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It's Sunday morning and the 11 a.m. church service at Living Word Christian Center in Brooklyn Park is in full swing. Hands sway in the air as the worship band plays. Television cameras above the congregation transmit the message to the at-home faithful. Polka-dot circles of light chase each other across the front wall of the sanctuary like a school of fish. As the music fades and the lights disappear, Pastor James "Mac" Hammond steps onto the stage, dressed in a well-cut charcoal suit and shiny purple tie. Hammond urges his flock to vote on November 4 for the candidate most in line with the word of God, but stops short of endorsing someone by name. Then the pastor invokes a fundamental tenet of his gospel: "It is the will of God that you prosper," he proclaims.
Mac Hammond inspires his congregation with the "prosperity gospel," a version of the good news in which following Christ leads to material wealth. With 9,000 members as of last year, a Bible college, elementary and high schools, a drug-treatment clinic, and a television audience reached through KARE-11, Living Word seems showered in God-given riches. The church bulletin proclaims a weekly operating income need of $319,822—or $16.6 million a year. Hammond, too, is a poster boy for his message. Though churches are not required to report the earnings of their pastors to the public, Hammond has garnered enough to donate almost $2.5 million back to his church.
But recently, the very prosperity Hammond preaches has gotten him into a sticky situation with the Internal Revenue Service. Living Word and the taxman are in the midst of a federal court battle over the church's refusal to comply with an IRS tax summons. The government wants to know the details of an arrangement in which the church helped Hammond finance an airplane, then leased it from him and paid the fees to keep it in a hangar. The IRS also wants information on loans Living Word made to Hammond—including helping to pay for his residence—which the church partially forgave.
Citizens for Responsibility and Ethics in Washington, a D.C.-based watchdog group, filed two complaints with the IRS about Living Word. One was over these financial arrangements; the other came after Hammond invited Michele Bachmann to the church in 2006 and proclaimed that he would vote for her.
If the IRS determines that the airplane deal or the personal loans violated rules prohibiting excessive financial benefit to insiders of 501(c)3 tax-exempt organizations, Hammond could be forced to pay the church back, as well as pay a fine to the IRS. In the worst case, Living Word could lose its tax-exempt status, though that scenario is unlikely.
At first glance it's easy to categorize Living Word as just another church thumbing its nose at the government, as more than 30 pastors did last month when they flouted the prohibition on tax-exempt organizations participating in political activities by endorsing Republican presidential candidate John McCain from the pulpit. But unlike these churches, says Walter Pickhardt, the Faegre & Benson tax attorney representing Living Word, the church's position is grounded in the law. "This is not a frivolous issue," says Pickhardt. "This is a First Amendment issue."
Living Word's main argument is that the IRS violated the very procedural rules designed to protect religious organizations from politically motivated audits. Pickhardt argues that the individual who initiated the church tax inquiry—Marsha Ramirez, the director of Exempt Organizations, Examinations—wasn't high-ranking enough. The argument is rooted in an ambiguity in the tax code created during the agency's restructuring 10 years ago. The code defines the appropriate high-level official as someone whose rank is at least as high as that of regional commissioner—a position eliminated during the restructuring.
"Given that the IRS has known about this for some time, it surprises me that the IRS hasn't fixed it," says Charles Watkins, an attorney at Webster, Chamberlain & Bean in Washington, D.C., who served as counsel to the IRS in the 1980s.
U.S. District Court Magistrate Judge Jeffrey Keyes took the arguments seriously enough in court earlier this month to ask for more information. This is the first time that this argument has been made, and Keyes said he could see it moving through the higher courts. Since the number of church tax inquiries has been going up, according to several legal experts, the Living Word case could have ramifications for faith communities across the nation.
"These are issues that not only Living Word faces," says Amy Rotenberg, church spokeswoman, "but all faith communities could find themselves in the same situation. Whatever the court decides will then become precedent that will impact how the government behaves going forward."
If the courts ultimately find that the IRS inquiry was valid, then Living Word will have to give up whatever documents a judge deems appropriate. But even if the IRS did ignore proper procedure in this round, it could probably start the process again, stick close to the rulebook, and try to get the church's ledgers, says Katina Peterson, a tax attorney at Dorsey & Whitney in Minneapolis.