St Martin Evangelical Lutheran Church v. South Dakota

• Decision Date: 26 May 1981
• Docket Number: No. 80-120,80-120
• Citation: 451 U.S. 772,68 L.Ed.2d 612,101 S.Ct. 2142
• Parties: ST. MARTIN EVANGELICAL LUTHERAN CHURCH and Northwestern Lutheran Academy, Petitioners, v. State of SOUTH DAKOTA
• Court: U.S. Supreme Court

451 U.S. 772

101 S.Ct. 2142

68 L.Ed.2d 612

ST. MARTIN EVANGELICAL LUTHERAN CHURCH and Northwestern Lutheran Academy, Petitioners,

v State of SOUTH DAKOTA.

No. 80-120.

Argued March 3, 1981.

Decided May 26, 1981.

Syllabus

Petitioner Church, located in South Dakota, is a member of the Wisconsin Evangelical Lutheran Synod. It operates an elementary Christian day school that is not a separate legal entity from the Church, but is financed by the Church's congregation and controlled by a Board elected from the congregation. Petitioner Academy is a secondary school in South Dakota owned, supported, and controlled by the Synod, and it also is not separately incorporated. Petitioners claim exemption with respect to their school employees from unemployment compensation taxes imposed by the Federal Unemployment Tax Act (FUTA) and South Dakota's complementary statute. Title 26 U.S.C. § 3309(b) provides an exemption with respect to, inter alia, "service performed—(1) in the employ of (A) a church or convention or association of churches, or (B) an organization . . . which is operated, supervised, controlled, or principally supported by a church or a convention or association of churches." A previous exemption under § 3309(b)(3) for service performed in the employ of a school that is not an institution of higher education was repealed in 1976 when FUTA was amended. After petitioners' unsuccessful administrative appeal from South Dakota's imposition of the taxes upon them and a successful appeal to a state court, the South Dakota Supreme Court held petitioners subject to the taxes.

Held : Petitioners are exempt from unemployment compensation taxes under § 3309(b)(1)(A). Pp. 780-788.

(a) Section 3309(b)(1)(A), as enacted in 1970, applies to schools, like petitioners', that have no separate legal existence from a church, or as in the Academy's case, from a "convention or association of churches." The employees working within these schools plainly are "in the employ of . . . a church or convention or association of churches" within the meaning of § 3309(b)(1)(A). And instead of construing the term "church" in § 3309(b) as being limited to the actual house of worship, a construction that would contradict the phrasing of FUTA, such term must be construed as referring to the congregation or the hierarchy itself, that is, the church authorities who conduct the business of hiring, discharging, and directing church employees. Pp. 781-785. (b) The legislative history, including the repeal of § 3309(b)(3), discloses no intent by Congress to alter the scope or meaning of § 3309(b)(1). Pp. 785-788.

S.D., 290 N.W.2d 845, reversed and remanded.

E. Thomas Schilling, Washington, D. C., for petitioners.

Allen R. Snyder, Washington, D. C., for the States of Alabama and Nevada, as amici curiae, by special leave of Court.

Mark V. Meierhenry, Pierre, S. D., for respondent.

Barry Sullivan, Washington, D. C., for United States, as amicus curiae, by special leave of Court.

Justice BLACKMUN delivered the opinion of the Court.

Petitioners, St. Martin Evangelical Lutheran Church (St. Martin), at Watertown, S.D., and Northwestern Lutheran Academy (Academy), at Mobridge in that State, claim exemption with respect to their school employees from taxes imposed by the Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301-3311 (1976 ed. and Supp.III), and by South Dakota's statutes complementary thereto, S.D. Codified Laws § 61-1-1 et seq. (1978 and Supp.1980). The exemption is claimed on both statutory and First Amendment grounds. The provisions primarily at issue are FUTA's § 3309(b) ¹ and South Dakota's § 61-1-10.4.²

I

A.

FUTA appeared originally as Title IX of the Social Security Act of 1935, 49 Stat. 639, and was enacted in response to the widespread unemployment that accompanied the Great Depression. It called for a cooperative federal-state program of benefits to unemployed workers.³ The Act has undergone a series of amendments that progressively have expanded coverage of the Nation's work force.⁴

This case concerns one of the more recent of those amendments, namely, that effected by § 115(b)(1) of the Unemployment Compensation Amendments of 1976, Pub.L. 94-566, 90 Stat. 2670. The Secretary of Labor has determined that this statute rendered nonprofit church-related primary and secondary schools subject to FUTA. The South Dakota authorities went along with that ruling in their interpretation of the State's amended statute. Petitioners are among those religiously affiliated schools so claimed to be required to pay the FUTA and South Dakota taxes. They contest this construction of the statutes. They argue also, however, that holding them subject to the taxes would violate both the Free Exercise Clause and the Establishment Clause of the First Amendment.

B

Proper understanding of the effect of the 1976 amendment requires a review of FUTA's development. From 1960 to 1970, FUTA, by § 3306(c)(8), unrestrictedly excluded from the definition of "employment" all "service performed in the employ of a religious, charitable, educational, or other organization described in section 501(c)(3) which is exempt from income tax under section 501(a)." Pub.L. 86-778, § 533, 74 Stat. 984.⁵ Under this definition, nonprofit church-related schools, of course, were exempt from the tax. A 1970 amendment, however, served to narrow that broad exemption of nonprofit organizations.⁶ See Employment Security Amendments of 1970, Pub.L. 91-373, § 104(b)(1), 84 Stat. 697. The amendment generally required state coverage of employees of nonprofit organizations, state hospitals, and institutions of higher education. Simultaneously, however Congress enacted a new and narrower exemption of nonprofit organizations and governmental entities. So far as pertinent to this case, that exemption was set forth in a new § 3309(b), which then provided:

"This section shall not apply to service performed—

"(1) in the employ of (A) a church or convention or association of churches, or (B) an organization which is operated primarily for religious purposes and which is operated, supervised, controlled, or principally supported by a church or convention or association of churches;

"(2) by a duly ordained commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order;

"(3) in the employ of a school which is not an institution of higher education . . . ."

No one, including the Secretary of Labor, disputes that church-run elementary and secondary schools remained exempt under this new § 3309(b).

In 1976, Congress again amended the Act. Unemployment Compensation Amendments of 1976, Pub.L. 94-566, § 115(b)(1), 90 Stat. 2670. The effect of the 1976 amendment, so far as pertinent to this case, was to eliminate completely the theretofore existing subsection (b)(3).⁷ Subsections (b)(1) and (b)(2), dealing specifically with religious employment, remained unchanged.⁸

In 1978, the Secretary of Labor announced, in a letter made public, that the 1976 repeal of § 3309(b)(3) of FUTA was

"clearly intended to result in State coverage of church-related schools, whose employees constitute over 80 percent of the employees of all nonprofit schools. In light of the repeal of 3309(b)(3), we think the only services performed in the schools that may reasonably be considered within the scope of the exclusion permitted by 3309(b)(1) are those strictly church duties performed by church employees pursuant to their religious responsibilities within the schools." Letter dated April 18, 1978, of Secretary Marshall to the Most Reverend Thomas C. Kelley, O. P., General Secretary, United States Catholic Conference.

The Secretary also ruled that neither § 3309(b)(1)(A) nor § 3309(b)(1)(B) was applicable to church-run schools. He notified the States, and they took steps for the collection of unemployment taxes from church-related schools. See Employment and Training Administration, U.S. Department of Labor, Unemployment Insurance Program Letter No. 39-78 (May 30, 1978), reprinted in [1978 Transfer Binder] CCH Unemp.Ins.Rep. ¶ 21,522.

II

Both St. Martin and the Academy are members of the Wisconsin Evangelical Lutheran Synod and, as such, are organizations exempt from federal income tax under 26 U.S.C. § 501(c)(3). St. Martin operates a state-certified elementary Christian day school at Watertown that offers kindergarten through eighth-grade education. The school, which is not a separate legal entity from the church, is controlled by a Board of Education elected from the local congregation. The congregation entirely finances the school's operation. The Academy is a state-certified 4-year secondary school at Mobridge and is owned, supported, and controlled by the Synod. It, also, is not separately incorporated. Approximately half of its students go on to become ministers within the Church. According to the record, all courses given at St. Martin and at the Academy are taught from a religious point of view based on the Synod's scriptural convictions.

When South Dakota proposed to tax them under § 61-1-10.3, petitioners took an administrative appeal. The Appeals Referee of the State's Department of Labor—Unemployment Insurance Division ruled that service performed by employees of each petitioner was "employment" within the meaning of the statute. Although finding that the Synod "believes a theological basis exists for their schools" and operates them because it "holds the conviction that training of the youth involves both education and religion and that the two are so closely interwoven they cannot be separated," App. to Pet. for Cert. A-36, the Referee declined to rule that petitioners were exempt under § 61-1-10.4, the state analogue to 26 U.S.C. § 3309(b). See nn. 1 and 2, supra. He ruled that petitioners were not eligible for exemption under § 61-1-10.4(1)(a) because, in his view, the term "church," as used in that ...