else they give their kids. So how did the Davises have the gall to deduct money they gave their sons?!?
Easily, actually.[fn3] The tax law permits a person to deduct contributions or gifts made “to or for the use of” certain charities, including churches.[fn4] The Davises argued that the transfers to their missionary sons were for the use of the Church—that is, their sons were acting to benefit the Church, and so money used to support them was for the Church.
And the argument is far from frivolous. Davis was actually just one of three cases, each in a different Court of Appeals, dealing with this question. While the Court of Appeals in Davis found that the payments were not deductible, two other Courts of Appeals came to the opposite conclusion, holding that payments to missionary sons were “for the benefit of” the Church and, thus, were deductible.
The Supreme Court conceded that both parties had viable arguments, and looked at the events leading up to the 1921 enactment of the law. It held that the “for the benefit of” language was intended originally to allow deductions made to auxiliary charitable organizations, such as trusts. Payments to missionary children were beyond the intended scope and, as such, parents could no longer deduct them.
And when did the Supreme Court decide Davis? May 1990. In November 1990, the Church sent out a letter in detailing a change to how missionaries would pay for their missions. Rather than directly financing their missions, missionaries and their families and friends would, going forward, pay a standardized amount of money (initially $350 for missionaries from the U.S. and C$400 for those from Canada) to the Church. The Church would then disperse that money to missionaries as needed.[fn5]
It’s worth noting that, as a result of paying the money to the Church, rather than to the missionary, that money clearly fits within the realm of deductibility. You don’t need to rely on “for the use of” when you’re actually paying money “to” a charity.
Did the Davis decision singlehandedly change the financing of missions? I don’t know. I don’t have any inside information, and I have no doubt that the Church was considering the inequities of having different costs (that were unknowable prior to the mission) for different missionaries. But it wouldn’t shock me if, at the very least, Davis affected the timing of the Church’s change in mission financing.
—
[fn1] Also acceptable forms of the answer: the polygamy case, the case with the guy with the great beard, and I don’t think of “Mormons” and “US Supreme Court,” at least not in the same sentence.
[fn2] Remember, prior to 1991, a missionary was responsible for the actual costs he or she incurred as a missionary.
[fn3] Note that I’m going to police this thread pretty tightly: I will delete, with no warnings, any comments that accuse the Davises or the Church of deceitful behavior for deducting payments made to missionaries. As I make clear, until this decision, the deductibility of such payments was a perfectly good reading of the Internal Revenue Code.
[fn4] I.R.C. section 170(c), if you’re interested.
[fn5] Remember, prior to the 1990 change, the cost of a mission varied from $150 to $750, and you couldn’t know how much you would need to pay until you knew where you were serving your mission.
Wasn’t part of the problem that people were double-dipping; that is, deducting mission expenses and simultaneously claiming the missionaries as dependents?
Would it be possible for someone, then, to set up a trust for their kids’ missions?
While I’m not going to accuse anyone of deceitful behavior, had the Supreme Court ruled the other way, I would have been worried. Specifically, I could have seen parents giving missionaries much more than they really needed, or were supposed to receive, and writing it all off.
Andrew, probably not if the kids’ remain the beneficiaries of the trust. If the church is the beneficiary, then the trust is probably a charitable trust, but the contributions would only be deductible under the complex private foundation rules.
Last Lemming, I don’t doubt that it happened. In this case, it looks like the Davises initially claimed their sons as dependents and didn’t take the deduction. They then amended their returns to take the deduction in addition to claiming their sons. And then, when they went to trial, they amended their claim again, not claiming their sons as dependents and only the charitable deduction.
John, the potential for bad behavior is one of the reasons I think the Supreme Court’s decision was both correct and inevitable.
It wasn’t clearly stated above, and I don’t know the answer independently, but I think what Sam is saying is that the Davis decision may have caused the Church to change the policy of mission financing, at least in part, to make it such that the payments went to the church, rather than the missionary, in order to make those payments tax deductible in the United States? Perhaps I’m missing the point.
If this is the case, it argues against missionaries paying for their own missions. The cost of missionary service is cheaper if it is being paid by someone who can benefit from the tax benefits. Most missionaries have no income tax liability while serving, and any tax benefit to them would be lost. However, their parents (for instance) could very well realize a tax benefit from paying for Junior’s mission.
Sam, I don’t have any inside information, but I remember when Davis came down, and my impression was that the decision did indeed have an influence on how we pay for our missionaries, both as to payment through the Church, and perhaps indirectly in the equalization of costs.
Kevin,
I was 14 when the change happened, and not a Supreme Court watcher, but I remember hearing about the change. And I would be far from shocked if it had something to do with the change; there’s no reason not to. I wouldn’t be surprised if the Church was independently considering some sort of change—the equalization of costs makes a lot of sense, independent of tax considerations—but at the very least, the timing is close enough that it’s probably related.
Mike D.,
Under the current program (which, as you point out, I forgot to include—maybe that’ll add yet another part to this series), a missionary who funds his or her own mission can potentially deduct the cost, because even if I were to fund my own mission, I would pay an amount into the central (deductible) pot, then the Church would provide my monthly allowance, whatever that was. (I say “probably” because, in truth, most 18- to 23-year-olds probably aren’t itemizing their deductions so, as a result, probably can’t use the deduction.)
Others with direct knowledge will no doubt soon chip in (Nate is exempt as he has to deal with Earthquakes and Hurricanes); but…
After Davis was decided; the Church had all mission support money paid directly to the Church. So yes, you could say that Davis changed Church “financial” policy.
I was attending law school in Washington, D.C. at the time and I heard Rex Lee argue this case before the Supreme Court. If anyone could have pulled out a victory for Br. & Sis. Davis (and all other parents similarly situated), it was Rex Lee. You could tell that the justices had the greatest respect for him. At the time, I spoke to a member of the legal team who said that the Church was looking beyond the results (then unknown) of this case. I’m sure the Church would have adjusted the mission finance policy anyway but this case probably hastened the change.
My first companion (served in Japan in 1970’s) believed in tracting without purse or script. He thought that if we got jobs and worked for our money, we would be more likely to meet people who might actually stay in the church. He was in his late 20’s and had previously worked as an MC on the stage in Las Vegas and he did decent Elvis impressions. He could easily make money singing in bars. His father was a jeweler and he could determine the value of diamonds by looking at them. There was quite a black market in diamonds on the street and he could find undervalued diamonds with little trouble, buy and resell them for hundreds of dollars profit. He also bought and sold cameras. He had missionary friends in Korea where there were high tariffs. He could make hundreds sending cameras. He supported the 6 missionaries in the branch in style.
I gave up a scholarship to go on my mission. In the 4 months with him I earned enough to pay for more than a year’s tuition. If I had continued on that path, my college would have been payed for. i point this out merely to say that there are many more options than we might initially realize.
“… another less-known case impacts our lives…”
Actually, it only impacts the lives of USAmericans.
Not all of “us.”
If that’s the New York City (rather than Rochester) Mission, then I was there at the same time as Elder Davis, though the name doesn’t ring a bell. I still have a stack of old mission newsletters; perhaps I could research where he served and figure out if I might have crossed paths with him.
Interestingly, I started out my mission with my parents sending me a check directly, just like everyone else. After several months, they discovered the tax issue and started donating the money to the ward, with the ward forwarding me a check. As far as I know, they didn’t have any problem claiming the contribution.
Mike’s post (#11) cracks me up. When I was in the Philippines (in ’94), there were a handful of elders who supplemented their income by playing semi-pro basketball. It wasn’t as glamorous as it sounds. There were certain places where the basketball play was somewhat competitive, even if the individual players weren’t. A handful of elders used to get paid to play on certain teams captained by competitive and relatively well-to-do pinoys. Don’t know if the President ever knew about that.
Oh, I think #12 might be lost. Somebody give that boy scout a map and a compass. :)
Naismith,
Assuming that Davis created and/or hastened the creation of a centralized pot of missionary money that all missionaries pay into, I’d say that the case impacted all of us who have been missionaries since 1991, have met missionaries since 1991, or who have helped to fund missionaries since 1991, irrespective of nationality. (Unless, of course, there was such a centralized fund that just didn’t apply to U.S. members who became missionaries.)
That said, you’re right that, especially as I talk tax, I’m relatively U.S.-centric. And that’s basically because I’m not a comparative tax guy; I know other tax systems only in broad brushstrokes. Still, toward the end of this series, I’m going to mention at least one change that the Church has made to its finances worldwide in response, I assume, to non-U.S. tax consequences. (And here, I’m hoping you’re waiting with bated breath . . .)
And Jim, that’s cool that you got to hear the argument in Davis. And also Left Field, the Davises’ brief says their son was in New York City; it would be cool to know if you two overlapped at all.
I’m curious about the distinction Naismith makes between “USAmericans” and presumably “OtherAmericans”–who might they be?
I don’t want to put words in her mouth, but I assume she’s thinking about Canadians, Mexicans, Central Americans, and South Americans.
After the Supreme Court case, but before equalization, there were parents sending mission money to the Church instead of directly to their children. It all seemed half apostate to me since President Kimball had said missionaries should save their own money instead of being supported by parents.
Mike (#11)–I also served in Japan in the 1970s. Right after I finished my mission in February 1971, President Nixon renounced a number of Us agreements on currency exchange, which had pegged the Japanese Yen at 360 per US Dollar for many years, and let the exchange rates float. The value of the Yen suddenly rose, and instantly doubled the cost in dollars for a US missionary to serve in Japan.
I also served in the Air force in Japan as a prosecutor, and put people in Federal prison for violating the Korean customs laws as your missionary companion did. If he had been discovered and prosecuted, it would have been a tremendous black eye for the Church that surely would overshadow all the “good” he thought he was doing by earning money when he should have been searching for souls. He would have been prosecuted in Japanese courts and put into the special prison for US citizens convicted of violating Japanese laws. It also would have made it difficult to get visa to send missionaries into Korea, too!
How much income tax did he pay to the Japanese government? Was he registered and licensed to do business in Japan? Of course not; it is illegal for non-Japanese to be working and earning money in Japan except in a legitimate business. He could have been summarily deported, going home in disgrace form his mission, if the prosecutors didn;t feel like putting him in jail.
Anyone tempted to pull that kind of thing overseas should be aware that their notions of “due process” are not like that in the US. In Japan, anyone can be arrested and placed in confinement for 3 weeks without being charged, without bail. You have no right to have an attorney present when being questioned by the police. And because Japan uses German 3 judge panels, not juries, criminal trials are held one hour per month. At the end of an hour, you go back to jail to wait until your next hour a month later. You can spend 6 to 9 months in jail just for a trial of 5 or 6 hours. And that is in a modern DEMOCRACY. Just guess what your rights are in Mongolia.
We didn’t have anyone to discuss this with at the time, the bishop was appropriately “whatever you feel good about.” But it seemed to us that if we claimed the charitable tax deduction for our missionary, then we might be acknowledging that they are the church’s responsibility, not our dependent. And it seems like double-dipping to benefit twice from the same event.
Because our health insurance would cover our dependent children, we chose to declare them our dependent but not deduct the mission expenses as a charitable deduction.
I’m not slamming anyone who did it otherwise–we might have done it differently if we’d had different advice. We were totally oblivious of the Davis decision.
We do take the charitable deduction when we support other people’s children on missions. But we’d be feeding and housing and clothing them anyway, if they were still at college.
Also, about the USAmerican thing, yes, there are lots of other Americans, and it is unfortunate that we don’t have a term like “USian” to specify people from one country. Both my husband and I participate in professional organizations with “American” in the name, but a constituency of North America. And sometimes people are offended at the US usurpation of the word. If adding two letters can be more clear and avoid offense, why not?
Raymond:
I appreciate hearing the exact details of what I vaguely expected would happen if we ever got “caught.” I always wondered just how far over the line we went. Pretty far it appears. But that was part of the reason I think he did it. As a prosecutor you have probably met perpetrators who were certain they could convince a jury of their innocence in the face of overwhelming evidence to the contrary.
But this was precisely what made him one of the most effective missionaries I ever met. He could convince people to listen to the lessons and sometimes join the church. My point is that maybe not everything he was doing was completely mis-guided. And what the rest of us were doing, talking to housewives all day or crazy people on the street, didn’t seem to be working very well. (Glass was half full and half empty). So why not try something else? I admired the degree to which he went to be innovative. I only suggest that perhaps more appropriate and equally creative ideas might be forthcoming from this distinguished group.
I can’t really answer for this companion but if faced with prison I can imagine hearing his voice right now in my mind saying: even bad publicity is better for the church than none. And prison might be a pretty good place for a humble missionary to preach the gospel and bring many lost sheep back unto the Lord. He was right, that might have been the perfect place to “transfer” him.
For your peace of mind Raymond, (wink wink) this companion was not the very worst missionary when it came to smuggling. Another guy I knew from high school was known as Elder Monster, only partly because he happened to share a name with our current beloved Prophet. He served in Japan with much distinction and pursued his “business” interests both during and after his mission, which was somewhat shorter than the usual 2 years. He once bragged that he was the only missionary to ever be sent home twice, because the mission president asked him to please leave again when, like a bad rash, he came back as an “underground Zone Leader.”
Elder Monster introduced me to this white powder called “hiropon” (if I remenber correctly, it has been a few decades) that was sent from heaven like manna to the children of Israel and it was better than the Holy Ghost. He claimed it was how an 80 something year old Spencer W. Kimball could work 20 hour days and recommended it to any missionary who really wanted to be a ZL. I didn’t want to be a ZL bad enough to rely on something better than my own rather feeble power from the Holy Ghost.
He worked the “wampaku” (translation-bad a$$) missionary network and somehow was blessed with enough income for expensive sports cars, cloths and a big house back in Utah, while I was struggling in college. He had a high toned Japanese wife and a couple of mistresses. He also acquired elaborate tattoos and I noticed the last time I saw him that he was missing a couple of the ends of his fingers. Miter saw accident, he claimed. (Does Yakuza make power tools?)
He didn’t show up for any high school reunions. Perhaps he too was “worthy” of a call from the Lord to a people who conventional Mormon missionaries were not exactly willing to serve. Where much is given, much is expected.