Community Lutheran School v. Iowa Dept. of Job Service

• Citation: 326 N.W.2d 286
• Decision Date: 24 November 1982
• Docket Number: No. 66485,66485
• Parties: 7 Ed. Law Rep. 995 COMMUNITY LUTHERAN SCHOOL, Lutheran Interparish School Association, and Zion- Saint John Lutheran School Association, Appellants, v. IOWA DEPARTMENT OF JOB SERVICE, Appellee.
• Court: United States State Supreme Court of Iowa

Page 286

326 N.W.2d 286

7 Ed. Law Rep. 995

COMMUNITY LUTHERAN SCHOOL, Lutheran Interparish School Association, and Zion- Saint John Lutheran School Association, Appellants, v. IOWA DEPARTMENT OF JOB SERVICE, Appellee.

No. 66485.

Supreme Court of Iowa.

Nov. 24, 1982.

Paul E. Horvath, Des Moines, for appellants.

Joseph L. Bervid, Walter F. Maley, and Blair H. Dewey, Des Moines, for appellee.

Considered en banc.

UHLENHOPP, Justice.

In this appeal we are asked to recognize a statutory exemption from coverage of the Iowa Employment Security Law, chapter 96 of the Iowa Code of 1981 (IESL), for three parochial schools which are separately incorporated from the churches in Iowa that formed them. The schools are Community Lutheran School, incorporated by Immanuel Lutheran Church, Klinger, and St. Paul's Lutheran Church, Readlyn; Lutheran Interparish School Association, incorporated by St. Paul's Lutheran Church, Williamsburg, St. John's Lutheran Church, Homestead, Immanuel Lutheran Church, Williamsburg, and Trinity Lutheran Church, Conroy; and Zion-St. John Lutheran School Association, incorporated by Zion Evangelical Lutheran Church and Evangelical Lutheran Church of St. John, Paullina. All of these churches and schools are affiliated with the Lutheran Church-Missouri Synod. Each of the three schools appealed to district court from denial of the exemption by the Iowa Department of Job Service. The appeals were there consolidated for review, and were affirmed. The schools then appealed to this court. We will refer to the schools collectively as the Lutheran schools.

This litigation arose as a result of recent amendments to the Federal Unemployment Tax Act (FUTA), chapter 23 of the Internal Revenue Code, and to IESL. FUTA imposes a tax on certain employers with respect to their employees but exempts all non-profit employers. FUTA allows covered employers to offset against their FUTA tax liability contributions into a federally-approved state unemployment fund. In order to meet federal standards, state unemployment compensation laws must cover certain non-profit employers who are otherwise exempt under FUTA.

Prior to 1978, FUTA permitted qualified state unemployment programs to exclude non-profit employers from coverage as 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; [or] (3) in the employ of a school which is not an institution of higher education.

....

I.R.C. § 3309(b) (1976). Iowa's plan contained identical provisions in order to qualify. Iowa Code § 96.19(7)(a)(6)(a), (b), (c) (1977). All public and private schools were exempt from coverage under this statute.

In 1976 Congress amended FUTA by deleting the third exemption for employees "in the employ of a school which is not an institution of higher education." Pub.L. No. 94-566, § 115(b)(1), 90 Stat. 2670 (1976) (effective 1978). Iowa likewise deleted this exemption in order to remain qualified. 1977 Iowa Acts, ch. 54, § 20; Iowa Code § 96.19(6)(a)(6)(a), (b), (c) (1981) (all references are to that Code unless otherwise stated).

The United States Secretary of Labor interpreted this deletion as making covered employers, for purposes of FUTA, of all elementary and secondary schools regardless of their public, private, or religious nature. Furthermore, in light of the deletion he interpreted the exemption of section 3309(b)(1), relating to religious employers, as not exempting religious schools from coverage.

The Secretary's directive regarding coverage of religious schools did not meet with success. Two cases did follow the directive. Ascension Lutheran Church v. Employment Security Comm'n of North Carolina, 501 F.Supp. 843, 845 (W.D.N.C.1980); In the Matter of Northwestern Lutheran Academy, 290 N.W.2d 845, 852 (S.D.1980). Both of those cases, however, have been undercut by subsequent court decisions. The United States Supreme Court overruled Northwestern Academy and made abundantly clear that the exemption in section 3309(b)(1) is still available to elementary and secondary religious schools. St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772, 788, 101 S.Ct. 2142, 2148, 68 L.Ed.2d 612, 624 (1981). See also State of Alabama v. Marshall, 626 F.2d 366, 368 (5th Cir.1980), cert. denied, 452 U.S. 905, 101 S.Ct. 3029, 69 L.Ed.2d 405 (1981) (ignored directive and held that the deletion of section 3309(b)(3) did not remove religious schools' exemption). Apparently the present secretary of labor has abandoned the position taken in the directive. See California v. Grace Brethren Church, 457 U.S. 393, ----, 102 S.Ct. 2498, 2505, 73 L.Ed.2d 93, 104 (1982).

In St. Martin the Court set out the test for exemption under section 3309(b)(1). One method of obtaining exemption is to demonstrate that the school employees are "in the employ of a church." I.R.C. § 3309(b)(1)(A). The schools in St. Martin were held to meet this exemption, as they were directly operated by a church. 451 U.S. at 785, 101 S.Ct. at 2149, 68 L.Ed.2d at 622. Though not at issue in St. Martin, the Court noted that a religious school separately incorporated from a church would not fall under the section (b)(1)(A) exemption but instead would have to meet the requirements of section (b)(1)(B) by showing "(1) that the organization 'is operated primarily for religious purposes', and (2) that it is 'operated, supervised, controlled, or principally supported by a church or convention or association of churches'." Id. at 782, n. 12, 101 S.Ct. at 2148, n. 12, 68 L.Ed.2d at 620, n. 12.

After the Secretary's directive but before the decisions in St. Martin and Alabama v. Marshall were announced, the Iowa Department of Job Service notified Iowa parochial schools that they would have to pay unemployment tax. Several schools including the Lutheran schools challenged the extension of coverage to them. An administrative hearing officer ruled against Job Service and granted exemptions as to schools whose employees were under the direct control of a church. The hearing officer based his decision on this court's holding in Sugar Plum Tree Nursery School v. Iowa Dep't of Job Service, 285 N.W.2d 23 (Iowa 1979).

In Sugar Plum we held employees of a day care center directly operated by a church were "in the employ of a church" and their services were exempt under section 96.19(6)(a)(6)(a) of the Iowa Code--Iowa's statutory equivalent to FUTA's section 3309(b)(1)(A). But we did not reach the issue of what exemption, if any, applies to religious schools separately incorporated from churches.

In resolving the latter issue in the challenge by the schools, the hearing officer used the test not yet annunciated in St. Martin, that a separately incorporated school must show (1) it is operated primarily for a religious purpose and (2) it is operated, supervised, controlled, or principally supported by a church or convention or association of churches. While holding that the second prong of the test was met by the Lutheran schools, the hearing officer decided that those schools were operated primarily for educational purposes. He therefore denied them exemption.

The Lutheran schools appealed to district court pursuant to section 17A.19 of the Iowa Administrative Procedure Act (IAPA). They contended that they were operated primarily for religious purposes and therefore met the requirements of section 96.19(6)(a)(6)(a). They also contended that refusal to exempt them would constitute an unconstitutional denial of religious freedom under the first amendment to the United States Constitution. The district court agreed that the schools were operated primarily for educational purposes, and affirmed. It also held the Lutheran schools' constitutional claim to be without merit.

In their appeal to this court, the Lutheran schools ask us to determine that they are "operated primarily for religious purposes" within section 96.19(6)(a)(6)(a) of the Iowa Code and its FUTA equivalent. Should we hold to the contrary, they ask us to declare the coverage of the Lutheran schools under FUTA and IESL to be violative of the first amendment.

I. Tax exemption statutes are strictly construed with doubts resolved in favor of taxation and against exemption. Parshall Christian Order v. Board of Review, 315 N.W.2d 798, 801 (Iowa 1982); Congregation B'Nai Jerusalem v. Board of Review, 301 N.W.2d 755, 756 (Iowa 1981). Furthermore, the Iowa Employment Security Law is interpreted liberally to achieve the legislative goal of minimizing the burden of involuntary unemployment. Smith v. Iowa Employment Security Comm'n, 212 N.W.2d 471, 472-73 (Iowa 1973). Our review of agency action under IAPA is at law, not de novo. City of Davenport v. Public Employment Relations Board, 264 N.W.2d 307, 311 (Iowa 1978).

II. The Iowa exemptions to IESL were enacted to bring this state into conformity with the FUTA exemptions. Our General Assembly "plainly intended the state exception to have the same meaning as the identical federal exception." Sugar Plum, 285 N.W.2d at 24. Though this court is the ultimate determiner of Iowa law, Ellis v. Iowa Dep't of Job Service, 285 N.W.2d 153, 156 (Iowa 1979), we give unusual respect to decisions of the United States Supreme Court interpreting identical language in federal statutes. Stromberg Hatchery v. Iowa Employment Security Comm'n, 239 Iowa 1047, 1050, 33 N.W.2d 498, 501 (1948). Referring expressly to separately incorporated schools, that Court indicated the appropriate test for exemption from FUTA under section 3309(b)(1) of the Internal Revenue Code. The requirement,...