In his talk at the close of the April 2008 General Conference, President Monson talked about the blessing we had received, both as members of the Church and, specifically, over the course of the conference. He ended his talk with counsel: parents are to love and cherish their children, youth are to keep the commandments, those who can attend the temple should, and we should all be aware of each other’s needs.
But what if, in closing his remarks,[fn1] President Monson had said, “My dear brothers and sisters, I feel strongly that Mitt Romney is the best person to lead our country. I encourage each of you to campaign on his behalf and to donate to his campaign. We have also established the Perpetual Mitt Fund, with an initial investment from tithing dollars for $1 million in order. This fund will go toward his election and, if any money is left over, it will be transferred to Harry Reid’s next campaign. If you would like to support the PMF, you can use the donation slips. In the ‘Other’ category, please write ‘PMF.'”[fn2]
There was, unsurprisingly, an immediate backlash. Dozens of people sent letters to the I.R.S., demanding that it revoke the LDS church’s tax exemption. In its review, the I.R.S. determines that the Church’s actions were in flagrant violation of the anti-campaigning rules. Sick of tax-exempts pushing the envelope, the I.R.S. decides to make an example of the Church and revokes its tax-exempt status, a revocation that the courts affirm.
So what happens? I should note that I have no inside information about the Church’s finances, so I’m going to recreate what I assume are at least a few income streams:[fn3]
(1) Interest income. Like I said, I have no knowledge of the Church’s income. But I know that tithing and other offerings are deposited into a bank account on Sundays when they’re received. I would be absolutely shocked if these accounts weren’t interest-bearing. As a tax-exempt, the Church didn’t pay taxes on interest it earned. But once it lost its exemption,[fn4] it became taxable, including on interest from bank and other deposit accounts. The Church would pay taxes of 35% of its interest.
(2) Income from passive securities investments. I’ve heard rumors that the church has an investment account, managed by investment managers. And, frankly, I’d be offended if it didn’t. It doesn’t, AFAIK, spend all of its money immediately; to the extent it doesn’t, that money should be earning a return.
There are three major types of income it could earn here: dividends, interest, and capital gains. Dividends are payments a corporation makes out of its earnings and profits to shareholders. Interest here would be agreed-upon payments on bonds, and capital gains would be gains from the sale of securities. The Church would be taxable at a 35% rate on all three types of income (there’s no reduced capital gains rate for corporations).
(3) Dividends from operating companies. Same tax consequence as passive investments. The Church appears to own a couple for-profit corporations (such as Deseret Book). So DB earns income on its sale of books. DB pays taxes on its income when it earns that income, just like any for-profit corporation. The Church wouldn’t pay taxes on DB’s income, but, as a newly non-exempt organization, it would pay taxes when DB distributed its profits to the Church in the form of dividends.
(4) Income from real property. I know the Church has real property. I don’t know if it sells it or otherwise has income from the real property, but if it does, it would be taxable on that income.
(4) Donations (e.g., tithing, fast offerings, etc.). This is actually the hardest income source to categorize. There’s a decent argument that the donations, given with detached generosity, would be gifts to the Church. (It’s not a certain argument, but it’s probably a decent one.) For federal income tax purposes, the recipient of a gift doesn’t include that gift in gross income. Therefore, the recipient of a gift is not taxable on that gift. If donations were treated as gifts, the Church wouldn’t have to pay taxes on them.
However, gift-givers don’t get a deduction for giving the gift. Members of the Church in the U.S. would, therefore, not be to deduct their tithing, fast offerings, etc. Moreover, there is a tax called the gift tax imposed on people who give gifts. There’s an annual exemption amount–I think it’s currently around $12,000–and a lifetime exemption amount–about $1 million–but, to the extent a member made gifts in excess of these amounts, she would be responsible for paying the gift tax, which is imposed on the giver at a rate of up to 35% of the amount of the gift.[fn5]
[fn1] I almost feel bad about this, because the talk I’m going to use to launch into an alternate reality is really a lovely talk; I’m not trying to make fun of it, mock it, or disrespect it. The only reason I chose this talk is because it works chronologically. Also, I shouldn’t have to say this, but we have learned by sad experience that it is the nature and disposition of many internet denizens, as soon as they have read something, to misinterpret it and then argue about or spread the misinterpretation. So keep in mind that the situation I’m setting up is fictional. President Monson did not, in General Conference, endorse or oppose any candidate for office.
[fn2] Just one more reminder: this is fiction, at least until I get to the potential tax consequences.
[fn3] I’m just going to go with federal tax consequences here. I would guess that most states tie their tax exemption to the federal exemption, but I don’t know that. In any state that does, the Church would probably lose its property and sales tax exemption, but state tax laws are so varied and broad that I’ll leave the state component to your imaginations.
[fn4] Last time, I promise: this is in a fictional alternative reality, not the reality that I’m typing in. So for the record: the Church has not lost its exemption, nor has it done anything that would warrant, under current law, such a loss.
[fn5] A friend, reading one of my prior posts, asked me how many footnotes I would have to write cutting off possible off-topic discussions before writing the post wouldn’t be worth it. I told him you could never have too many footnotes. That said, for this post, five is probably one or two too many. So let me just say: I don’t know that or care if the Church’s position of political neutrality is caused by, influenced by, or completely unrelated to its tax-exempt status, and I’m not trying to imply any causal relation in this post. Instead, I’m trying to create a realistic view of a world in which the Church lost (or, for that matter, never had) an exemption from the U.S. federal income tax.