Brooklyn Park megachurch, feds quarrel over tax-law investigation

Living Word church disputes authorization of IRS inquiry

2 Oct 2008 // An IRS regulation — Internal Revenue Code Sec. 7611(a)(2) — says that only a "high-level Treasury official" can order an inquiry into whether a church violated tax law.

How high does the official have to be?

On Thursday, a federal magistrate in the case involving Living Word Christian Center and its high-profile pastor, Mac Hammond, said he needed to hear more arguments on whether he should take the government's word on who is a "high-level" official.

U.S. Magistrate Jeffrey J. Keyes gave attorneys for the government and Hammond's church two weeks to file more briefs on the question.

The hearing in U.S. District Court in St. Paul stemmed from a show-cause order filed by the government Aug. 12 after the church refused to turn over records. In March, an IRS agent served a summons on Hammond, telling him to produce documents related to the Brooklyn Park church he founded in 1980.

The government contends the documents might show whether the church violated its tax-exempt status and whether Hammond himself might owe taxes on a business deal.

Attorneys for the church refused to hand over the materials. They argued that IRS officials launched the inquiry without proper authorization — namely, approval of a "high-level" official.

"Our position is that didn't happen here. The IRS says it did," said Walter A. Pickhardt, a Minneapolis lawyer who represents the church. "What the magistrate was asking was, 'Well, that's what they say. How much should I defer to their judgment?' Our response was: 'None. You shouldn't give any deference to that.' "

Robert E. Fay, an attorney with the U.S. Department of Justice's tax division in Washington, who is handling the case, did not immediately return a call seeking comment.

The church's spokesman, the Rev. Brian Sullivan, also did not immediately return a call for comment.

The IRS decided to look into Living Word and Hammond in April 2007 after a Washington-based group, Citizens for Responsibility and Ethics in Washington, or CREW, filed a complaint against the Twin Cities megachurch. That complaint was based, in part, on documents obtained by a local news Web site, the Minnesota Independent.

The group said the church had lent Hammond nearly $2 million on favorable terms over a five-year period. CREW said the documents showed the church made at least eight loans to Hammond between 1999 and 2004, two of which involved the pastor's purchase of an airplane that he then leased back to the church.

Hammond is a former U.S. Air Force pilot. His biography says he flew 198 combat missions during two tours in Southeast Asia. After the war, he spent 10 years flying and running an air cargo business. He still flies.

One loan was for Hammond to buy a home in Florida and three loans were unsecured, the group claimed.

At the time, Tim Mooney, CREW's senior counsel, acknowledged the documents "paint an incomplete picture" about the church's business dealings. But, he said, "the more you read the loan documents, the more you're left with the impression that something shady was going down at Living Word."

A spokesman for CREW did not immediately return a call Thursday.

PLANE LEASE AT ISSUE

Hammond and his wife, Lynne Hammond, began their church in 1980 with a congregation of 12. He said in a sworn declaration in the case that last year, the average Sunday church service's attendance was about 7,000. Living Word's empire has branched out to a parochial school, a college, a Christian nightclub, a chemical-dependency treatment center and a thrift store, among other ventures.

Hammond is a proponent of what's become known as "Prosperity Gospel." It holds that if a person is sincere in religious belief and actions, God will reward them with wealth and material possessions.

CREW, a nonprofit watchdog group, has filed two complaints against Hammond and Living Word Christian Center, sometimes referred to as LWCC. In 2006, it complained that during a church service, Hammond told the congregation he intended to vote for Michele Bachmann, then a candidate for the state's 6th Congressional District.

Bachmann, a Republican, won the election. Hammond's vow to vote for her had been an empty one, however; he didn't live in the 6th District.

When it comes to individuals, the IRS only needs a whiff of suspicion to launch an investigation and demand records. But because of a church's special status under the tax law, the agency must go through a two-step process to investigate a religious entity.

First, it must compile enough public data that would allow an "appropriate high-level Treasury official" to make a determination that there is a "reasonable belief" that a church might have done something to jeopardize its tax-exempt status or may have engaged in business activity that might be taxable.

If such a determination is made, the IRS launches a "church tax inquiry," and the agency can request — but not demand — records from the church. Once the church is notified of the inquiry and 15 days have passed, the process moves to the second stage, a "church tax examination," during which various records can be demanded.

In the Living Word case, Marsha Ramirez, the IRS' director of Exempt Organizations Examinations, authorized the inquiry. In a court filing, the government said the church's response to its initial inquiries "persuaded the IRS that it need not further investigate LWCC's political activities, and the IRS so notified LWCC.

"But LWCC's response confirmed that LWCC leases planes owned by Hammond, and pays Hammond to hangar these planes," the filing said. "LWCC's response also indicated that it had loaned money to Rev. Hammond, and subsequently forgave portions of this debt. The IRS concluded this leasing arrangement and these loans warranted further examination."

At that point, Ramirez authorized agents to begin the examination.

NOT 'HIGH' ENOUGH?

The IRS code says "high-level" means "the secretary of the treasury or any delegate of the secretary whose rank is no lower than that of a principal Internal Revenue officer for an internal revenue region."

But the church argues that Ramirez is not a "high-level official" and that there's no evidence in the record that she had a "reasonable belief" the church violated the tax code.

"These deficiencies mean that the IRS did not lawfully commence a church tax inquiry," the church argued.

In response, Fay, the government attorney, argued Ramirez has nationwide authority over examinations into tax-exempt organizations.

"The IRS needs the information requested to do a conscientious, thorough examination of what Reverend James 'Mac' Hammond received as compensation, how that compared to the amount of compensation he was authorized to receive, and the extent to which the airplane lease-back agreements affected his compensation," Fay wrote.