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