The Washington Post’s exclusive story on David Nielsen’s whistleblower complaint to the IRS with respect to The Church of Jesus Christ of Latter-day Saints “saving its excess surplus donations instead of using them for charitable works” deserves a more technical explanation of the law surrounding tax-exempt organizations.
First, let’s establish some foundational points: 1) the primary purpose of a charity’s activities is to accomplish one or more tax-exempt purposes; and 2) the tax-exempt purposes include religious, charitable and educational, among others. It bears noting that religious organizations are granted a high level of deference relative to other charities as it relates to fulfilling their tax-exempt religious purposes.
The First Amendment’s Religion Clauses — Establishment Clause and Free Exercise Clause — prohibit the government from making laws establishing religion or prohibiting the free exercise of religion. Accordingly, religious organizations are deemed charities without having to go through the formal application process required of other charities and are generally exempt from annual filing requirements. What’s more, the IRS provides considerable latitude to religious organizations and presumes their validity if they bear basic tenets of a religion (e.g. a creed or form of worship, a formal doctrine, etc.).
Historically, religious organizations operate with considerable autonomy as charities unless they intervene in political campaigns or they grant excessive private benefit to individuals. The IRS will not question the validity of doctrine or religious belief.
Supporting organizations are a type of charity established to support another charity, such as a church or a hospital. Generally, a supporting organization must be operated for the benefit of the supported charity. IRS rules require that supporting organizations maintain program activities that are “commensurate-in-scope” with their financial resources.
An “integrated auxiliary” is a charity unto itself, but is affiliated with a church. It generally enjoys tax exempt status as a group with its supported church. Because it shares its exemption with its affiliated church, there is no “commensurate-in-scope” test for integrated auxiliaries.
Now, how do all these rules combine to determine whether Mr. Nielsen’s complaint has merit? In the Post’s report, Philip Hackney made the general observation that a charity cannot “amass a war chest year after year” without spending money for charitable purposes. In the abstract this is true, though it should be clearly noted that “public charities” like religious organizations, have no affirmative duty to spend any certain amount of their resources on exempt purposes. Mr. Nielsen’s complaint erroneously claims as much, but this is a requirement only for private foundations (e.g. the Bill and Melinda Gates Foundation). So, how do these rules apply to The Church of Jesus Christ of Latter-day Saints specifically and to its associated charity, Ensign Peak Advisors (EPA), in which the surplus donations were stored?
A fundamental doctrine of the church is self-reliance and emergency preparedness. The church teaches its members caution and prudence with respect to personal resources. For years, the church’s instruction has been to practice careful economy.
This counsel stands on its own but also undergirds the most fundamental doctrine of the church (which it shares with the rest of the Christian world): that at some point, Jesus Christ will come again and that coming will be preceded by the calamities foretold in the Bible (after all it’s right in the name: The Church of Jesus Christ of Latter-day Saints). Thus, the Ensign Peak Advisors’ amassing of financial resources is applied doctrine: it is the church fulfilling its religious purposes, on an entity level, just as it urges its members to do on a personal level. In a nutshell, it takes the Bible’s warnings — that things will get worse — at face value. It then applies its doctrine of self-reliance and preparedness to that ominous prospect.
The church classifies EPA as both a supporting organization and an integrated auxiliary. As an integrated auxiliary, EPA’s lack of charitable spending would be considered as a whole with the church’s substantial spending on its charitable purposes and would likely be a non-issue. As a supporting organization, EPA would be analyzed on its own and could be subject to scrutiny under the commensurate-in-scope test, as it seems not to have activities or programs that are commensurate in scope with its resources — it is just amassing funds.
If the IRS challenges EPA’s status as a charity, however, based on the commensurate-in-scope test (though given the IRS’s considerable deference to churches, this is highly unlikely), the test would be balanced against the church’s religious beliefs and applied doctrine. In that test, constitutional rights will almost certainly prevail.
Eric S. Smith is a member of the firm’s Business and Finance section. Mr. Smith’s practice focuses primarily on federal, state and local tax matters. Mr. Smith is also the associate dean of Weber State University’s John B. Goddard School of Business & Economics.