Profits, Bonneville, and the Church

Once upon a time,[fn1] a couple wealthy alumni left all of the shares of the Mueller Pasta Co. to NYU’s law school. The donation kinda freaked people out: a pasta company owned by a tax-exempt organization presented a possibly existential threat. Because the company didn’t have to pay taxes on its profits, it could charge less per box, undercutting other pasta companies and driving them out of business. (How? Well, in 1947, the top marginal corporate income tax rate was 53%. Imagine a pasta company charged 20 cents for a box of pasta and made 10 cents of profit per box. After taxes, they would have about 5 cents left. If Mueller didn’t have to pay taxes, it could charge 15 cents, a 25% discount. As long as it had similar quality, you’d probably buy the Mueller pasta!) Alternatively, it could charge the same amount, make twice the profit, and use that profit to buy competition and otherwise act as a monopolist.

Neither was, in many people’s mind, a good result. So Congress enacted the unrelated business income tax. What is the unrelated business income tax? We don’t need to go into a lot of detail, but in broad strokes: to the extent a tax-exempt organization earns income not related to its exempt purpose, it pays taxes on that income at ordinary corporate rates. The unrelated business income tax is meant to take away any unfair advantage that tax-exempt organizations would otherwise have competing with for-profit entities.

What does the story of NYU and its pasta company have to do with Mormonism? Well, earlier this week, Bonneville International Corporation, a media company owned by the LDS church, announced some sort of restructuring of its properties in a handful of local markets. I don’t fully understand what it did, partly because I don’t live in any of the markets it’s operating in and partly because its announcement (at least in Denver) is insanely marketing-speak-heavy.[fn2] (Other markets include Seattle, Phoenix, Sacramento, and I assume Salt Lake.)

With this announcement, I saw a handful of people asking about how to square Bonneville’s very clear pursuit of profit with church ownership.

But here’s the thing: my discussion of the unrelated business income tax is largely a head fake. Why? Because tax-exempt organizations hate having to pay it. My understanding is that calculating it and preparing unrelated business income tax returns in kind of a pain. So mostly, well-advise tax-exempts at least don’t pay it.

How do they avoid it? By putting their unrelated businesses into wholly-owned for-profit subsidiaries. Tax-exempt organizations don’t have to pay taxes on their passive income[fn3] (and passive income includes corporate dividends and capital gains). (Should tax-exempt organizations be exempt on their passive income? It’s a fair, and fairly contentious, issue, but for our purposes here, it’s enough to say that they are, and the fact that the tax law exempts passive income is not controversial.)

Putting a tax-exempt organization’s for-profit business into a taxable subsidiary solves the problems that NYU’s ownership of the Mueller Pasta Co. raised: Bonneville will pay taxes on its income in the same way any for-profit media conglomerate would. It won’t be able to undercut competition’s after-tax profits and it won’t be able to earn supersized profits. Bonneville’s after-tax profits will be the same as they would be if it were owned by the general public or a wealthy individual or literally anybody else. The only difference is, when it distributes its profits to its owner (the church), its owner won’t owe taxes on the distribution.


[fn1] Um, 1947.

[fn2] Seriously: “Bonneville Denver announces the launch of Denver Sports, a new sports-media brand that will encompass several content distribution channels for fans in the Mile High City.”

[fn3] There’s a small exception to this rule, but it’s mostly irrelevant to this particular blog post. If you’re really curious, though, if a tax-exempt organizations borrows money and uses that borrowed money to buy a passive investment, it owes taxes on a portion of its return, for reasons I discuss in this article.

Photo by Tom Briskey on Unsplash

Comments

  1. Thanks for the historical background.

  2. I can come across as blasé about the Church and taxes, because I know a fair amount about UBTI and because I’ve been fairly convinced for a long time that the Church of Jesus Christ of Latter-day Saints is pretty well squared away with regard to U.S. federal income taxes. There are interesting questions about other kinds of taxes, but for me the real topic for discussion is not taxes but media. Bonneville International is not making pasta. It’s a media company. I’m a fourth estate kind of guy. I’d like journalism to neither own nor be owned by government, and neither own nor be owned by clergy. In that respect, I have serious concerns in every direction. With the largest media companies measuring revenue in billions, Bonneville International appears to be a tenth that size and not usually a headline player. But I’d still like to see editorial policy separated from both church and state.

  3. lastlemming says:

    Thanks for this. I hope people take the time to read and understand it. When we discuss the Church’s tax exempt status, it is important that we not be outraged by things that are not true.

    In the interest of clarification, I am trying to parse the following sentence about passive income:

    It’s a fair, and fairly contentious, issue, but for our purposes here, it’s enough to say that they are, and the fact that the tax law exempts passive income is not controversial.

    In the first instance, the issue is “fairly contentious”, but in the second, it is “not controversial”. Would it be reasonable to restate it as follows?

    There is disagreement among academics over whether the exemption of passive income is wise policy, but there has been no serious legislative attempt to overturn it.

  4. lastlemming, sorry about the ambiguity in that. What I mean is, there’s an open debate over whether tax-exempt organizations’ passive income should be exempt. But there’s no debate over whether, under current law, it is.

    Chris, I understand that unease, and I’d extend it to whether major media platforms should be owned, not only by government or religion, but whether they should be owned by the tremendously wealthy. That said, I’m comfortable hand-waving that with respect to a minor player like Bonneville owning a bunch of sports media. I mean, it still implicates the questions you raise, but not in any kind of urgent manner. (I suppose it’s ownership of KSL, etc., in Utah comes closer to your questions, but, like you said, it’s not a major player in the media landscape and I don’t see any indication that it’s going to become one.)

    Also, I think you underestimate the critical nature of pasta! (jk)(kind of)

  5. We just need a wealth tax to solve all these tax loopholes!

  6. Mark I,
    We have a constitutional amendment to tax income. Are you proposing we just tax wealth without constitutional authority? Or suggesting a decade long amendment process doomed to fail?

    Second, if you manage to convince the population to take from the rich after 10 years of demagoguery, or just ignore the constitution, how do you plan to administer this thing?

    Have teams of value assessors and lawyers arbitrating the true value of a sports cars, baseball cards or watches? Do you plan to issue refunds when values of those items decrease? Again, requiring teams of lawyers researching and debating. It’s a mess. And like France, will lead to less wealth being in the country and even poorer investment decisions being made. “Is this avtio profitable?” Should only marginally be affected by tax decisions. Not the main driver of them. We are the wealthy and most prosperous nation in the history of the world because resources are being productively allocated. Don’t mettle with that because you think a few fat cats aren’t paying enough. We spend a massive amount of money. The issue isn’t that we need to figure out how to get more gold eggs out of that goose. It’s to use our resources we collect to do the things we want/need to do. Not borrow ad infinitum at an increasing rate, pay increasing rates of interest on those increases, and desperately try to find ways to pay for it.

  7. sute, I don’t want to get too into the weeds of constitutional tax limitations, but do want to throw a couple things out. First, there’s widespread (though not universal) agreement that the 16th Amendment wasn’t necessary to enact an unapportioned federal income tax (though the question is moot since we do have the 16th Amendment). Also, while there’s debate over whether the Constitution allows an unapportioned wealth tax, some really smart and informed people say it does (at least as long as it doesn’t include real property).

    We may or may not have the political will to enact and enforce a wealth tax, but it’s a potentially viable source of income.

    But also, Mark, it has absolutely nothing to do with the question of the church owning Bonneville. Presumably, tax-exempt organizations would also be exempt from a wealth tax. They wouldn’t have to be, of course, but I don’t see any reason why we wouldn’t grant similar exemptions from wealth tax as we do from income tax. Which is to say, this is pretty far afield from the topic of the OP.

  8. purple_flurp says:

    “We are the wealthy and most prosperous nation in the history of the world because resources are being productively allocated. ”

    this is sort of true, but I don’t think it’s true in the that you think it’s true

    mostly it has to do with the referent of “we”

    first I’m assuming you’re talking about the USA because only an American would say something like that.

    And I would not say that “we”, meaning the collective citizens as a nation are the most wealthy and prosperous in the history world, rather a tiny percentage of us are the most wealthy and prosperous in the history of the world. Or in other words, “we have proportionally more rich people than other nations, and they’re wealthier than anyone else has ever been”.

    That is true, but not necessarily something to be celebrated, in fact that just makes us the best the best candidate for modern-day Babylon.

    Also, the reason why that is the case is not because of magical productivity powers. No, it’s basically because we steal it. As the the current global hegemon we can enforce economic relationships that favor us, and disfavor others. All of our diplomacy is still gunboat diplomacy, even if looks nicer. There’s a reason we can get a bunch of bananas (a fruit that cannot actually grow in the continental US) for a few dollars, and that’s because we make sure that the people in other countries actually growing and cultivating the bananas are being paid the lowest wages possible to make it profitable to ship in sell them in the USA in the first place. Same goes for our sweat shop clothing, as well as mineral resources like lithium.

    “”””Our””””” wealth and prosperity come at the expense of other people, often outside our own borders. And, historically, just enough has trickled down to mostly keep the poors within in our borders from getting to uppity.

    the purpose of the US government is to do imperial crimes on behalf of our capitalists and protect the wealthy at the expense of others. That’s basically how the constitution was designed, it was deliberately intended to prevent the landless poor from participating too much in the power sharing

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