Mormonism in the Internal Revenue Code

taxWhenever possible on April 15, I like to put together a quick post about some Mormon-related trivia from the tax world. This year’s edition: church financial disclosure.

In brief: tax-exempt organizations by definition don’t pay taxes. Prior to 1943, they also didn’t file any tax returns—they were pretty much entirely outside of the tax regime. That changed with the Revenue Act of 1943, which required tax-exempt organizations to file annual information returns. Broadly speaking, those returns lay out the sources of the organization’s income and where it spends that money.[fn1]

The return-filing requirement continues today, in largely (though not entirely) the same form. And, in marked contrast with most tax returns, the law requires tax-exempt organizations’ returns to be made available for public inspection. (If you want to inspect some, sign up for a free account here and have at it.) 

There have been a couple exceptions to this information return-filing requirement, though, including one notable one: churches.

Actually, I should be a little more specific: from 1943 until 1969, “religious organizations” were exempt from the filing requirement. In 1969, Congress decided it needed more information about tax-exempt organizations, including churches. So, in its version of the Tax Reform Act of 1969, the House of Representatives eliminated the filing exemption for religious organizations.

220px-Ernest_Leroy_WilkinsonThe House’s bill shocked churches into action; they started to lobby the Senate to preserve their historic exemption from filing. Among others, the United States Catholic Conference and Ernest Wilkinson testified in the Senate about the deleterious consequences of eliminating the exemption.

But Wilkinson’s testimony isn’t my Mormon hook here: it’s far better than that. The church lobbying effort was mostly successful: the Senate didn’t follow the House in repealing the filing exemption for churches. But it was not fully successful—the Senate narrowed the exemption fairly significantly.

Rather than an exemption for “religious organizations,” Tax Reform Act of 1969 preserved the exemption for “churches, their integrated auxiliaries, and conventions or associations of churches.”

What is an “integrated auxiliary”? It isn’t a legal term of art; it has no established meaning in civil or ecclesiastical law. The best we have are the Treasury regulations, which define an integrated auxiliary as a tax-exempt organization that is affiliated with a church that does not offer goods or services to the general public.[fn2]

So where do the words “integrated auxiliaries” come from?

Senator Wallace Bennett of Utah. Wallace_Bennett

Senator Bennett was concerned that Mormon church auxiliaries (like the Relief Society and the Mutual Improvement Associations) wouldn’t qualify as churches or conventions or associations of churches. So he added the word “auxiliaries” to the legislation, to preserve the filing exemption for various Mormon church-related organizations.

(And where did “integrated” come from? It’s not completely clear—“integrated auxiliaries” is not a Mormon phrase, and it doesn’t appear to be related to any other religion, either. Best guess? It may have been inserted by the Senate Finance Committee to ensure that any auxiliary that was exempted from the filing requirement have a tight enough connection to a church.)[fn3]

(Adapted loosely from a minor point in my article “The Present, Past, and Future of LDS Financial Transparency” in the Spring 2015 volume of Dialogue.)

[fn1] Section 117(a), if you’re interest in looking.

[fn2] Treas. Reg. § 1.6033-2(h)(1) (as amended in 2011).

[fn3] A lot of the legislative history of integrated auxiliary comes from Charles M. Whelan, ‘Church’ in the Internal Revenue Code: The Definitional Problems, 45 Ford. L. Rev. 885, 914 (1977).

Comments

  1. Fascinating! I wonder if there is any connection between “integrated auxiliary” and the “correlation” of the Relief Society into a much more integrated part of the Church. (I seriously doubt it, but the timing is a funny coincidence.)

  2. mapinguari says:

    Care to speculate about the future of financial disclosure requirements for churches? There seems to be an increasing call for transparency both from within and without religious bodies.

  3. During my law school tax class, we read a Supreme Court case (opinion written by Sandra Day O’Connor) about whether funds paid by an LDS family directly to their missionary son in the field (this is how missions were paid for at the time) could be counted as a charitable deduction. The Supreme Court said no, but reasoned that if the funds were paid directly to the church in a uniform manner (as opposed to the specific funds needed by each individual missionary), and the church then paid the funds out to the missionaries, these contributions to the church could be deductible. In short, Sandra Day O’Conner effectively designed the current system for how missions are paid for.

  4. Fascinating, JT.

  5. mapinguari says:

    I remember reading that case as well, JT. My appreciation for the holding increases as the time until my oldest child will serve a mission decreases.

  6. JT, I’ve written about the Davis case and mission finances in a series of posts that ends here: http://timesandseasons.org/index.php/2011/09/mission-finances-part-3/ (I link to the other posts in the series in that post).

    mapinguari, I talk about it some in the Dialogue article, but in short, I suspect the tax law disclosure requirement isn’t going to change in the foreseeable future.

  7. Jason K. says:

    I love your tax posts with my whole soul, Sam.

  8. Sam – Great write-up on the Davis case. And I like that you were a little more cautious than me in your conclusion on how it affected the current system for how missions are funded.

  9. This is fascinating, Sam. Thanks.

  10. Kevin Barney says:

    I found the initial draft of the Treasury Regulation: “An integrated auxiliary is a tax-exempt organization that is affiliated with a church that does not offer goods or services to the general public, including, but not limited to, a female relief society, a young men’s and/or young women’s mutual improvement association, a primary organization for children, a Sunday school, youth basketball leagues, pioneer trek reenactments, and programs modeled after Alcoholics Anonymous for the treatment of persons supposedly addicted to pornography.”

  11. J. Stapley says:

    Great write-up (and addition, Kev)!

  12. Senator Wallace Bennett’s son, Robert, got an even more Mormon-specific clause into the Immigration and Nationality Act. In Section 274, which makes harboring or transporting an undocumented alien a crime, there’s this exception:

    It is not a violation of [the clauses criminalizing such harboring or transporting,] except where a person encourages or induces an alien to come to or enter the United States, for a religious denomination having a bona fide nonprofit, religious organization in the United States, or the agents or officers of such denomination or organization, to encourage, invite, call, allow, or enable an alien who is present in the United States to perform the vocation of a minister or missionary for the denomination or organization in the United States as a volunteer who is not compensated as an employee, notwithstanding the provision of room, board, travel, medical assistance, and other basic living expenses, provided the minister or missionary has been a member of the denomination for at least one year.

    And you thought Kevin’s draft regulation was a joke!

  13. That’s awesome: thanks Mark!

  14. As hilarious as Kevin’s comment was, it is not terribly off-base. Five years ago I had lunch with a very well-respected tax attorney. Afterward, we went up to his very posh corner office at his firm where I noticed a framed picture of a document signed by Ronald Reagan. It was the signature page of the bill that passed the 1986 Internal Revenue Code into law. Turns out that this guy was one of its drafters (for those who are unfamiliar with US tax law, this is the current behemoth of a tax code that the United States uses). Amazed, I asked him about his experience and what was the rationale behind a couple of clauses. He then went to his file drawer where he still had some of his drafts. Written in handwriting next to each clause was a list of large corporations (individually, specifically named). “What are these?” I asked. “Those? Oh, those were the companies we were targeting with each of those clauses.”

  15. Here’s the Dialogue article as a sneak peek (complete with printer’s marks!) for those who want to be the first to read Sam’s fine work for free: https://www.dialoguejournal.com/wp-content/uploads/sbi/articles/4804_taxdaysb.pdf

  16. Sam: Even better than the way this provision tracks the church’s missionary program is the way Sen. Bennett got it passed–added as an amendment to an agricultural appropriations bill (which had already passed the House), it got included in the conference report and was passed by the house without debate. Which, when they discovered it, made the Tom Tancredo–Steve King anti-immigrant wing go absolutely nuts.

  17. loved this — thanks for livening up our Tax Day!

  18. Finding statutes written by and for the church is pretty cool. I think a lot of church members would be pretty upset about the church’s involvement in the immigration statute (that is, if they knew about it). Unfortunately, the immigration statute only protects the church, and not the individual missionaries–which explains why around six years ago a poor elder, raised mostly in the U.S. and returning home after an honorable full-time mission in Cincinnati, got picked up ICE at the Cincinnati airport and got deported. Nowadays he would’ve been eligible for deferred status (circa 2012, not the newer laws that are running into problems in the courts). The statute didn’t protect the missionary in that incident, but it did protect the church.