Thread by @smbrnsn

I'm thinking I'm going to live-tweet this complaint about Ensign Peak Advisors. Because on the first page it says this: 1/

That's decidedly not true. Currently, the IRS audits about 0.41% to tax returns. That number shoots up for the very wealthy and the very poor, but for the vast majority of Americans, they're never going to face an audit. 2/ trac.syr.edu/reports/706/#:….

I suspect the audit rate for tax-exempt orgs is similarly miniscule. And for religious auxiliary organizations like EPA? Next to zero (if you can be any more next to zero). 3/

(I should also point out, before I get much further, that this submission to the Senate Finance Committee is purely a publicity stunt. I mean, sure, it's been submitted to the Committee. But that's meaningless, because there's no formal submission policy. 4/

My guess is they sent it in and that, if it gets opened, it'll be ignored. Because this isn't the kind of thing, frankly, that Senate Finance is going to be interested in, and they're under no obligation to do anything.)

Also, you can get the memo here: religionunplugged.com/news/2023/2/8/… 5

I'm going to ignore the securities law allegations, because it's not my area of law and I'm not qualified to comment on them (though, looking at the bios of the two attorneys on this, I struggle to see where they're qualified either. But that's neither here nor there). 6/

I don't know that I'd boast about this: Wall Streeters are notoriously unconcerned with what the law is, quite frequently to the deep chagrin of their attorneys. 7/

I'm looking forward to the explanation here, because I've tried to think through how tax exemption for an investment fund would provide a competitive advantage, and as far as I can tell, that's bullshit. But I'm excited to be proved wrong! 8/

Wait, is this it?!? I mean, tell me you've never read a private equity fund prospectus/partnership agreement without telling me you've never read a private equity fund prospectus/partnership agreement. 9/

(For those lucky souls who never have: private equity funds have significant limitations on investors' ability to pull money out. Sometimes they essentially say, Screw it. If you have taxable income from your investment, you'd better have cash to pay your taxes. 10/

Other times, the provide that the fund will annually make a tax distribution, usually equal to the highest combined federal and state taxes of any investor in the fund. But they're basically indifferent to whether you need cash to pay your taxes or not. 11/

Either they allow you to withdraw cash or they don't.) 11/

So I'm going to be pedantic here: these weren't "distributions." A "distribution" is money paid to an equity owner. These were capital contributions--essentially investments.

Does it matter? Well, yes. 12/

So my understanding is that this is, in fact, EPA's pitch. I've had banker friends that EPA tried to recruit, and their general take is (a) the investments in EPA are too plain-vanilla and boring, and (b) EPA doesn't pay enough. 13/

If true, the fact that assets were deleted from EPA's balance sheet strikes me as a bad thing.

Though the link between that and private inurement (basically, distributions of profits by a nonprofit to insiders) is tenuous at very best. 14/

He basically says, Often this kind of thing happens because insiders are taking money.

Even if that's true here (and there's no evidence so far that it is), embezzlement is different from private inurement.

Is there something wrong? Well, I'm not an accounting expert. 15/

But it's going to take some, well, evidence for me to believe that there's inurement here. 16/

Like, "can be used" is doing a lot of work here. 17/

Okay, you got me. I Googled what a "Klein conspiracy" is. And it looks suspiciously like they're using it because at least they knew "RICO violation" would be facially stupid. 18/

Sigh.

Look, almost all investment funds in the US are limited partnerships. They *do not pay taxes* because partnerships are pass-through entities. So EPA not paying taxes doesn't put it in a better position than other investment funds. 19/

Once more for the people in the back: EPA didn't *distribute* money to for-profit endeavors (unless they were investors, and you haven't said they were). It made capital contributions to for-profit endeavors. 20/

Okay, I'm back briefly:

I think I'm starting to understand where the disconnect between what he thinks happened and what happened is. He writes this: 22/

In his mind, the amounts distributed to Beneficial Life and City Creek represented using tax-exempt money to support a for-profit enterprise.

In a way that's right. But in a much more important way, it's not. 23/

Specifically, as I've said before, Beneficial and City Creek were not owners of EPA. They were investments. Money paid to them represented capital contributions. 24/

That's *entirely* consistent with what EPA did: it invested money in for-profit enterprises. And this type of investment is the definition of a private equity investment (albeit without the fund). It is critical that these were owned by, not owners of, EPA. 25/

It's this misunderstanding that seems to underlie a lot of the rest of the tax stuff. Like yes, it has to be organized for a qualifying charitable purpose. But it doesn't actually have to actively pursue one: funding a charitable organization likely qualifies. 26/

And investing in for-profit entities is precisely what an investment company (including the extremely rare nonprofit investment company) does. These capital contributions are functionally the same as, say, buying stock. 27/

So, for instance, this statement fails. If its exempt purpose is to manage the money of a tax-exempt organization, that's what all of its investments (including in City Creek and Beneficial Life) did. 28/

One more on this: for tax purposes, "withdrawal" doesn't have any particular meaning I'm aware of. It implies, I suppose, that BL and CC were investors in EPA and pulled their money out. I'm pretty sure that's not the case, and the complaint doesn't seem to suggest it is. 29/

Sigh.

The case doesn't actually hold this. What does the case hold? 30/

So most of what Make a Joyful Noise did was operate bingo games. The court said that was an unrelated trade or business, and represented a more-than-insubstantial activity. So it didn't qualify. taxnotes.com/research/feder… 31/

In dicta, the court did mention not spending any money on its exempt purpose. But that's not the grounds the court ruled on. And it couldn't be--otherwise donor advised funds' exempt status would be in jeopardy. 32/

Anyway, I can't imagine who is still reading in a now-33-tweet-long thread. (If you are reading, hi! and thanks!) At this point, I'm out of gas, so the live-tweet is done. But I'm open for questions! As long as they're not about securities law questions! 33/33

A couple more thoughts:

First, there are a lot of inferences. Are they warranted? Maybe. But they are inferences and logical leaps nonetheless. Like this: 34/

I mean, it's possible that this means that EPA lied in previous years.

But it's also possible that EPA only opened a reportable foreign account in 2019. Or that the definition of "foreign financial account" changed.

Which is it? I don't know. 35/

Also, continuing my pedantry: even if it was a lie, they didn't "falsely deny under oath"; they falsely *affirmed under penalties of perjury*. /pedantry (for now!) 36/

And once again: whether they failed to file FBARs depends not on whether they had foreign investments (they did!) but whether they exercised control over certain foreign financial accounts (I don't know!). 37/

Finally (for now, at least), this is true. To be a tax-exempt "integrated auxiliary," EPA has to have been operated for certain listed charitable purposes.

Was it? 38/

In 1971 (Rev. Rule 71-529 for anyone who wants to follow along), the IRS asks whether a putatively tax-exempt org, the purpose of which is to manage and invest funds for other tax-exempt orgs with a below-market fee, qualified as exempt. 39/ taxnotes.com/research/feder…

The IRS ruled that it was.

This looks really similar to the business model of EPA to me. I don't know its fee arrangement, but I'd be shocked if it weren't well below market.

Which is to say, I suspect EPA meets the terms of tax exemption laid out by the IRS. 40/

(There are also a handful of IRS rulings that say that an integrated auxiliary that manages church money is exempt. Most of them have been superceded, though not contradicted.) 41/

So this time is it the end?

Idk. 42/42

Further update: it looks like it's a good thing I disclaimed any securities law knowledge (primarily because it's legitimately not my area of expertise). The @WSJ is reporting that the SEC is investigating EPA (and/or the Mormon church). 43/43

https://twitter.com/smbrnsn/status/1624201958750928898?s=20&t=tYgo9wb3jJenP-T9Gczfag