In my last post, I wrote about the 60 Minutes segment on Ensign Peak Advisors. As part of that segment, the interviewer asks Bishop Waddell, “But don’t you agree this would be a nonissue if there were more transparency?”
He responds, “No. Because then everyone would be telling us what they want us to do with the money.”
Frankly, I think he’s wrong. But for now let’s respect that. For purposes of this post, I’m going to assume that the church will maintain a significant investment portfolio. And whatever I think about it,[fn1] I’m going to be indifferent to whether and how it should spend down that portfolio. Because I think EPA’s current status, as an external tax-exempt investment advisor, is ultimately untenable, notwithstanding the fact that it’s legal.
What do I mean? Well, as a general rule, investment managers are for-profit, taxable endeavors. EPA is a nonprofit, tax-exempt organization. (Critically, “nonprofit” doesn’t mean it can’t earn a profit. Some nonprofits—including, notably, hospital chains—are tremendously profitable. The “non” in nonprofit means that the profit earned can’t benefit any individual. While this is a little over-simplified, it basically means a nonprofit can’t distribute its profits as dividends.)
Nonprofit status is governed by state law. Some states require that a nonprofit engage in one of an enumerated list of purposes. (Illinois has a list of 35 purposes a nonprofit can be organized to pursue.) Other states allow a virtually unlimited range of purposes. (Utah, for instance, following the modern trend, allows a nonprofit to be organized “to engage in any lawful act,” with one or two exceptions.)
Not all nonprofits are exempt from the federal income tax, though. To qualify as tax-exempt, an organization has to meet an organization and operation test. The organizational test requires that the organization’s governing documents limit its purpose to one or more charitable activities (and the Internal Revenue Code lists the acceptable charitable activities) and prevent it from engaging in more than an insubstantial amount of noncharitable activities. The operational test looks at whether the organization does, in fact, limit its activities primarily to charitable activities.
So right here, EPA runs into a theoretical wall. The church itself clearly qualifies as exempt—religion is one of the explicitly-listed charitable purposes. But investment management? Nope.
Prior to about 1997, that didn’t matter. The church had an internal investment management team. And an exempt organization can manage its assets. But once EPA was separately incorporated, if the church wanted it to be exempt, it had to figure out how that would work.
And look, EPA probably an “integrated auxiliary.” An integrated auxiliary has to qualify as exempt, has to be affiliated with a church, and has to essentially support itself or receive its support largely from the church.[fn2]
But the thing is, if an investment advisor just sits on the money, it doesn’t look like it’s doing anything charitable. Decades ago, the IRS issued a ruling creating the commensurate-in-scope rule, which basically says that to qualify as exempt, an organization has to spend a commensurate part of its assets on charity. I’ve argued that this rule doesn’t apply to integrated auxiliaries, and the New York State Bar Association says its scope and application are generally unenforced and also unduly vague, especially in light of the fact that Congress is capable of imposing distribution requirements if it wants to.
It’s also worth noting that it turns out that EPA does distribute money back to the church on a pretty regular basis, which undercuts the idea that it’s not doing anything charitable with its money.
All of that said, it still strikes me as weird and uncomfortable that we have an exempt organization, the whole role of which is to manage a multi-tens-or-hundreds-of-billions-of-dollar portfolio.
So what should be done? Honestly, I think EPA should give up its tax-exempt status. I mean, it’s not the only exempt money manager out there—Harvard Management Company is also a 501(c)(3) organization. But unlike EPA, HMC files public disclosures of its finances and doesn’t appear to actually hold Harvard’s endowment; it just manages it.
What are the consequences of converting EPA to a for-profit investment manager? There’s one substantive one. It would pay taxes on its income. And what is its income? Presumably the church pays its something for managing the church’s assets. It has to pay its employees and rent and other expenses.
Which means it would be slightly more costly to operate. But the church has the resources to pay slightly more; in fact, the vast majority of its for-profit endeavors are separately incorporated in taxable entities.
And converting EPA to a for-profit entity eliminates questions of whether it’s actually engaged in charitable activities, and whether it actually merits tax exemption. It wouldn’t be! And that would be just fine!
And doing so also future-proofs EPA against legislative or regulatory changes that put increased emphasis on the commensurate-in-scope doctrine. And they frankly undercut any argument that EPA should be more transparent than just filing its 13Fs.[fn3]
So, in spite of the marginal tax costs, I believe that converting EPA to a for-profit investment advisor would be better for society and for the church.
[fn1] I think the church should very publicly and accountably promise to spend X% of its principal annually on certain charitable endeavors.
[fn2] This history of “integrated auxiliaries” has an interesting Mormon pedigree. In 1969, Congress made some significant changes to the rules governing tax-exempt organizations. Senator Wallace Bennett of Utah worried that those changes would provide worse treatment for church auxiliaries like Relief Society, MIA, and other organizations that, at the time, were still separately incorporated. So he added the word “auxiliaries.” Congress prefaced it with “integrated,” though integrated auxiliaries was not an actual real thing, to ensure that there would be a close relationship between these organizations and the relevant church.
[fn3] UPDATE: To clarify, based on Loursat’s comment: become for-profit wouldn’t answer the question of whether EPA should be more transparent. It would eliminate any legal argument for it. And to be clear: under current law, an integrated auxiliary doesn’t have to file a Form 990 with the IRS. But there are strong arguments that, because it, like other tax-exempt organizations, receives an effective subsidy, it should be subject to the same disclosure requirements that other tax-exempts are subject to. For-profit entities don’t receive the same class of subsidy and don’t have the same duty to society to be transparent.
Photo by Nathan Dumlao on Unsplash