Pastor Mac Hammond and Living Word Christian Center–under investigation by the Internal Revenue Service for alleged favorable loans and compensation provided to Hammond by the church’s board–had their day in court Thursday as the mega-church fights to keep certain documents related to church finances out of the hands of the IRS.
Specifically, the IRS is looking for detailed information regarding favorable loans the church made to Hammond of almost $2 million and payments the church made to Hammond to rent a hangar for the church’s jet.
An IRS court filing said: “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.”
Also at issue, according to Living Word’s attorneys, are significant changes to the structure of the IRS since the early 1980s relating to churches. Living Word contends that the IRS did not follow appropriate procedures related to IRS investigations of churches. Judge Jeffrey Keyes said, “I see this as a case that could be moving up through the courts.”
While Living Word complied with some aspects of the investigation, it has declined to provide the IRS information pertinent to the case. The IRS served Living Word a summons in March and the church did not comply. A magistrate judge ordered the church’s attorneys to appear in court Thursday and argue their case.
“This case is about the First Amendment, the free exercise of religion and separation of church and state,” said Walter Pickhardt, attorney for the church. “Living Word did cooperate but the IRS didn’t follow correct procedures. It was an overbroad request.”
Pickhardt also pointed out that the requested documents would expose church donors to government intrusion.
Pickhardt recounted the background behind the investigation — that a speech by U.S. Rep. Michele Bachmann at the church, and Hammond’s endorsement of her, triggered an initial investigation. Subsequent media investigations then highlighted the financial practices of the church (which were originally reported by the Minnesota Independent).
The lawyer for Living Word argued that, thanks to a series of legal changes, including an important one in 1984, churches have special rights in IRS investigations.
In 1984, Congress changed the structure of IRS enforcement to include a two-level process for investigating possible infractions by churches. The IRS must first conduct an inquiry, asking individuals and entities to produce certain information, and then, based on that information, could carry out an examination of church records, otherwise known as an audit. The law change was made to minimize government intrusion into religion and religious organizations.
The change also said that examinations, and the related demands for information from churches, needed to be issued by someone with a high-level of authority within the IRS, such as a regional commissioner.
Of the change, the IRS said:
>Congress, when it enacted IRC 7611, tried to minimize the potential for church-state confrontations in Service examinations of churches by adopting detailed procedures to be followed whenever the Service was involved in what the statute characterized as a “church tax inquiry.” These procedures emphasized the need for a speedy determination of a church’s tax liabilities without unnecessary examination of church records.
Another change in 1998 restructured the IRS from a system of regional commissioners to a categorical system of taxpayer directors. For instance, previous to 1998, the Midwestern states would have had a commissioner who would have looked into a variety of cases. After 1998, there were directors responsible for enforcement for each type of taxpayer. In this case, the director of exempt organizations oversees tax compliance for all churches in the nation. There’s another director for large and medium businesses, another for wages and investments, and so on.
Living Word argued that the director who issued the summons for church financial statements did not have a high enough level of authority to issue the summons and that’s why the church did not comply. It was the director of exempt organization examinations who issued the summons, and that position is fourth in line on the IRS chain of command.
“Our argument is that [authority] wasn’t delegated correctly” since the IRS restructuring and that the summons should have gone to a higher level for review, said Pickhardt.
The attorney for the IRS, Robert Fay, said that isn’t the case. Courts have recognized that government agencies have deference in how to implement statutes, and the IRS restructuring in 1998 effectively replaced the commissioner system with a system of directors who wield the same level of authority as commissioners once did.
Judge Keyes noted that there is virtually no case law governing this issue. “I’m surprised that in the last 10 years this issue hasn’t been raised before.”
The judge gave lawyers for both sides two weeks to submit a statement about the issue of authority before he issues a judgment on whether Living Word will be required to comply with the summons.