The Religion Unplugged and Washington Post stories raise (at least) three important questions. I’m going to try to address all three here (though at least one will be really quick), and I suspect that this post will be unsatisfying both to those who want to see the church vindicated and those who want to see it get its comeuppance. And that’s because, contrary to popular perception, the tax law isn’t an area full of clear answers and bright lines. It’s also because many tax issues are fact-dependent, and we lack many of the facts. To the extent that you want more information and analysis, Peggy Fletcher Stack has been doing some great reporting on this.

The three main issues I see are these:

Does the church have $100 billion in securities-type investments?

Should the church have $100 billion in securities-type investments?

Does the $100 billion in investments violate the tax law?

Now, I have absolutely no answer to number 1. I’m slightly skeptical, just because growing $12 billion in 1997 to $100 billion today (with two significant market downturns happening in those 22 years) strikes me as requiring some pretty aggressive assumptions. On the other hand, it’s at least plausible. And notably, the church has the ability to tell us how much it’s worth. To the extent it chooses not to do so, assertions like this will continue to find traction. Since the ball’s in the church’s court here, and since I have neither knowledge of nor the ability to find out the net asset value of the church’s investments on my own, for purposes of this post, I’m going to assume that he’s right, and that the church has $100 billion invested in Ensign Peak Advisers.

So on to the normative question: should the church be able to amass $100 billion? In the first instance, that’s not a new question; I was at a conference a couple months ago that asked that same question about private foundations and donor-advised funds. And it’s been a big question in the university context: Harvard has been described as hedge fund with a university attached. According to the story in the Post, the Harvard endowment is worth almost $50 billion. That $50 billion supports (or, if it were used, would support, at least) about 23,000 students and another 16,000 staff and faculty.

I don’t think you’ll find anyone (well, virtually anyone) who argues that tax-exempt organizations shouldn’t be able to accumulate any assets. After all, charitable giving is at least moderately cyclical, while need is countercyclical. In a downturn, there is more need for charitable support, while donors often can’t give as generously.

On the other hand, $100 billion is a lot of money. That’s plenty to fund a lot of rainy days. Is it too much? Probably. What is the appropriate size for an endowment for the Mormon church, with its X million members and large non-investment real estate holdings that are self-insured? I don’t know. It’s definitely something north of zero.

A big problem here is that the terms of this discussion are hard to frame. We don’t have a sense of how much a charitable organization should be doing. How much has to be comparative to its assets, but is there an absolute amount too? The whistleblower complaint raises these important questions. And we definitely should discuss them as they relate to the church. And I hope that, as we discuss it, we don’t give into the tremendously Mormon cultural idea that this is a True Answer that we can arrive at. This is something that the institutional church should be grappling with, and that we as members should be grappling with as we grapple with our relationship to the church. But you’re not one scripture away from proving that the church is using its money perfectly, and you’re not one exposé away from proving that the church is a corrupt and selfish institution.

And finally, the descriptive question: is Ensign Peak Advisers violating the tax law?

It’s not entirely clear. The Post reporters talked to Phil Hackney for the story, which was a really good move on their part. Phil is a friend, and knows a ton about the law governing tax-exempt organizations. And Phil points out that, if Ensign Peak Advisers has only held and invested money, and never paid any out, that’s probably a bad thing.

Quick note here: when we’re talking about potential tax violations, we’re not really talking about the institutional church. Rather, we’re talking about Ensign Peak Advisers, a separate tax-exempt entity. As best as I can tell, Ensign Peak Advisers is an investment fund/adviser that the church uses to invest its additional money. And, according to the whistleblower, while money goes into Ensign Peak, it doesn’t come out. Rather, it’s invested and continues to grow.[fn1]

And this is potentially a tax problem. Ensign Peak Advisers is a “supporting organization” and an “integrated auxiliary.” To qualify for a tax exemption, it (probably) has to meet the requirements of section 501(c)(3) of the Code independently. And, uncontroversially, managing a securities portfolio isn’t one of the tax-exempt purposes listed in section 501(c)(3).

But. In 1964, the IRS released a ruling[fn2] holding that a corporation whose sole activity was to engage in a noncharitable business could qualify as tax-exempt. In the ruling, the IRS looked at a corporation that earned most of its money from renting out a building it owned and maintained. The corporation was organized for charitable purposes, and executed those charitable purposes by making grants and contributions to other charitable organizations. To qualify, the IRS said, it had to ensure that its grants were “commensurate in scope with its financial resources.”

The IRS also blessed an arrangement where a tax-exempt hospital set up and funded a trust to pay out malpractice claims. Its sole purpose was to hold money and pay out the claims, and if its assets dropped below a certain point, the hospital had to make more contributions in. The IRS determined that, by serving as a repository of funds that the hospital could use to further its exempt mission, the trust qualified for an exemption. In that case, there was no discussion of commensurate-in-scope, and no discussion of the trust actually making payments.[fn3]

And what does “commensurate in scope” mean? That’s a good question. And the answer is, nobody knows, precisely. In 1981, the IRS said that the commensurate-in-scope standard is very fact-specific. In that case, the IRS was looking at an organization whose claimed charitable purpose was to donate all of the net proceeds of an annual charitable fundraiser to a charity that it chose. The IRS decided that a blanket ruling that doing so met the commensurate-in-scope rule was inappropriate; even if this particular organization qualified, that didn’t mean that every organization that held a fundraiser and sent the net proceeds to a charity met the commensurate-in-scope standard for tax exemption.[fn4]

It’s worth noting that the fact that there is even a question is kind of unique to this setup. If the church were to do its investing in-house, there probably wouldn’t be any question about exemption, because the church’s exemption rests on its religious mission. Similarly, if the church invested in a normal outside investment fund (as opposed to a tax-exempt one), there wouldn’t be any tax issue. Public charities can (and do) invest in outside investment funds, and they can leave their invested money there indefinitely. A normal investment fund doesn’t have to have any kind of charitable purpose because it’s not charitable.

The issue here is that we have a tax-exempt investment fund/adviser, the only activities of which seem to be investing. Because that’s not a charitable purpose, it may have to meet the commensurate-in-scope standard to qualify for tax exemption.

Or it may not. Like I said, there’s been very little description of what the commensurate-in-scope standard requires, and even less of what it applies to. Does it apply to a supporting organization (one of the two things Ensign Peak Advisers is)? Probably.

Does it apply to an integrated auxiliary of a church (the other things Ensign Peak Advisers is)? Maybe? 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, fwiw, under the Internal Revenue Code, integrated auxiliaries of churches are, like churches, treated differently from other tax-exempt organizations. They’re presumptively not private foundations and they’re not required to file returns. So are they also exempt from the commensurate-in-scope rules? I sincerely don’t know.

I know that many of you came to get an answer to the question whether the church broke the law. The short answer is no, it didn’t. It’s possible, though, that Ensign Peak Advisers doesn’t qualify as tax exempt. The standards are ambiguous, both in substance and in scope, though, so it’s not completely clear that it does or doesn’t qualify.

As for whether $100 billion is too much for the church to have sitting, unspent: it’s an important thing to think about. It’s a question that the church needs to seriously engage. It’s a question that we, as members of the church and as tithepayers, need to seriously engage. And the question of how large an endowment tax-exempt organizations (including, but not limited to, churches) should have is an important question we, as society and the voting public, need to engage with.

And ultimately, as we engage, we need to understand that there’s not a right and a wrong answer to this. All we have is grey, and we’ll swim in the ambiguity of grey. But as we talk and argue and fight over the amount, maybe we’ll start to engage questions of the relationship of money and religion, of what the purpose of money is for a church, of how we (as stakeholders) want to see the church use the money that we help contribute. We can engage with why we contribute (or why we don’t). Maybe we can become self-reflective, and look at how we use our own assets.

And then maybe we can be more mindful as we make charitable and consumption choices.

Note: I’m not going to be watching the comments super-closely. If you have questions, feel free to include them, but forgive me if I don’t respond, or don’t respond quickly: I really do have other work I should be doing and family I should be hanging out with. Also, please keep the comments respectful. Don’t go demonizing the whistleblower or the church. That doesn’t mean you can’t address them critically, but, for instance, the whistleblower’s motives have no bearing on whether his complaints are founded or not. So why talk about them?

[fn1] In a video that I only watched the very beginning of—because ask me about my patience for YouTube videos where someone talks at the camera—the whistleblower says the church’s portfolio is ~50% US equities, 10% foreign equities, 30% bonds, and 10% other investments, iirc. (My percentages are slightly off, but they should be close.) So kind of a standard portfolio.

[fn2] Rev. Rul. 64-182.

[fn3] Rev. Rul. 78-41.

[fn4] GCM 38742.