It seems like every time there’s a church scandal—and especially one that concerns money—people start arguing that the scandal-ridden church (or even churches in general) should lose their tax exemptions. (If you want to see an example, search “mormon tax exemption” on Twitter.)
So how does tax exemption relate to churches, and especially churches that make a lot of money? I thought it might be worth a quick Explainer.
Why Are Churches Exempt, Anyway?
Fair questions. One reason is history—religious exemptions from taxation go back at least to the Bible. When Joseph imposed a 20% tax on Egyptian land, he exempted the priests from the tax.
Jump forward to the United States: while it hasn’t been a straight line, the exemption of at least some religious property from the property tax goes all the way back to Colonial days. And churches have been exempt from income taxation since the introduction of the modern federal income tax.
But My Church Isn’t Helping the Poor
Popularly, “charitable” corresponds to something like “aid to the poor.” But legally, the definition of charity is broader than that. Largely, U.S. law adopts the subjects of the preamble of 1601’s Statute of Charitable Uses in defining what is charitable; that preamble includes churches.
But beyond that, while the idea of charity suffuses the tax law, the Internal Revenue Code lays out eight (or, I guess, nine, depending on how you parse them) purposes that tax-exempt organizations can pursue:
religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals
Note that the first one is for religious organizations; whether or not you consider religion charitable (and, again, for legal purposes, it is, in fact, a subset of charitable), the Internal Revenue Code expressly allows for religious organizations to be exempt.
And that’s the case even if they do no poor relief. The Supreme Court considered the question of whether a religious organization that didn’t help the poor could qualify for (property) tax exemption. It’s conclusion?
We find it unnecessary to justify the tax exemption on the social welfare services or “good works” that some churches perform for parishioners and others — family counseling, aid to the elderly and the infirm, and to children. Churches vary substantially in the scope of such services; programs expand or contract according to resources and need. As public-sponsored programs enlarge, private aid from the church sector may diminish. The extent of social services may vary, depending on whether the church serves an urban or rural, a rich or poor constituency. To give emphasis to so variable an aspect of the work of religious bodies would introduce an element of governmental evaluation and standards as to the worth of particular social welfare programs, thus producing a kind of continuing day-to-day relationship which the policy of neutrality seeks to minimize. Hence, the use of a social welfare yardstick as a significant element to qualify for tax exemption could conceivably give rise to confrontations that could escalate to constitutional dimensions.
That is, while churches are welcome to do what we colloquially think of as charity, the Supreme Court declined to bring the idea of poor relief into the definition because different churches do different amounts of it. The government telling a church what its religious obligations are would implicate the First Amendment’s Religion Clauses.
Okay, Fine, But What About the Church’s Profitability?
The Mormon church has a lot of billions of dollars. And it makes money on its investments; how, then, could it possibly be a non-profit?
Well, largely it’s because nonprofits can make a profit. And stick with me here—this isn’t some kind of paradox. See, the idea underlying nonprofits (and tax-exempt organizations, for that matter) isn’t that they can’t earn a profit—it’s that they can’t distribute that profit to insiders or share it with identifiable individuals.
Two critical things to point out here: the first is, paying a salary is not the same as distributing profits. In fact, tax-exempt organizations can, under some circumstances, pay pretty nice salaries. Clemson, a nonprofit, tax-exempt university, paid Dabo Swinney, head coach of its football team, $10.54 million last year. (And yes, I get that Nick Saban made more but, given that Alabama is a state school, his salary comes from government, not a nonprofit.) At some point, a high enough salary because the equivalent of impermissible profit-sharing, but there’s no bright line. Instead, the IRS basically takes a comparative view.
Second, as long as they don’t share their profits, nonprofits can earn a lot of money. We can look at the church’s return on its investment fund, but we can also look at nonprofit hospitals, many of which do really, really well. (There is controversy over whether many of them should be tax-exempt, given that they operate almost identically with for-profit hospitals, but that’s an aside to this particular Explainer.)
So the fact that the Mormon church makes a lot of money on its investment return doesn’t cut against its status as a nonprofit or as a tax-exempt.
Something Something Politics
And what about the fact that the church sometimes lobbies? Yeah, not a problem. There’s a strict prohibition on tax-exempt organizations endorsing or opposing candidates for office. But they’re allowed to lobby and otherwise participate in the political process as long as that politicking is limited to an insubstantial part of their activities. And what constitutes “insubstantial”?
We don’t know. We know from judicial decisions that 5% (of expenditures or activities or something) is fine. We also know that 15-20% might be too high. But we don’t have a bright line.
Final Thoughts
So that’s the landscape that nonprofit, tax-exempt organizations, including religious organizations, inhabit. And one can certainly make the argument that the category “nonprofit” or “charitable” or “tax-exempt” should be narrowed. That’s fair as a normative matter. But this (plus a handful of other rules) is what the law as it currently stands looks like.
Photo by Cosmic Timetraveler on Unsplash
By Common Consent, a Mormon Blog 
Why do people visit “ByCommonConsent?” I am not sure why others do, but I know that I visit it to learn things. I don’t visit it to confirm my biases. At least I don’t think that I do.
Sam: Your posts are always enlightening. I learn so much when I read what you write! It would tell you that it is a gift. But I am sure that is unfair. A gift is something that comes easily. I assume that your writing skills have been honed over hours and years of practice.
So thank you for this post. Thanks for teaching me something, yet again.
Off topic: Glad I left Twitter.
Please carry on with applicable comments to Sam’s great explainer.
Mr Brunnon, I do hope that you appreciate how greatly your expertise and your explanations are welcomed in this particular universe. Please do keep on keeping on.
Good stuff, Sam, as usual. I’m sorry it has to be repeated.
And now for my standard qualifiers:
1. We’re talking here about U.S. federal income tax and the U.S. Constitution. This is appropriate because these are the regimes under which the questions are being asked. But the answers are specific to the setting, not matters of natural law. There are many jurisdictions and many forms of taxation, and different rules apply.
2. In my practice the interesting question—one particularly relevant in present circumstances—is the boundary question. When does an activity stop being “religious” and therefore subject to different rules—tax, regulatory, filing, labor, etc.? We ask the question about church-owned investment funds. The returns are probably not taxable in any event (see specific exclusions in the UBTI rules) but is the investment fund subject to church reporting rules, or general securities law reporting rules? (And are they different?) In other contexts we ask the same kind of questions about church-owned hospitals and publishing companies and schools and coffee shops and even (in my practice) religious orders. Some are easy to answer, both in and out of the “religious” category. But some of the questions are quite challenging. “Church-owned” by itself does not answer the question, although some churches (of all stripes) and church representatives would like to think it does.
Thanks, Stephen, Greg, and Raymond! I’m glad it was helpful.
And yes, Chris, this is definitely limited to US law. I assumed that would be clear, but maybe I should be more explicit: as a US tax attorney and tax professor, I am usually just talking about US federal or state law unless I explicitly say otherwise.
Thanks for the clear explanations.
But…Clemson is a state school. For the most outrageous salary paid to the football coach of a private nonprofit university, you have to dip down very slightly to Lincoln Riley at USC. His salary is estimated to be $10 million, but unlike state schools, USC does not have to publish it.
lastlemming, oops.
If we’re looking at USC, according to its 990 (p. 16) it paid Clay Helton, its former head coach, about $4.8 million for FYE June 2021. Since Riley started later that year, we’ll know his salary toward the end of this year or the beginning of next. (Rumors include that USC bought Riley’s homes at a significant profit to him. I don’t know if that will show up in the 990 as additional compensation, but the house it allegedly bought him in LA and the use of a private jet that it’s allegedly granting him should.)
Thanks, Sam.
Just to clarify for anyone (like a good friend of mine who, I think, totally missed your point), did I read you correctly? You’re merely saying *why* the law currently benefits the Church they way it does, explaining *how* we got here, correct? You’re not making a normative argument that the current tax laws are in fact correctly calibrated, that they *should* make the Church tax exempt for the reasons you state?
Any interest in sharing either your or others’ ideas about what some of that line drawing ought to look like if Congress were to readjust the rules that allows the Church to accumulate such wealth tax free?
Utah Man Am I, that’s right. I’m describing the current lay of the land. Maybe sometime I’ll post about my normative thoughts (that is, the way I think things should be) (though maybe I won’t because I’m a law prof, meaning I’m long-winded and, frankly, developing those ideas over a series of articles).
I will say, however, that to the extent we want change, I suspect there’s a strong constitutional speedbump to aiming that change at churches. As one court has said (paraphrasing, and not citing because I don’t have my casebook at home with me), no organization (including churches) has a constitutional right to be exempt, but if we revoke (or prevent) exemption for a constitutionally-suspect reason, that’s no good.
So, like, it would probably be acceptable to say that any tax-exempt organization with more than $500 million in assets has to pay an excise tax on those assets (or, alternatively, any tax-exempt org with more than $1 billion loses its tax exemption). That may be a terrible idea; it may be ultimately unproductive. But it doesn’t violate the constitution.
But saying that a church (and only a church) that accumulates $500 million/$1 billion/whatever pays an excise tax or loses its exemption would almost certainly violate the First Amendment.
Thanks for the quick response. Yeah it’s going to be hard to navigate around the Lukumi and Cake Baker cases. (For you non-First Anendment lawyers out there, basically you can’t pass a regulation if it looks like you’re targeting a church or exercising animus toward religion generally.)
But you can (thanks, or curses, to Scalia) have neutral and generally applicable rules that apply equally to *all* organizations. It’s hard, though, in today’s polarized climate to do anything neutrally and not have someone throw rocks at you claiming a pro- or anti-religion bias.
And so the rules, at the federal level, at least, will remain largely the same, and the Church will continue (for better or worse) to accumulate billions on its billions.
But it would be within the realm of possibility for the government to require tax-exempt organizations, including churches, to disclose their finances publicly, right? Or would the sort of regulations in force in the U.K. and Canada not work in the U.S.?
Jeremy, under current U.S. law, almost all tax-exempt organizations other than churches have to file a Form 990 with the IRS, a form which is made available publicly. (Form 990 is largely financial disclosure.) In 1969, the House passed a bill that would have expanded the disclosure requirement to churches; after some church lobbying it was stopped in the Senate. I suspect that that kind of change to the rules would pass the constitutional muster if the political will to do it existed.
I think if the Law were changed only to require churches to disclose, there could be a First Amendment problem. (Or, at least, an argument that it’s problematic constitutionally.)
But if the law were changed to require all non-profit and/or tax exempt organizations to disclose, then that wouldn’t be problematic.
It’s not really a secret anymore that most charities set up by big corporations or billionaires don’t actually do very much charity. They end just being a way for said owner to make even more money or hide it.
The thing is, anon37, for all kinds of reasons that’s not remotely accurate.
I still find it baffling that churches are not required to file a 990 and that there are no requirements for them to publicize their financials. I work for a non-profit, and as a tax-exempt 501(c)3, we are essentially subsidized by the government. In return for that subsidy, we are required to be transparent about our finances, including listing the salaries of the top paid employees. Churches should be no different.
I think you’ve written about this before, Sam, so I’m beating a dead horse. I doubt this would have any chance of changing with our current House leadership.
Ok. What’s your take on the idea that Ensign Peak was essentially an independent business of the Church (a hedge fund, basically) and based on that was required to pay taxes like the rest of the Church’s businesses? I think the argument goes that because,
a.) since none of the fund’s net worth was distributed for any of the nine items above (religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals)
b.) that the only distributions made were to invest in the Temple Square adjacent shopping mall and to keep Beneficial Life from failing
c.) the fact that Ensign Peak Associates is legally a separate entity from the Church of Jesus Christ of Latter-Day Saints
Ensign Peak Advisors did not qualify as a tax-exempt organization under United States law.
Also, what about Mr. Nielsen’s claim that on a regular basis, assets would be deleted from Ensign Peak Advisors’ accounting system? If that is true, it seems to him (and me) the only possible explanation would be private inurement (fraudulent embezzlement). I’m wondering what your take is on this?
Charities in the US are under very little restriction on honest and efficient use of your money.
Tax exempt religious charities should be subject to what the CharityWatch does for secular charities.
Put the Church of Mormon and the Catholic Church at the top of the list for public reporting.
Our Church is now in trouble and could possible lose it’s tax exempt status because it broke the law by setting up 13 illegal shell companies and by making the CEO’s of these companies sign document’s where they were only allowed to see the signature page.
These CEO’s were signing documents that they had no idea what was in them, something that is illegal in a lot of states if not all.
too
When two of these CEO’s asked to see all of the documents before they signed them they were fired and replace with two “yes men” who had no problem signing paper work for these illegal companies.
This is what got our Church in hot water, not just how they took assets out of the EPA stock fund and what they did with them, which was illegal.
Very very illegal.
Hi Mark, Neilson was just straight-up wrong about the requirements for tax exemption. While some tax-exempt entities do have to distribute a portion of their assets, integrated auxiliaries (a term of art) do not. And EPA qualifies as an integrated auxiliary. (One thing that integrated auxiliaries can be organized to do under the Treasury regulations is invest a church’s money.) So yes, it’s incorporated separately; that’s kind of the point of an integrated auxiliary. But it qualifies as tax exempt, and the fact that it didn’t distribute money doesn’t affect its qualification.
Chloe, I’m going to make an assertion from authority, because I’ve shown my work elsewhere: I’m a tax attorney and professor. I’ve probably spent as much time thinking about this as anybody. And the church’s tax exemption isn’t even remotely at risk. (Also, fwiw, there was nothing illegal about how EPA or the church used, or didn’t use, its assets. Just the failure to file 13Fs.)