Brunson with More Thoughts on Ensign Peak

Sam still doesn’t believe church’s can do whatever they want with their tax exemption. Not too many people do but trust me, Church’s can do whatever they want.  Cite that as Jones, on Church Tax Exemption.  Churches can smoke Amazonian weed and they can even sit on a mountain of dead presidents through a separately incorporated entity.  If we admit, as Sam does, that a church can invest and horde earnings in-house, we necessarily concede it may do so through an integral part entity.  But, well, I could be wrong.  Sam is out with some interesting thoughts on Ensign Peak’s tax exempt status.  Recall that we recently posted on the topic.  

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.

darryll jones