CREW's 2nd Complaint Against Living Word

On 2/08/07, Citizens for Responsibility and Ethics in Washington, or CREW, filed a complaint with the IRS, asking it to investigate LWCC for possible violation of federal law. CREW is the group that had made a complaint the previous October, based on the politicking from LWCC's pulpit. This time, CREW cited possible “inurement” [private benefit] to LWCC’s senior pastor, based on information in the Marshall Group report. CREW’s letter of complaint laid out the relevant law and facts.

CREW began by referencing section 501(c)(3) of the federal code, which governs tax-exempt organizations.

Public 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 to donors’ contributions. A public charity must be organized and operate exclusively to engage in charitable activities…and may not pass on any portion of its net earnings in a manner that inures to the benefit of private individuals…

Citing the IRS’ Tax Guide for Churches and Religious Organizations (link at left), CREW continued:

This restricts a public charity from engaging in certain acts of self-dealing with insiders and from creating excessive compensation schemes that are not in the interest of the organization or the public benefit it is mandated to serve.

…

Based on the information in the Marshall Group memorandum, it appears that LWCC may have violated tax law prohibitions on inurement and self-dealing through a series of financial transactions involving its founder, Senior Pastor and member of the Board of Trustees, James “Mac” Hammond.…

The complaint listed the specific facts that raised questions about LWCC's stewardship, beginning with the sale and leaseback of the airplane.

In 1999, LWCC sold Mr. Hammond an airplane for $1,063,000…Mr. Hammond leased two planes to LWCC under a non-cancellable operating lease that required LWCC to cover…expenses including maintenance, fuel and staff costs…

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 of the debt on the plane LWCC sold him…LWCC paid Mr. Hammond, at a minimum, nearly twice that amount monthly to lease the plane back to him. Despite the fact that LWCC had an option to purchase the plane it leased from Mr. Hammond, the church never exercised that right. Had it done so, or had the church maintained ownership of the plane it sold to Mr. Hammond, it would have incurred fewer expenses….LWCC also rented hangar space owned by Mr. Hammond for $3,650 per month with an option to purchase…LWCC did not exercise the option to purchase the hangar, but instead allowed Mr. Hammond to borrow $155,000 from the church…using the hangar as collateral…Essentially, LWCC paid Mr. Hammond to use, operate, and store his own planes and his own hangar facility.

The airplane leaseback scheme appears to have violated federal tax law because it potentially inured charitable resources to the benefit of Mr. Hammond. Inurement occurs when an insider, such as a director or founder, derives a benefit from an organization’s assets or resources because of his or her position…

A related issue…is whether LWCC’s payments to Mr. Hammond for the use of his planes sufficiently furthered its exempt purpose as a ministry…Living Word Christian Center is located 23.9 miles from [MSP] airport, which serves 131 nonstop markets…It is unclear whether LWCC’s leases for the two planes represented ordinary and necessary expenditures to further its exempt purpose, but it is clear that the ultimate beneficiary of these payments was Mr. Hammond.

The CREW complaint also noted the eight personal loans totaling $1.9 million made by LWCC to Hammond between 1999-2004, and concluded:

Based on the totality of the available facts and circumstances, it appears that LWCC illegally extended private benefits to Senior Pastor Mac Hammond in violation of IRC section 501(c))3). ... CREW respectfully requests that the IRS conduct a full-scale investigation into the financial transactions and internal processes....

Mac Hammond's response to the complaint, and what happened next, will be explored in future posts.

Doesn't Every Church Need a Stunt Plane?

In 2004, LWCC was leasing two airplanes from its senior pastor at a total cost of $74,422 per month! Under the non-cancellable lease agreement, LWCC was also paying for all fuel, maintenance costs and rented hangar space for the planes. And guess who the space was rented from? These were among LWCC's financial obligations listed in the Marshall Group report.

One of the planes was this Cessna 650 that seated 12:

Click here for source. Scroll down for relevant story and image.

The other plane was, apparently, even spiffier...a Flugzeugbau EA 300L marketed as "the premiere aerobatic, sport and professional aircraft on the market today..." In other words, it was a stunt plane. These pictures don't show Hammond's specific plane, but you get a pretty good idea.

Source: Supplement to CREW complaint, 2/9/07.

LWCC’s other loan obligations at the time of the Marshall group report:

• Note for parsonage: balance owed as of 12/31/03 = $369,297
• Note and land lease for hangar: $618,873
• Note for 500 acres near Brainerd: $627,427 due as of report
• Note for 32 acres near Brainerd, $219,305 due as of report

LWCC was planning to pay $893,064 for airplane leases in ’04, ’05, ’06, ’07 and $577,686 in ’08.

The borrower leases two aircraft from its Senior Pastor and incurs related operational expenses such as hangar space, maintenance and staff costs….The Borrower has made both secured and unsecured loans to its Senior Pastor from time to time. One such loan is a mortgage loan secured by the Senior Pastor’s residence in Florida, which bears interest at prime +1%....

The organization leases two airplanes from its President/Senior Pastor under non-cancellable operating leases. The first plane has a lease rate of $39,422/mo…[The second plane] has a lease rate of $35,000/month. The Organization is also required to pay all operating costs of the airplanes…

The mortgage LWCC was seeking from Marshall was to be used to retire loans, give return on equity for private investors, and pay for equipment and facility improvements. The optional $5 million advance would also go for improvements.

As of 10/04 when the Marshall report was prepared, LWCC management was taking serious and unnecessary risks with the organization’s money. At that time, the FDIC insured up to $100,000 per depositor per bank. Many depositors with large cash accounts spread them among several banks so that their assets are fully insured. According to the Marshall Group report, “At June 30, 2004 and 2003, the Church had cash in checking and savings accounts at one bank significantly in excess of federal deposit insurance limits. At June 30 ’04, this amount was approximately $938,000…”

James "Mac" Hammond's Private Bank

After the publicity around LWCC/Hammond’s endorsement of a candidate in October '06, an anonymous source gave The Minnesota Independent (MNIND), an online newspaper, a copy of a lengthy financial report on LWCC that had been prepared in late 2004.

The report had been prepared by "Marshall Financial Group [then known as The Marshall Group], a non-bank lending company that set up and serviced large participation loans, mostly in real estate… Its core business had been organizing and leading loans that were too big for one bank to handle..." Source: Mpls/St Paul Business Journal 11/13/08

The Marshall Group report was prepared in 10/1/04. LWCC was seeking a $20-$25 million loan package from Marshall. Before deciding whether to make the loan, Marshall investigated the church’s financial history, financial practices and its assets and liabilities. The Marshall Group is no longer in business.

MNIND reported that the Marshall Group docs seemed to show financial deals that "heavily benefited Hammond personally." The Marshall Group report listed "generous loans Hammond received from the church totalling $1.9 million. It outlined agreements for rental of airplanes he purchased with church loans, then leased back to the church--at a profit to him of nearly $900,000." MNIND sent the docs to a tax watchdog group (CREW) for its opinion. After seeing the documents, CREW filed a complaint with the IRS.

From the report, here are dates and amounts of loans to Hammond from 1999-2004, and a few other dealings. It's long and slow loading, but if you want to see for yourself, access it here.

LWCC had been founded in 1980 and operated as LWCC. In 12/94 Living Word International Inc. incorporated for religious/charitable purposes. Revenues and expenses of LW Int'l have been intermingled with those of LWCC.

In April 1998, LWCC borrowed $1 million to buy 500 acres near Brainerd. LWCC representatives said it might be developed into a camp. As of the writing of the Marshall Group report, this land had not been developed.

Loan #1. In 7/99 LWCC sold an airplane to Hammond for $1,063,000. LWCC was paid $700,000 in cash and given promissory note for $363,000 at 8.7%. (In other words, it agreed to let Hammond pay off the remainder of the cost over time, in effect loaning him $363,000 toward the cost of the airplane.)

Loan #2. In 4/02 LWCC gave Hammond an additional loan of $30,500. The July ‘99 note for the airplane was restated at $159,000. According to the church, the note was “paid in full” by April, 2003.

Loans #3, 4. In 2000 LWCC two or more loans not including the $30,500. These combined for a 2002 balance of $568,000.

These next two transactions were explained in this way: A business “related by management control” (which the Marshall report didn’t name, but “related by management control” sounds like Hammond or someone close to him) operated internet service and receives subscription revenues for total of hundreds of thousands in ’03 & ’04.

The Church’s integrated auxiliary, Living Word International, Inc., has a contract with a corporation related by management control to provide internet services to Living Word Int’l Inc. Terms of the agreement call for set fees to be paid to this corporation based on the number of subscribers to the proprietary internet service to be offered by the auxiliary church. The corp. provides the necessary access, service and support to allow subscribers to access the auxiliary Church’s internet portal. Living Word International, Inc. is the only customer of this corporation.

?1^st loan to Hammond-owned corporation? In December, 2000, LWCC made a $180,000 loan through Living Word Int’l to “a related corporation that is providing internet services.”

?2^nd loan to Hammond-owned corporation? In June of 2001 there was a second loan to this “related corporation providing internet services” for $198,000. (This was later combined with the 12/00 loan for total of $378,000, unsecured, due 12/04. )

Loan #5. In 12/01 Hammond was given an unsecured loan for $15,000 5.75%. Monthly payments were $288; was declared paid in full in 8/03.

Loan #6. In 5/02 LWCC made another loan to its senior pastor, this time for $155,000, secured by an airplane hangar.

Loan #7. In 5/03 LWCC borrowed $630,000 for a hangar for “leased aircraft.”

Loan #8. In 12/03, LWCC loaned another $177,133 to Hammond, unsecured.

Loan #9. In March ’03 there was yet another unsecured loan to the “Senior Pastor-President,” this time for $225,000.

What questions does this raise in your mind? How about these for starters.

Why was LWCC was loaning large sums of money to Hammond again and again? LWCC is not a bank or lending institution. Secondly, why does Hammond keep seeking loans from LWCC? Why doesn't he go to his bank or other lender?

More from the Marshall Group report, what it means, why it matters, and what happened next, in future posts.