The Mormon Church in the @PanamaPapers?!?

So, lds church for-profit companies implicated in Panama Papers stuff and disaffected Mormon internet is all up on that.

— Andrew S (@GASpriggs) May 10, 2016

Yesterday, the ICIJ released its searchable Panama Papers database. (For some background on the Panama Papers, you can look my BCC post or my Surly Subgroup post. Or the ICIJ’s site.) Some enterprising individual appears to have plugged Mormon-related words into the search bar, and came up with at least two hits: Bonneville International and Deseret Investment.

Now, this is exactly what we’re supposed to be doing with this database: searching for those who think they can use tax havens to avoid meeting their obligations. So should you be outraged that the church is doing this?

Short answer: no. But I’m a law professor, so the short answer is never enough.  

There are problems with looking at the data absent any context. In fact, the ICIJ expressly recognizes and warns about the problems with this disclaimer:

There are legitimate uses for offshore companies and trusts. We do not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly. Many people and entities have the same or similar names. We suggest you confirm the identities of any individuals or entities located in the database based on addresses or other identifiable information.

What does this disclaimer mean for our purposes? Different things for each entity.

Bonneville International Limited

Bonneville International Limited almost certainly has no relationship to the church. I mean yes, I know that the for-profit media subsidiary of the church is named “Bonneville International.”

But it’s not like we have exclusive use of the name. I mean, the first thing that pops into my mind when I hear Bonneville is Hugh Bonneville (and I don’t even watch Downton Abbey. Much, at least).[fn1]

Per the ICIJ, Bonneville International Limited is connected with BOS Trust Company (Jersey) Limited, a wealth planning entity associated with the Bank of Singapore. Those aren’t the kind of services the the church would use.

Moreover, Bonneville International Limited was found in the Panama Papers, which were leaked from Mossack Fonseca, a Panamanian law firm. There’s not a lot of reason to believe the church would work with Mossack Fonseca.

Which is to say, the Bonneville thing probably relates to the second part of the ICIJ’s disclaimer.

Deseret Investment Inc.

Unlike “Bonneville,” “Deseret” is pretty much a Mormon word. And Deseret Investment Inc. is almost certainly related to the Deseret Trust Company, the church’s investment manager.

But didn’t I just say that there’s no reason to believe that the church has a relationship with Mossack Fonseca? Yes I did. So how did Deseret Investment Inc. get wrapped up in the Panama Papers?

It didn’t. This database is based on at least four leaks of information; Deseret Investment Inc. was in what they’re calling “Offshore Leaks”; its inclusion in the database predates the Panama Papers.

Still, it’s (probably) a church-owned entity in a tax haven. Isn’t that wrong?

I’m going to give a shortened version of the answer here. (If you’re interested, I’ve written in great detail about the history, reasons, policy, and problems with tax-exempts investing through tax havens in the Northwestern University Law Review.)

The church is exempt from tax under section 501(c)(3) of the Internal Revenue Code. Like other tax-exempt organizations, it generally doesn’t pay taxes on its income. There are a couple exceptions, though, where tax-exempts do pay ordinary income taxes. The big one is where they operate certain for-profit businesses; they must pay taxes on the income from those businesses.

They also have to pay taxes on investment income they earn where they borrowed to fund the investment.

Now, the church doesn’t borrow (much, at least) money. But investment partnerships like hedge funds and private equity funds do. And the tax law treats that borrowing as undertaken by the tax-exempts that invest in the partnerships. So if the church were to invest in a hedge fund that borrowed money, the church would have to pay taxes on a portion of its share of income from the fund.

The thing is, tax-exempts almost by definition aren’t supposed to pay taxes on income from investments. (I go into a lot of detail in my article, but this unrelated debt-financed income rule was initially enacted to combat tax evasion through sale-leaseback transactions.) But tax-exempt entities can avoid these rules by investing, instead, through a blocker corporation, generally incorporated in a tax haven jurisdiction.

Is this bad? I’ve argued that it is. But it’s not wrong like tax-exempts-shouldn’t-do-this wrong; rather, it’s wrong because the unrelated debt-financed income rules are unnecessary and poor tax policy. As long as they exist, though, tax-exempt organizations (including the church) can and should invest through offshore blockers, including through Deseret Investment Inc.

[fn1] That’s not to suggest that Bonneville International Limited is associated with Hugh Bonneville; if you’re trying to hide your assets offshore, I can’t think of much stupider than giving your holding company a name that can be easily traced back to you.

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