Gem State Academy Bakery, In re, 7608

Citation70 Idaho 531,224 P.2d 529
Decision Date06 April 1950
Docket NumberNo. 7608,7608
CourtUnited States State Supreme Court of Idaho

Willis C. Moffatt, Boise, Doane & Furey, Boise, for appellant.

Robert E. Smylie, Atty. Gen., John W. Gunn, Asst. Atty. Gen., for respondent.

TAYLOR, Justice.

Following a hearing the Industrial Accident Board affirmed a determination by the Employment Security Agency, to the effect that the Gem State Academy Bakery is liable for the payment of contributions to the employment security fund, upon remuneration paid to truck drivers, engaged in the sale and delivery of bakery products, and to the manager of the bakery. The facts are not in dispute and are succinctly stated in the findings of the board:

'I. The real employer or proprietor herein is the Idaho Conference of Seventh Day Adventists, a religious organization, which is mainly supported by contributions from its church membership. Among its activities it conducts schools, of which the Gem State Academy is one. This is a boarding school which it maintains and operates at Caldwell, Canyon County, Idaho, where approximately 150 pupils are educated not only in religion, but intellectually and vocationally. As an essential part of its vocational system the school maintains a dairy, a cafeteria and a bakery, the latter called Gem State Academy Bakery.

'II. The bakery for a number of years was privately owned and operated as the College Heights Bakery. During that period the Academy had an arrangement with the owner under which a number of its students were vocationally trained therein. The owner desiring to discontinue the business, on April 1, 1948, the Conference purchased the bakery at an approximate cost of $22,000.00 for the purpose of continuing it as a unit in the Academy's vocational educational program for from 30 to 40 students, something less than a third of the Academy's total enrollment.

'Since then the bakery has been operated by the Conference through the Academy under a manager employed for that purpose. The manager receives what is termed a 'missionary wage' in the Adventists' denominational parlance, the same as the Conference pays to its other workers and teachers. According to the financial statements, in its book-keeping, half of the manager's salary is charged as 'selling expense.'

'III. The bakery employs students who are taking the course, such employment being considered as part of their vocational training. In part their employment has a charitable aspect, since some of them could not otherwise attend school. So far as needed bakery products are supplied to the Academy and cafeteria.

'A local sales-room is maintained, presumably with student help, where products are sold at retail to the public.

'No commercial advertising of the bakery is carried on over the radio or in the newspapers.

'Bakery products are sold at retail on routes in the more remote rural sections in and around the trade area tributary to Caldwell. For this purpose seven truck drivers are employed on a commission basis. Such employees are not teachers or students but members of the church with families. They make regular trips delivering to regular customers and from time to time solicit additional customers.

'Gross sales are shown currently to be somewhat in excess of $4000.00 per month. In book-keeping the receipts from the sale of bakery products are set up to offset expense and the profits, currently comparatively small, are turned over to the Academy or Conference.

'The whole operation of the bakery is subsidized by the Conference and gain is mostly reflected in capital account. The Conference as proprietor absorbs the loss, if any, and benefits from the profit, if any. No profit inures to the benefit of any individual.'

The question presented is whether or not the employment involved is exempt from the operation of the Employment Security Law by the terms of section 72-1316(a)((7), I.C.: 'Service performed in the employ of a corporation, community chest, fund, foundation, or association organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation.'

It is agreed that the Idaho Conference of Seventh Day Adventists is an association organized and operated for religious and educational purposes, and that no part of its net earnings inures to the benefit of any private shareholder or individual. All the earnings of the bakery, including those resulting from the sales made by the employees in question, are used by the conference in promotion of its religious and educational purposes. It also appears from the record that charity is one of its purposes, at least as an adjunct of its religious and educational activities.

In its rulings of law the board said: 'It is to be noted that the first test of whether employment is covered or not is to be determined from the standpoint of the individual performing the service. To be exempt that service must be in an operation devoted exclusively to religious or educational purposes.' It is apparent that the board has adopted a rule of strict construction of the exemption, with particular emphasis upon the word 'exclusively.' When this law was first adopted in Idaho (Ch. 12, 1936, 3rd Ex. Session), under an exemption practically identical in terms with that quoted above, the following Administrative interpretation was adopted: 'For the purpose of the exclusion the nature of the service is immaterial; the statutory test is the character of the organization for which the service is performed.' 3 C.C.H. Unemployment Insurance Service, page 15,033. On the face of it quite the opposite of the rule stated by the board.

The language of our exemption was taken from the federal Social Security Act of 1935, 42 U.S.C.A. § 301 et seq., which in turn was taken by the Congress from its own Internal Revenue Code, Rev. Code, section 101(6), 26 U.S.C.A. § 101(6), the language of the exemption having been carried down from 1913. We also copied it in our income tax law. Property Relief Act of 1931, 63-3029(4), I.C. The general rule is that the construction of a statute of another state by its courts, if reasonable, will be followed by us, upon the subsequent adoption of the statute by our legislature. State v. Taylor, 59 Idaho 724, 87 P.2d 454; Bishop v. Morrison-Knudsen Co., 64 Idaho 806, 137 P.2d 963. As to our income tax law, the legislature made this rule of construction mandatory. Section 63-3085, I.C.; John Hancock Mut. Life Ins. Co. v. Haworth, 68 Idaho 185, 191 P.2d 359. And in our Employment Security Law itself the legislature tacitly recognizes the applicability of the rule to the construction of that law in the provisions for state cooperation with the administration of the federal act. Sections 72-1302(b) and 72-1341, I.C., as amended. Therefore, the construction of the exemption here considered, as found in the federal decisions, is quite compelling.

Trinidad v. Sagrada Orden De Predicadores, 263 U.S. 578, 44 S.Ct. 204, 205, 68 L.Ed. 458, is a decision concerned with the application of the same exemption to the income of a religious organization. It was rendered in 1924. The organization was possessed of large holdings of real estate, stocks of private corporations, and money loaned at interest, from which it derived the bulk of its income in rents, dividends and interest. It also received income from the sale of stocks, wine, chocolate and other articles. No part of the income inured to the benefit of any private stockholder or individual. The collector contended that it was not 'operated exclusively' for the stated purposes, but was also operated for business and commercial purposes. The court said:

'Whether the contention is well taken turns primarily on the meaning of the excepting clause, before quoted from the taxing act. Two matters apparent on the face of the clause go far towards settling its meaning. First, it recognizes that a corporation may be organized and operated exclusively for religious, charitable, scientific or educational purposes, and yet have a net income. Next, it says nothing about the source of the income, but makes the destination the ultimate test of exemption.

'Evidently the exemption is made in recognition of the benefit which the public derives from corporate activities of the class named, and is intended to aid them when not conducted for private gain. Such activities cannot be carried on without money; and it is common knowledge that they are largely carried on with income received from properties dedicated to their pursuit. This is particularly true of many charitable, scientific and educational corporations and is measurably true of some religious corporations. Making such properties productive to the end that the income may be thus used does not alter or enlarge the purposes for which the corporation is created and conducted. * * *'

The court observed that sales referred to were not made to the public in competition with others, and further said: '* * * That the transactions yield some profit is in the circumstances a negligible factor. Financial gain is not the end to which they are directed.' The fact that the goods were not sold to the public does not appear to be an important factor. This is the view taken of the case by the C.C.A. First Circuit, in Santee Club v. White, 87 F.2d 5, 8.

With some exceptions the rule of liberal construction in favor of exemption suggested in the Trinidad case has since been followed by the federal courts under both the income tax and social security act. Cochran v. Commissioner, 4 Cir., 78 F.2d 176; Koon Kreek Klub v. Thomas, 5 Cir., 108 F.2d 616; International...

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