Fleecing the Flock, or Victim of Stereotype?

Hammond used his Sunday morning, 2/11/07 platform to further respond to the complaint filed by CREW and the resulting news coverage.

KARE-11 TV, the station on which LWCC’s church service was being broadcast at the time, put a story on its website.

A nationally known pastor from Brooklyn Park dramatically defended himself and his church Sunday morning.

Mac Hammond spent nearly his entire hour-long sermon, which is broadcast on KARE 11, refuting allegations made by a Washington watchdog group.

That group, Citizens for Responsibility and Ethics, claims the Living Word Christian Center broke federal tax laws by arranging certain lucrative financial deals for Hammond.

"I can understand why a lot of people would look at us with skepticism," Hammond said.

…

Hammond says because of the church's success, he may be falling victim to a common stereotype.

"Irresponsibly using the pulpit authority to fleece the unsuspecting flock of God," Hammond preached. "That's very often the stereotype that is attached to a ministry such as we are."

...

"We have gone to every extreme to make sure every legal requirement, every regulatory statute has been addressed, amen," Hammond said.

The watchdog group says it has provided the I.R.S. with "startling" information that should lead to an investigation.

Video of a portion of Hammond’s “sermon” on the charges was later posted on YouTube:

In the video, Hammond can be seen arguing that his “compensation” or “salary” is reviewed by attorneys and compared with the compensation at churches of similar size, and that his compensation is within “safe harbor.”

[My thought: Here’s another straw man argument. The CREW complaint did not deal with Hammond’s compensation or salary, but rather with the many lucrative side deals, special loans and leases that benefited him as an insider.]

Hammond said, “I would almost welcome an IRS audit” because “when you’ve dotted every I and crossed every T you can’t wait” to show it.

I've labored for 25 years to dot every legal I and cross every legal T, and if they came and did an audit, I would like to know if there's something wrong. I want to change it, man, because I want to comply with the law. Amen.

Hammond claimed that “the board is an independent entity. They don’t answer to me.”

[My thought: Again, he was not fully honest. He neglected to add that the board consisted of Hammond himself, his wife, the minister of an LWCC franchise church in northern MN, the son of his friend Kenneth Copeland, and other close associates.]

Hammond said that the real question is not what someone makes, but what he does with the money. “I’m the largest contributor in the history of this church,” over 25 years, he said. He said that he and his wife Lynne had given LWCC $2 million over the previous 5 years.

As for the bankruptcy of his aviation business, which preceded the founding of LWCC, he explained that “I was personally liable” for the corporation’s $100,000 in “unpaid employee withholding taxes.” He added, “Every dime of that was paid.”

[In other words, the business he owned and ran before he founded LWCC was not paying its employee withholding taxes for quite some time, if a balance of $100,000 was allowed to accrue.]

The Porsche, he said, he paid for with "four speeding tickets and a suspended license."

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.

Immediate Fallout from the Bachmann Endorsement

Mac Hammond’s actions on 10/14/06--using the sanctuary to politick, as well as offering it as a platform for one candidate's campaign--set in motion legal challenges to the church’s tax-exempt status, and brought negative publicity for Hammond and LWCC. (The event itself was described here in an earlier post.) What's told below isn't new, but many people still don't know all the facts.

Three days after the Bachmann endorsement, a watchdog group in Washington, D.C. [CREW] filed a complaint with the IRS against LWCC. The complaint quoted Hammond’s words as well as Bachmann’s, highlighting the partisan politicking in each of their talks.

The complaint, addressed to IRS Commissioner Mark Everson, says in part:

[CREW] respectfully requests an immediate [IRS] investigation into the activities of Living Word Christian Center, based in Brooklyn Park, MN….Because you pledged earlier this year to investigate violations of tax law during, and not after, the election cycle, we ask that you look into this matter immediately…

The complete initial complaint can be found here.

The complaint against LWCC made our local news, just as the original politicking had done. In response to media inquiries, LWCC said that Mac Hammond thought he was within the rules by saying he spoke “personally”--that he simply misunderstood the rules.

Unfortunately, that was NOT TRUE. The Minnesota Independent reported:

When asked about the statement [from the pulpit], a LWCC official said that the endorsement was the result of Hammond’s misunderstanding of IRS guidelines. Associate pastor Tim Burt... [said] that Hammond thought he was within the rules by saying he was speaking personally.…“He didn’t knowingly or willingly violate IRS guidelines. He misunderstood the IRS guidelines…’”

But a recording from a…LWCC staff meeting on Election Day in 2004 [two years earlier] indicates that Hammond clearly understood IRS regulations governing his church’s tax status and was aware of the risk in which he placed the church when he personally endorsed Bachmann.

“There have been two or three churches who have gotten a little too vocal about supporting President Bush that did get sued,” Hammond said…. “….But we did what we felt led to do. I preached a Sunday on it [the upcoming presidential elections], talked a lot about it, nobody should have any doubts about what’s the right thing to do…. The law does clearly state that a non-profit tax-exempt organization cannot use their property, premises or influence to support one candidate over another. I could, but I would have had to offer it formally to his opponent.”

Full story here.

Thus, LWCC was not being truthful when it claimed Hammond didn’t understand the rules for tax-exempt organizations. Hammond himself had explained those very rules to his staff. As Hammond himself has said, LWCC has plenty of lawyers to advise it on these matters. In addition, the IRS provides free resources to help churches and other organizations understand the rules. CREW’s complaint referred to IRS Publication 1828. That is a Guide for Churches and Religious Organizations, available to anyone online here at the IRS website.

For those who want to hear for themselves what Hammond said about tax-exempt requirements, the audio recording is linked here. It can also be found through the Minnesota Independent story, linked above.

It’s important to recognize that proof of Hammond’s prior knowledge of the rules came to light only because some concerned person on the inside put the tape in the hands of local media.

The IRS did not impose any sanctions against LWCC for the abuse of its tax-exempt status. That event did occur during the George W. Bush administration, which was known to be very friendly (some would say overly-friendly) to conservative Christian groups.

How'd This Mess Start? Part II: LWCC, Hammond, & Bachmann

As mentioned in the last post, tax-exempt organizations are limited in their political activity. The IRS Guide for churches and religious organizations explains that

…(S)ection 501(c)(3) organizations, including churches and religious organizations, are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. …(P)ublic statements of position (verbal or written) made by or on behalf of the organization in favor of … any candidate for public office clearly violate the prohibition against political campaign activity. Violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise tax.

Some election-related activities are fine so long as they're done in a non-partisan manner. For example, a candidates’ forum to which all candidates for an office are invited, or a get-out-the-vote drive, could be acceptable. If election-related activities favored a certain candidate or a certain group of candidates, they’d be prohibited for a church that wanted to remain tax-exempt. The IRS provides free resources, like the online guide linked above, to help churches understand the requirements.

What About Free Speech Rights?

The leaders of tax-exempt organizations DO have the right under the 1^st Amendment to speak out for candidates, but they must do so as individuals and not use the organization’s platforms (services, gatherings or newsletters) to do so. A statement by a pastor at Sunday church that “I'm voting for X” would not be okay, but a statement at a campaign rally in a park would be fine, as long the pastor makes clear he speaks for himself and not the church.

What About Inviting a Candidate to Speak?

A candidate being invited to speak in a church gathering might be okay, if done in non-partisan way. Does the church provide the same opportunity to all the candidates seeking the same office? Does the church avoid showing support of or opposition to any candidate? A church in Iowa does (or at least used to) invite each candidate for President to speak at its Sunday services, one candidate per week, in the Sundays leading up to the presidential caucuses. That is acceptable because the opportunity was open to each candidate, and there were no comments by the leadership for or against anyone. Other churches have held candidate forums at which all candidates for a particular office are given the chance to talk about the issues.

Michele Bachmann Visits Living Word Christian Center

In 2006, then-State Senator Michele Bachmann was running for the U.S. Congress. On October 14, three weeks before election day, she spoke at LWCC’s Saturday night service, right after a sermon by Mac Hammond. Pastor Mac introduced her by saying,“We can’t publicly endorse as a church, and would not, any candidate, but I can tell you personally that I’m going to vote for Michele Bachmann. Because I’ve come to know her, what she stands for, and I want her to share her testimony with you tonight.”

Michele Bachmann got up and spoke for 15 minutes or more. She expressed appreciation for the opportunity to meet the "fellow believers" at LWCC. Mrs. Bachmann talked passionately about hearing God's message when she was 16 years old and being faithful to God through the stages of her life, saying she was not "lukewarm" but "hot for God." She worked in resume items--college, law school, an advanced law degree, marriage, being a foster parent and serving in the Minnesota Senate. Near the end of her talk Bachmann explained her work as a state senator on the "definition of marriage" issue. She also talked about her run for the Congress, saying,"It's one of the top three races" in the U.S. because the race would decide "which way this country will go."

(My thought: Her talk raises the question--what is the difference between "testimony" and a campaign speech? But even if her talk could be considered strictly non-partisan, Mac Hammond's endorsement from the pulpit was clearly in violation of IRS rules and potentially endangered LWCC's tax-exempt status.)

When Mrs. Bachmann had finished, Mac Hammond spoke again, saying, "It's important. We need to put people of God in office. And I don't want any more letters about 'church and politics don't mix.'"

Here is video of Mac Hammond's introduction of Michele Bachmann that night. The visual is blurry but he can be clearly heard.

10/17/06 Citizens for Responsibility and Ethics in Washington (CREW) filed a complaint with the IRS based on Hammond's introduction of Mrs. Bachmann at the 10/14/06 church service. CREW is a non-profit group dedicated to holding public officials accountable for their actions.

CREW said that Hammond's introduction absolutely prohibtited from interfering in election under “very favorable tax benefits public charities receive” under 501(c)(3). CREW's 10/17 information release said,

On October 14, 2006 Ms. Bachmann delivered a campaign stump speech from the Living Word Christian Center’s pulpit and the church’s pastor, Mac Hammond, openly endorsed her candidacy. Pastor Hammond’s comments and Ms. Bachmann’s speech were made during the Living Word Christian Center’s weekend services, presented before the entire congregation and broadcast over the Internet. By using church resources to promote the candidacy of Ms. Bachmann, the church jeopardized its tax status.

At the time, CREW's executive director chided the IRS for having investigated "only progressive organizations such as the All Saints Church in Pasadena, California, the NAACP and Texans for Public Justice. This complaint and the clear evidence supporting it should spur the IRS to investigate the Living Word Christian Center and all 501(c)(3) charities that abuse their status, regardless of ideology.”

That was how LWCC and Mac Hammond started making the news in 2006. There has been no sanction from the IRS for the incident, but the endorsement of Bachmann set in motion some other difficulties for LWCC and Mac Hammond. And it came to light later that Mac Hammond did not live in the 6th Congressional District, and so was not eligible to vote for Michele Bachmann. Mrs. Bachmann was elected to Congress that year and reelected in 2008.

Videos of Bachmann's LWCC talk are available on You Tube here and here.

How'd This Mess Start? What does the IRS Have to do with LWCC?

This post will try to explain how LWCC’s governance and financial dealings with Mac Hammond came to the attention of the IRS, which put LWCC in a negative light in the eyes of some.

What Taxes Do

As everyone knows, the programs of our government, from the federal to the state, county and city levels, are paid for through our taxes. At the federal level, military operations, including the weapons, vehicles, rations and other supplies of our men and women overseas, are paid for through tax dollars. So are the service academies, air traffic control, homeland security, weather service, Medicare and more. The CDC and health departments do research, testing and/or sharing of information to help identify illnesses like H1N1 and prevent the spread of disease.

State funds pay for state highway construction & repair, bridges, state court system, state park management, highway patrol and more. Regionally, we support our airports and public transportation system. City or county funds pay for hospitals, road maintenance, sidewalks, streetlights, sewer, police and fire protection, and other local needs. Of course there are many other functions of government, all of which cost money.

Tax-Exemption under IRS Code 501(c)(3)

There are some who (very loudly!) object to paying taxes, say taxes are too high, or argue that their tax dollars are not being spent the way they want. I doubt if anyone agrees 100% with the way public funds are spent. But we all use or benefit from government services to a greater or lesser degree.

Most people and businesses are expected to pay income, sales and property taxes to support these various levels of government. But under section 501(c)(3) of the IRS code, religious, charitable, educational, and certain other organizations may be exempt from tax so long as they meet certain requirements. IRS Charities article

Non-profit organizations were exempted from tax in recognition of their benefit to the community. A large church such as LWCC will still use certain public services such as infrastructure (road, sewage, streetlight, etc.), fire and police protection. But unlike its residential and business neighbors, LWCC is exempt from property taxes because of 501(c)(3).

In order to keep its tax-exempt status, a church or other entity must be organized and operated for exempt purposes only (like religion, helping the poor, education, etc.) and none of its earnings may “inure to” (benefit) any individual--more about that in futures posts. In addition, it it may not participate in any campaign activity for or against political candidates. IRS on exemption requirements

More about tax exemption and the "Bachmann episode" in the next post.