Mormon Church avoids tax on huge Israeli tech gains

Mormon Church Credit: Shutterstock
Mormon Church Credit: Shutterstock

Marshfield Advisors, a unit of the Mormon Church's Ensign Peak Advisors, one of the world's biggest investment funds, has tax exemption in the US and has avoided tax in Israel too.

In Salt Lake City there is an office. At first glance it seems like just another investment office. Young people sitting in front of screens and following real time data from various stock markets, TVs tuned into financial channels and magazines about finance strewn across tables in the waiting room. But look again, a bit more deeply, and you will see that this is not like other such offices. The pictures on the walls are different, depicting biblical images. The employees are dressed less casually and you won't see them drinking coffee or tea, forbidden by their religion and when you examine further you'll discover another difference: these are not employees of a generously paying investment bank but rather a church, and their salary is as church employees.

Until three years ago, the organization occupying this office was "the best kept secret in the investment world," according to the "Wall Street Journal," and even today it is still considered somewhat mysterious, and there is no other financial organization of such a size of which so little is known about it. It is so mysterious that all its employees must sign a life-long confidentiality agreement about their activities.

The organization is called Ensign Peak Advisors, the investment manager for assets of The Church of Jesus Christ of Latter-day Saints, better known as the Mormons. The fund is named after Ensign Peak, a hill that overlooks Salt Lake City, the state capital of Utah, which was founded in the 19th century by the Mormons, who were fleeing religious persecution in the eastern US.

On November 21, 2019, the veil of secrecy surrounding the fund was partially removed. It happened because a former employee did what no person had previously dare do and filed a 74-page complaint to the US Internal Revenue Service (IRS). The complaint revealed the activities of the fund, the huge amount of assets that it managed and the way in which it had allegedly illegally been granted a tax exemption.

As of today there is no evidence that the US IRS has taken any operative action against the fund but the exposure itself was sensational, with the "Washington Post" devoting a huge article to the subject. Americans were amazed to discover that the fund of the Mormon Church, many of whose believers live in poverty, was one of the largest investment funds in the country, and one of the world's four largest investment funds, after the sovereign wealth funds of China and Russia, and alongside the Saudi government's SoftBank's Vision 1 Fund and Mubadala Investment Co. - the sovereign wealth fund of Abu Dhabi.

$100 billion waiting for the Judgement Day 

There are 16 million Mormons worldwide. Most live very modestly but despite that they are committed to giving up 10% of their salaries for funding construction of churches, universities, and missionary activities that are a fundamental part of the church. David Nielsen, today aged 44, was such a believer. As the years went by he found himself as a senior portfolio manager at Ensign Peak, managing investments worth $800 million. Until he decided to become a whistleblower, about the organization that he had devoted his life to.

According to his complaint, with many pages of financial data attached, the church collects about $7 billion annually from the contributions of Mormon families, but only uses $6 billion of the money for its declared purposes: religious activities, education and charity. The other $1 billion is transferred to Ensign Peak for investment in shares, bonds and real estate. Nielsen claimed that since it was founded in 1997, and as of the complaint filed in 2019, the fund's assets had grown from $12 billion to about $100 billion. As Ensign was registered as an organization supporting religion and charity, it was entitled to tax exemption. But Nielsen claimed that Ensign had become a business organization, contrary to the aims it had declared to the authorities.

The US media featured the story prominently and other anonymous sources confirmed Nielsen's claims. An article in the "Wall Street Journal" claimed that Ensign had a policy of keeping about 70% of its money in liquid assets in the belief that mankind is facing an imminent catastrophe and the money would be needed to help its people. In the same article Ensign Peak CEO Roger Clarke confirmed that 50% of the fund's assets are liquid.

In 2020, US organization Transparency & Truth, which researches the activities of the Mormon Church, revealed that Ensign Peak makes investments through 15 companies, 13 of which invest in publicly traded shares and have portfolios worth tens of billions of dollars, as well as direct investments. Two of the companies also engage in venture capital investments and one of these is Marshfield Advisors, an investment fund that also works under the radar in Israel, and is fully owned by Ensign Peak.

Studying the reports filed with the US Securities and Exchange Commission (SEC) filed by Marshfield, shows that it is incorporated in Delaware, at the same address as Ensign Peak. "Globes" can reveal that between 2014 and 2016, Marshfield invested $70 million in Israeli venture capital fund Viola Ventures and Israeli Internet technology companies ironSource and Outbrain. The investment in ironSource is especially interesting because it yielded Marshfield huge profits. Despite that the fund surprisingly managed to avoid paying tax in Israel, according to documents filed in the Tel Aviv District Court last year.

The church invests in ironSource

ironSource is a high profile Israeli technology company. Initially the company developed a platform for installing apps and subsequently acquired a company for placing ads in games. Over the years ironSource grew, among other things through acquisitions, and despite being frequently featured in the Israeli financial media, the company remained relatively opaque regarding its technological products. Last summer, ironSource listed on Wall Street through a SPAC merger at a company valuation of $11 billion, although its market cap fell 80%, when tech shares began falling towards the end of 2021, although following a recently announced merger, it is now valued at $4.4 billion.

Aside from the enormous amounts that ironSource shareholders earned from the sale of shares over the years, including those sold when the company went public, the company also distributed dividends over the years totaling hundreds of millions of dollars. Data show that ironSource investors enjoyed massive returns on their investments and one of those who benefitted was Marshfield.

As far as is known, Marshfield began operating in Israel in 2014, when it reached an agreement with Viola Ventures. Email correspondence between Marshfield's legal advisors reveals that the Salt Lake City-based fund committed to invest $40 million in Viola's Carmel IV fund. In 2014, Marshfield received LP (limited partner) status in the Viola fund, together with the other limited partners, it received a proposal to invest in ironSource. Marshfield enjoyed a bonus regarding the investment because Viola, which had invested in ironSource, had an income tax pre-ruling exempting LP investors in the fund from tax payments in Israel.

A taxation expert told "Globes" that such rulings could exempt LP investors not only from tax payments from profits produced by the fund itself but also from direct investments in companies in which the fund had invested. In 2016, Marshfield directly invested $15 million in ironSource for 36,904 shares, giving it a 2.3% stake in the technology company. At the same time, Marshfield also bought shares in Israeli content recommendation company Outbrain for $15 million. Viola Ventures had also invested in Outbrain.

"I expect a struggle with the Israeli tax authorities"

One year later, ironSource was about to distribute a dividend and Marshfield was expecting to receive the full amount, without needing to pay capital gains tax in Israel. The fund's US legal advisor Adam Cohen contacted Israeli law firm Naschitz Brandes Amir and requested help on the matter. The partner appointed to handle the case was Ziv Neufeld, an international taxation expert who 18 months later quit Naschitz Brandes Amir & Co. but continued to handle Marshfield until 2020, as an independent lawyer.

But immediately after the appointment, it became clear that Viola Ventures Carmel IV fund, in which Marshfield had invested, was not the fund in which Viola had initially invested in ironSource (Carmel III) and had received the pre-ruling from the Israel Tax Authority.

"Now I realize that Carmel III invested in ironSource (not Carmel IV), Cohen wrote to Adv. Neufeld in an email on May 25, 2017. "Marshfield does not have any holdings in Carmel III (only in Carmel IV). These are two distinct legal entities."

Due to the new situation, Neufeld was skeptical about the ability of Marshfield to avoid paying tax following its investment in the wrong fund. Cohen wrote in an email, "Expect a struggle with the tax authorities in Israel," and that, "We are probably looking at a payment of 25%."

Marshfield's concerns about paying tax in Israel were substantial because in the US the fund is covered by the tax benefits of the parent fund Ensign Peak, so that the savings on tax payments in Israel would be a pure saving.

But Adv. Neufeld, in contradiction to his own forecast, succeeded in persuading the Israel Tax Authority that Marshfield was entitled to a full exemption, on its capital gains from ironSource. Marshfield were very satisfied and paid Adv. Neufeld his agreed fee. He continued to represent them over the following two years and also obtained a similar exemption for 2018 and 2019. In a professional opinion in 2020, in answers to Marshfield's management, he wrote, "A lot of effort and discussions were required to convince the authorities before we succeeded in obtaining a tax exemtion. To sum up, Marshfield was in danger of paying $2.5 million in capital gains following receipt of the dividend, a danger that we successfully averted."

The conflict revealed a delicate fabric of relations

Adv. Neufeld could be satisfied not only over his professional achievement for his client from Salt Lake City, but also the fee that he was paid. According to the agreement between Marshfield and Naschitz Brandes Amir that was signed in 2017, the firm would receive 15% plus VAT of any tax savings earned by Marshfield regarding the tax on its ironSource investment. Adv. Neufeld left Naschitz Brandes Amir at the end of 2018 and continued to handle Marshfield in 2019, under the same terms.

But the relationship between Marshfield and Adv. Neufeld ran aground at the end of 2020, when it was announced that ironSource was considering a public offering, and that a fat dividend would likely soon be paid. Adv. Neufeld already saw the fabulous sums that Marshfield was about to receive, which would dwarf the fees he had previously received, worth several hundreds of thousands of dollars. He quickly contacted Marshfield and asked for permission to act to get a tax exemption for 2020 as well. Email correspondence shows that Marshfield asked to understand the expected cost of his new activity and he replied that it would be the same agreement from 2017 - 15% of the expected savings. Marshfield responded by email a few days later that it preferred to hire another attorney.

Adv. Neufeld filed a lawsuit against Marshfield in the Tel Aviv District Court last year, claiming that he had signed an agreement on fees with a risk on his side that there would only be any payment if there were tax savings, and in any case, this rate also embodied a discount given to Marshfield because there was an agreement that the relationship between the parties would continue regarding future capital gains that Marshfield would record from its shares in ironSource.

According to Adv. Neufeld, after he had paved the way and through his efforts received the coveted tax exemption, Marshfield preferred to dispense with his services to save the fee it was committed to pay, and use another lawyer. Marshfield, for its part, claims that the fee agreement was anyway with Naschitz Brandes Amir & Co. and not with Adv. Neufeld and that they had never signed up to having him represent them forever.

Adv. Neufeld knew what he was fighting for. According to conservative estimates, which took into account various shares that had been sold over the years, Marshfield had made capital gains of more than $100 million from ironSource. The savings in tax payments by Marshfield in Israel would amount to tens of millions of dollars. Therefore Adv. Neufeld felt that his fee ought to be significantly higher than the amount he had been paid.

But ultimately, the dispute between Adv. Neufeld and Marshfield does not really need to interest the public. What is of more powerful interest is the glimpse it provides into how a religious body becomes a central player in the financial industry, and especially into the delicate web of relationships between deep-pocketed international investors, Israeli venture capital funds, the tax authorities and leading legal consultants who charge fat fees to find loopholes in the law that will save due tax payments.

Marshfield, whose agreement with its legal adviser demonstrates clearly how very important it was for it to avoid tax payments in Israel, is not unique. To some extent it embodies the vision of its parent fund Ensign Peak, which according to Nielsen seeks to save as much money as possible for the future of the Mormon community and tries to protect its full tax exemption wherever it can. Nielsen even quoted the fund's chief investment manager who told him on one occasion: "The biggest danger for Ensign is to lose its tax exemption."

Marshfield told "Globes" that it was prevented from addressing the matter as it is part of a pending legal dispute that is indirectly related to the investment in ironSource, and the fund and its partners pay taxes legally.

Viola Ventures said, "Viola is a private investment fund and it does not deal publicly on matters relating to the investments in which it invests. However, it is important to mention that the details described that have been given to us includes substantial inaccuracies."

Adv. Neufeld declined to comment.

Published by Globes, Israel business news - en.globes.co.il - on August 15, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Mormon Church Credit: Shutterstock
Mormon Church Credit: Shutterstock
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