Perspective: I teach tax law. This is what I wish reporters understood about church finances
This is a call for higher journalistic inquiry and thoroughness on complicated matters related to tax and religious organizations
Recent news articles underscore a journalistic deficiency in reporting related to tax law and its implications for The Church of Jesus Christ of Latter-day Saints. There appears to be a disconnect between what the tax law is and what reporters think the tax law ought to be.
Let me explain.
Recent stories in The Washington Post and the The Wall Street Journal have focused on The Church of Jesus Christ of Latter-day Saints’ use of tithing funds. A recent article in the Post— ”He was Mormon royalty. Now his lawsuit against the church is a rallying cry” — and another in the Journal — “Inside the Mormon Church’s Globe-Spanning Real-Estate Empire” — restate David Nielsen’s “whistleblower” allegations that the church’s reserve funds represent tax malfeasance because the investment funds aren’t spent on charitable purposes.
But, with some irony, the Journal article also goes on to suggest the church is now spending too much in building temples. Building temples, of course, is an explicit religious charitable purpose.
The latest Post report focuses on James Huntsman’s lawsuit against the church, alleging fraud for its representation of how tithing funds are used. Nielsen’s whistleblower claim is what spurred Huntsman to file his lawsuit.
But, these stories fail to point readers to actual tax law. When journalists imply tax law violations based on their normative view of what the tax law should be, it spreads misinformation about what the tax law actually is and what the tax law actually requires.
I offer here an explanation on what the tax law provides in relation to tax exempt churches, using The Church of Jesus Christ of Latter-day Saints and the Huntsman and Nielsen claims as cases in point.
The Journal’s report details the church’s recently constructed and planned temples, not-so-subtly highlighting purported evidence of opulence: limestone flooring from Bethlehem and wood from the Congo River region. While the article makes no mention of the church’s extensive education or other charitable spending, the article does at least acknowledge the church’s spending on humanitarian aid (self-reported at over $1 billion in 2022).
But in the next breath, seemingly to suggest it isn’t enough relative to its overall reserve funds, the article quotes a church member of some public notoriety who stopped tithing in order to donate to charities that “feed hungry children.” To get a range of perspectives, the report summoned both a defense from the church’s Presiding Bishopric and the opinion of a Brazilian film editor who left the church 10 years ago.
But the report fails to address one simple question.
What does tax law actually state?
Churches and other charities are tax exempt and capable of receiving tax deductible donations under section 501(c)(3) of the Internal Revenue Code.
That provision provides for two different types of charities: public charities and private foundations, both of which must be organized and operated for a charitable purpose.
A “religious” purpose is expressly a charitable purpose.
Private foundations are generally funded with a single benefactor while public charities rely on broad-based public support. Tax rules differ and are more stringent for private foundations than for public charities. Most relevant here, private foundations must spend 5% of their endowment each year on activities that directly further their charitable purpose.
Public charities are under no such obligation. Furthermore, a certain type of public charity, known as a “supporting organization,” operates for the benefit of another public charity. The supporting organization’s charitable purpose is fulfilled as it financially supports another (usually related) public charity’s charitable activities.
Under the law, The Church of Jesus Christ of Latter-day Saints would be considered a public charity. Though it spends billions furthering its religious charitable purpose annually, it is under no affirmative spending mandate to do so under the tax law. In other words, the church is not obligated to make any specific annual expenditures relative to its total reserve funds.
Ensign Peak Advisors, the entity that invests the bulk of the church’s reserve funds, is a supporting organization of the church and is also a public charity. Supporting the church, its tax exemption would derive from the church’s charitable activities, and it would also have no affirmative spending mandate. Rather, the church does the spending.
The church moves excess funds into supporting organizations where they can be invested until needed, and must then receive funds back when it desires to spend money on the church’s religious purposes. It is much easier to deal with the investment world in a separate legal entity — a “supporting organization” — than directly in the church’s name.
There is a reason, then, that the IRS has taken no action over the past four years on Nielsen’s whistleblower complaint, a point acknowledged in both the Journal and the Post stories. Looking at the facts at face value, there doesn’t appear to have been any violation of tax law.
The Journal report implies that as a charity spends, there is (ought to be?) a lavishness restriction. There is none under the law. Nor is there a hierarchy of charitable purposes with one (humanitarian) being more worthwhile than another (religious). The church, of course, does both, viewing the former as a natural extension of the latter.
It’s also worth noting that “religious” is the first charitable purpose listed in section 501(c)(3) and it is the only charitable purpose with constitutional underpinnings in the Free Exercise Clause of the First Amendment.
While the Post’s report generally refrains from conflating what the tax law is, relative to what the tax law ought to be, it leaves incomplete important tax aspects of Huntsman’s claim. When an individual makes a donation to charity, she makes a gift. In order to complete the gift, she relinquishes all dominion and control over the transferred property. That is, she retains no legal right or economic benefit in the transferred property.
Part of Huntsman’s claim for relief in the lawsuit is a refund of his tithing. There is no legal basis for this claim under the tax law because in the eyes of the law, he indeed relinquished all control over those donations (and, in turn, almost certainly received tax deductions). This is the reason his argument is based on the much more difficult to prove claim of fraud, because under the tax law, he has no legal right to funds he willfully gifted to the church.
All this is a call for higher journalistic inquiry and thoroughness on complicated matters related to tax and religious organizations, including The Church of Jesus Christ of Latter-day Saints.
If journalists and concurring readers believe the tax law in this area should change, then they should lobby Congress. But they should bear in mind that any changes that impose greater restrictions and requirements on how churches spend the money donated to them will significantly impact donations to all churches and potentially other organizations, not just The Church of Jesus Christ of Latter-day Saints.
Relatedly, future reports should bear a disclaiming tone that recognizes the nuance and complexity of the tax law. A more deferential tone to the tax law’s inherent complexity would go a long way toward helping readers form more informed and less rigid conclusions and hopefully establish more fertile ground for civic discussion between those who are members of the church, those who are not and those who once were.
Eric Smith is associate dean and professor of taxation in the Goddard School of Business & Economics at Weber State University. He is also an adjunct professor of law at the University of Utah’s S.J. Quinney College of Law. The views expressed in this opinion article by the author are his alone and don’t necessarily reflect those of his employers or the Deseret News.