Complaint - CREW: IRS: Regarding Illegal Living Word Christian Center Endorsements and...

8/6/2019 Complaint - CREW: IRS: Regarding Illegal Living Word Christian Center Endorsements and Contributions: 2/7/2007-

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CREW I citizens for responsibilityand ethics in washingtonFebruary 8, 2007

The Honorable Mark W. EversonCommissionerInternal Revenue Service1111 Constitution Avenue, N.W.Washington, D.C. 20004Re: Living Word Christian CenterDear Commissioner Everson:

Citizens for Responsibility and Ethics in Washington ("CREW") respectfully requests animmediate Internal Revenue Service ("IRS") investigation into the activities of Living WordChristian Center ("LWCC"), located in Brooklyn Park, Minnesota. Based on recently releasedfinancial documents, it appears that LWCC has illegally provided President and Senior PastorJames "Mac" Hammond with benefits that violate federal tax law. Although the subject matterof this complaint is unrelated to CREW's October 18,2006 complaint against LWCC for illegalelectioneering, the pattern of potentially illegal conduct by the church is troubling and meritsinvestigation. Pursuant to IRS procedures, CREW is submitting a copy of this complaint to theIRS field office in Dallas.

IRC Section SOl(c)(3) RequirementsPublic charities, including churches, are granted special privileges under federal tax law.

Among these are exemption from most income tax and the ability to confer tax-deductibility todonor's contributions. A public charity must be organized and operate exclusively to engage incharitable activities, demonstrate a minimum level of public support, and may not pass on anyportion of its net earnings in a manner that inures to the benefit of private individuals. 26 C.F.R. 1.501(c)(3)-1 (c). This restricts a public charity from engaging in certain acts of self-dealingwith insiders and from creating excessive compensation schemes that are not in the interest of theorganization or the public benefit it is mandated to serve. Id. See also Tax Guide for Churchesand Religious Organizations, I.R.S. Pub. 1828 ("Pub. 1828") (September 2003) at 4. The IRS issolely responsible for enforcing the provisions ofIRC 501(c)(3). See IRC 780 1(a)(2). Seealso Pub. 1828.

BackgroundLWCC is a church located in Brooklyn Park, Minnesota that is exempt from taxation

pursuant to IRC 501(c)(3). In the 26 years since its founding, the church has growndramatically, expanding its worship center, purchasing several tracts of land, and making other

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capital expenditures. LWCC accomplished this largely through private financing. In 2004,LWCC sought a mortgage to continue its expansion. The Marshall Group, LWCC's mortgagebroker, prepared a confidential information memorandum as part of the due diligence process fora loan from its affiliate, Marshall Investments Corporation. The Marshall Group, Living WordChristian Center $25,000,000 First Mortgage Loan, October 2004 ("The Marshall Groupmemorandum")(attached as Exhibit A) at 7. The Marshall Group memorandum detailed termsfor a $25 million loan that would be used by LWCC to retire debt from a prior bank loan andreturn equity to private investors. Id. CREW does not know whether The Marshall Groupultimately loaned the money to LWCC.

Based on the information in The Marshall Group memorandum, it appears that LWCCmay have violated tax law prohibitions on inurement and self-dealing through a series offinancial transactions involving its founder, Senior Pastor and member of the Board of Trustees,James "Mac" Hammond. These transactions include a financially questionable leaseback schemeinvolving Mr. Hammond's planes and several personal loans made to Mr. Hammond by LWCCthat appear to be disguised distributions ofLWCC's earnings. Both the leaseback scheme andthe private loans may well violate established inurement rules. See Founding Church ofScientology V. U.S., 412 F.2d 1197, (Ct. Cl. 1969), cert. denied, 397 U.S. 1009 (1970). Giventhe nature of these transactions, CREW believes that the IRS should open an immediateinvestigation into LWCC's financial activities pursuant to IRC 7611.

Airplane leasebackIn 1999, LWCC sold Mr. Hammond an airplane for $1,063,000. Exhibit A at 90. The

terms of the deal included $700,000 cash and a note for $363,000 payable to LWCC at 8.7%interest. Id. at 90. The loan was secured by "an airplane" according to the information in TheMarshall Group memorandum, however it is unclear whether it was the plane LWCC sold to Mr.Hammond, or a second plane he owned at the time. Id. The terms of the loan dictated that Mr.Hammond pay $8,981 per month to LWCC.' In April 2002, the balance of the airplane loan wasrolled into an additional loan for $30,500, and the note was restated for $159,514 payable toLWCC at the prime rate plus 1.5%. Exhibit A at 90. Mr. Hammond paid LWCC $10,199monthly from April 2002 until the note was paid in full in April 2003. Id. at 69.

Mr. Hammond leased two planes to LWCC under a non-cancellable operating lease thatrequired LWCC to cover operational expenses including maintenance, fuel and staff costs.Exhibit A at 28. Based on the information in The Marshall Group memorandum, the monthlycharge to LWCC under this agreement ranged from $17,008 per month to $39,422 per month,per plane. Id. at 54, 75 and 95.

Mr. Hammond enjoyed favorable financial treatment in his transactions with LWCC. Mr.Hammond paid an average of $9,590 per month to LWCC through April 2003 for the balance of1 The Marshall Group memorandum does not contain the monthly payment information for this loan. CREWcalculated the likely monthly payment based on the principle, the interest rate and the length of the loan.

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the debt on the plane LWCC sold him. Exhibit A at 90. LWCC paid Mr. Hammond, at aminimum, nearly twice that amount monthly to lease the plane back from him? Despite the factthat LWCC had an option to purchase the plane it leased from Mr. Hammond, the church neverexercised that right. Had it done so, or had the church maintained ownership of the plane it soldto Mr. Hammond, it would have incurred fewer expenses. Based on the information in thesedocuments, it appears that LWCC made a decision to financially benefit Mr. Hammond, amember ofLWCC's board of trustees. Id. at 30. LWCC also rented hangar space owned by Mr.Hammond for $3,650 per month with an option to purchase. Id. at 95. LWCC did not exercisethe option to purchase the hangar, but instead allowed Mr. Hammond to borrow $155,000 fromthe church in 2002, using the hangar as collateral. Id. at 91. Essentially, LWCC paid Mr.Hammond to use, operate and store his own planes at his own hangar facility.

The airplane leaseback scheme appears to have violated federal tax law because itpotentially inured charitable resources to the benefit of Mr. Hammond. Inurement occurs whenan insider, such as a director or founder, derives a benefit from an organization's assets orresources because of his or her position. 26 C.F.R. 1.501(c)(3)-I(c); Jean Wright and Jay H.Rotz, Reasonable Compensation, IRS Exempt Organizations Continuing Professional EducationText (1993) at 4. There is little question that Mr. Hammond was an insider ofLWCC forinurement purposes. He sat on the board of trustees along with his wife Lynn Hammond, wherethey comprised two of the seven votes. See Exhibit A at 30. Mr. Hammond was, and continuesto be, the spiritual leader and founder of LWCC and exerted significant influence over theorganization. See Joe Bodell, Give 10% Or Else: Church Employees Ordered to Tithe,Minnesota Monitor (December 18,2006) (attached as Exhibit C).

Tax law prohibits transferring property to insiders for less than fair market value. Pub.1828 at 4. See also Founding Church of Scientology v. U.S., 412 F.2d 1197,1202 (Ct. Cl. 1969),cert. den., 397 U.S. 1009 (1970) (disguised distribution or benefit from the net earningsconstituted inurement). Mr. Hammond received favorable financial terms that allowed him topurchase a plane from LWCC and lease it back to the church. The terms of the post-salearrangement appear to be financially worse for LWCC than they would have been had LWCCmaintained ownership of the plane. The IRS has stated:

The general rule is that if the arrangements are indistinguishable from ordinaryprudent business practices in comparable circumstances, a fair exchange of benefitsis presumed and inurement will not be found. If the transactions depart from thatstandard to the benefit of an individual, a finding of inurement should be made.

2 The Marshall Group memorandum notes that Mr. Hammond leased two planes to Lwee during this period, butdoes not specify the rate Mr. Hammond charged for a specific plane. Based on Federal Aviation Administrationregistration records available to eREW, it appears that Mr. Hammond upgraded his planes periodically since 1999,but owned no more than two planes at any given time. Federal Aviation Administration Aircraft Report of James M.Hammond (January 1, 1999-present) (attached as Exhibit B). It also appears that Mr. Hammond may have sold theplane he purchased from Lwee in and used the proceeds to upgrade to a different model. rd.

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Overview ofInurement/Private Benefit Issues in IRC 501(c)(3), IRS Exempt OrganizationsContinuing Professional Education Text (1990) at 3. Although the information available doesnot prove that the leaseback transaction between LWCC and Mr. Hammond fell outside ofordinary prudent business practices, there is ample evidence to warrant an IRS investigation intowhether LWCC engaged in prohibited private inurement.

A related issue regarding the leaseback transaction is whether LWCC's payments to Mr.Hammond for the use of his planes sufficiently furthered its exempt purpose as a ministry. Acharitable organization may spend its net earnings on ordinary and necessary expenses related toits exempt purpose, including reasonable compensation for the work done by insiders. FoundingChurch of Scientology, 412 F.2d at 1200. If, however, a charity compensates an insider in amanner that is not ordinary and necessary to its operations, the charity risks loss of its tax status.John Marshall Law School and John Marshall University v. United States, 228 Ct. Cl. 902, 903(1981).

The Marshall Group memorandum notes:[LWCC] believes that these lease arrangements are no more expensive than ifsecured from an independent provider. [LWCC] believes the aircraft are important tothe efficient management of its ministry at the present time, and it continuallyreviews and assesses the economic advantages of their deployment. [LWCC] usesthe airplanes to transport the Senior Pastor and/or staff to national events andspeaking engagements, and to transport guests, speakers, educators, and others to andfrom [LWCC]'s Main Campus in the Minneapolis/St. Paul area.

Exhibit A at 28. The Marshall Group memorandum did not compare alternative airlinetravel options that might have saved the organization money without sacrificing its travelneeds. Living Word Christian Center is located 23.9 miles from Minneapolis/St. PaulInternational airport, which serves 131 nonstop markets. MSPAirport.com, Statistics,http://www.mspairport.comimsp/stats/default.aspx(lastvisitedFebruary7.2007).Itisunclear whether LWCC's leases for the two planes represented ordinary and necessaryexpenditures to further its exempt purpose, but it is clear that the ultimate beneficiary ofthese payments was Mr. Hammond. This warrants further investigation by the IRS.

Personal LoansAccording to The Marshall Group memorandum, Mr. Hammond received eight personal

loans from LWCC between 1999 and 2004:$363,000 (July 1999)$478,428 (December 1999)$562,874 (June 2000)$ 15,000 (December 2001)

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$159,514 (April 2002)$155,000 (May 2002)$225,000 (March 2003)$117,133 (December 2003)

Exhibit A at 50, 70, and 90-91. LWCC loaned Mr. Hammond more than $1.9 million during thisperiod.' In addition to the substantial amount of money loaned, LWCC provided terms and ratesthat appear very favorable to Mr. Hammond. Two of the loans were related to the purchase of aplane in the leaseback arrangement. Id. at 90. Three additional loans totaling $357,133 were notsecured with any property. Id. at 50. In 1999, LWCC also apparently served as the mortgageefor Mr. Hammond's Florida residence, loaning him $562,874. Id. at 91. LWCC allowed Mr.Hammond to make interest-only payments for one year, characterizing the debt as "long-term."Id. The Marshall Group memorandum suggests that LWCC allowed Mr. Hammond to makeinterest-only payments after 2000 and Mr. Hammond may have deferred principal payments untilas late as 2004. Id. at 49.

LWCC potentially violated tax law because the loans may have inured to the benefit ofMr. Hammond, an insider. See John Marshall, 228 Ct. Cl. at 903 (revocation of exemptionsupheld where insiders received a series of interest-free, unsecured loans). There is no evidencethat Mr. Hammond mitigated his insider status by recusing himself from the board votesregarding the loans, and given his status as the spiritual leader and founder of LWCC and thesignificant influence he exerted over the organization, asking the church to justify the loanswould be within the IRS's authority. See Founding Church of Scientology, 412 F.2d at 1201(church should justify loans, reimbursements and other payments made to "dominant figure" inthe church).

In LOWlYHospital Association v. Commissioner, 66 T.C. 850 (1976), the court upheldthe revocation of tax-exempt status of a hospital that made a series of unsecured loans to itsdoctor's privately-owned nursing home and to a trust for his children. In supporting its holding,the court noted that the nature of the loans, and the financially questionable position taken by thehospital suggested that the loans constituted illegal inurement:

Moreover, it cannot be said that being the principal source of financing for Dr.Lowry's nursing home was in petitioner's best interest. While the interest ratereceived by petitioner on the unsecured loans was roughly equivalent to the interestrate it was receiving or could have received on passbook deposits from the local bankat the time the loan was made, the nursing home loans represented a substantiallygreater risk. An equivalent risk, incurred for a similar duration, could be expected toproduce higher earnings elsewhere. Petitioner could also have used these funds toimprove the hospital service to the community. Petitioner made loans which were

3 This accounts for the April 2002 loan that rolled the unpaid balance of the July 1999 loan together with anadditional $30,500 loan. Exhibit A at 90. A summary of the loan terms detailed in The Marshall Groupmemorandum is attached as Exhibit D.

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Complaint - CREW: IRS: Regarding Illegal Living Word Christian Center Endorsements and...

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