Supreme Court: Wisconsin's Religious Nonprofit Exemption from Unemployment Comp. Tax Must Include Catholic Charities

In Catholic Charities Bureau, Inc. v. Wisconsin Labor and Industry Review Commission, (Sup. Ct., June 5, 2025), the U.S. Supreme Court, in an opinion by Justice Sotomayor, unanimously held that Wisconsin violated the First Amendment's religion clauses when it held that Catholic Charities Bureau does not qualify for the exemption from unemployment compensation tax that is granted by state statute to nonprofits "operated primarily for religious purposes". The Wisconsin Supreme Court had held that Catholic Charities' activities were no different than those offered by a secular organization; they did not involve worship services, religious outreach, ceremony, or religious education. In reversing the Wisconsin supreme Court, the U.S. Supreme Court said in part:

A law that differentiates between religions along theological lines is textbook denominational discrimination....

This case involves that paradigmatic form of denominational discrimination....

Put simply, petitioners could qualify for the exemption while providing their current charitable services if they engaged in proselytization or limited their services to fellow Catholics. Petitioners’ Catholic faith, however, bars them from satisfying those criteria. Catholic teaching, petitioners say, forbids “‘misus[ing] works of charity for purposes of proselytism.’” ... It also requires provision of charitable services “without making distinctions ‘by race, sex, or religion.’” ...  Many religions apparently impose similar rules.... Others seemingly have adopted a contrary approach....

Wisconsin’s exemption, as interpreted by its Supreme Court, thus grants a denominational preference by explicitly differentiating between religions based on theological practices.

Justice Thomas filed a concurring opinion, saying in part:

As a matter of church law, Catholic Charities and its sub-entities are an arm of the Diocese of Superior, and thus, for religious purposes, are not distinct organizations.  But, when determining whether Catholic Charities was a religious organization entitled to a tax exemption, the Wisconsin Supreme Court nevertheless relied on Catholic Charities’ separate corporate charter to treat it as an entity entirely distinct and separate from the Diocese. That holding contravened the church autonomy doctrine....

Justice Jackson filed a concurring opinion, saying in part:

The Federal Unemployment Tax Act (FUTA) allows a State to exempt from its unemployment-coverage mandate any “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.”... The State treats church affiliated charities that proselytize and serve co-religionists exclusively differently from those that do not.... Because I agree that this distinction violates the neutrality principle of the Constitution’s Religion Clauses, I join the Court’s opinion in full.

... [B]oth the text and legislative history of FUTA’s religious-purposes exemption confirm that Congress used the phrase “operated primarily for religious purposes” to refer to the organization’s function, not its inspiration....

Congress sought to extend to most nonprofit workers the stability that unemployment insurance offers, while exempting a narrow category of church-affiliated entities most likely to cause significant entanglement problems for the unemployment system—precisely because their work involves preparing individuals for religious life. It is perfectly consistent with the opinion the Court hands down today for States to align their §3309(b)(1)(B)-based religious-purposes exemptions with Congress’s true focus.

SCOTUSblog reports on the decision. 

Wisconsin Supreme Court Says Catholic Charities Not Exempt from Unemployment Comp Law

 In Catholic Charities Bureau, Inc. v. State of Wisconsin Labor and Industry Review Commission, (WI Sup. Ct., March 14, 2024), the Wisconsin Supreme Court by a vote of 4-3 held that Catholic Charities Bureau and four of its sub-entities are not entitled to an exemption from the state's unemployment compensation law.  The statute exempts nonprofit organizations "operated primarily for religious purposes and operated, supervised, controlled, or principally supported by a church or convention or association of churches." The court concluded that under the statute, what is important is the purpose of the nonprofit organization, not the purpose of the church which controls it. The court said in part:

... [I]n determining whether an organization is "operated primarily for religious purposes" within the meaning of Wis. Stat. § 108.02(15)(h)2., we must examine both the motivations and the activities of the organization....

CCB and the sub-entities profess to have a religious motivation.... However, accepting an organization's motivations does not end the inquiry as we must also examine its activities....

 Here, such criteria weigh in favor of a determination that CCB's and the sub-entities' activities are not "primarily" religious in nature.  The record demonstrates that CCB and the sub-entities, which are organized as separate corporations apart from the church itself, neither attempt to imbue program participants with the Catholic faith nor supply any religious materials to program participants or employees.  Although not required, these would be strong indications that the activities are primarily religious in nature....

CCB's and the sub-entities' activities are primarily charitable and secular.  The sub-entities provide services to individuals with developmental and mental health disabilities.  These activities include job training, placement, and coaching, as well as services related to activities of daily living.  CCB provides background support and management services for these activities——a wholly secular endeavor....  

Such services can be provided by organizations of either religious or secular motivations, and the services provided would not differ in any sense....

The court also concluded that neither this inquiry nor the required payment of unemployment tax violates the Free Exercise or Establishment Clauses.

Justice Bradley, joined in part by Chief Justice Ziegler, filed a lengthy dissenting opinion, saying in part:

 Impermissibly entangling the government in church doctrine, the majority astonishingly declares Catholic Charities are not "operated primarily for religious purposes" because their activities are not "religious in nature."... The statute, however, requires only that a nonprofit be operated primarily for a religious reason.

Justice Hagedorn also filed a brief dissenting opinion.

AP reports on the decision, as does Courthouse News Service,

Mississippi Governor Signs Ban on Gender Transition Procedures for Minors

Yesterday Mississippi Governor Tate Reeves signed into law House Bill 1125, the Regulate Experimental Adolescent Procedures Act (full text). The new law bans providing gender transition procedures (including puberty blockers, hormonal treatments and surgery) for persons under the age of 18.  It also prohibits use of public funds and Medicaid coverage for such procedures and prohibits state income tax deductions for expenses of the procedures.  In a press release announcing his signing of the bill, Governor Reeves said in part:

At the end of the day, there are two positions here. One tells children that they’re beautiful the way they are. That they can find happiness in their own bodies. The other tells them that they should take drugs and cut themselves up with expensive surgeries in order to find freedom from depression. I know which side I’m on.

In Israel, Jerusalem Municipality Places Tax Lien on Vatican-Owned Guest House

Times of Israel reports that the Jerusalem Municipality has placed a lien on the bank accounts of the Vatican-owned Notre Dame of Jerusalem Center.  The Center contains a guest house with rooms and suites for travelers, a chapel, restaurants and other facilities.  Municipal authorities say that the Center owes $5 million in back taxes, contending that it operates as a regular hotel. The Vatican says it is a non-profit organization serving Christian pilgrims. The paper explains in part:

Religious institutions in Israel, including churches and monasteries, are exempt from paying property tax. However, in recent years, Israel has sought to come to an agreement with the Vatican that would place Church-owned commercial enterprises — like hotels and coffee shops — under taxation.....

The Church’s position is that since the sides have not come to a final agreement, the existing arrangement in which no properties are taxed should remain in force.

The state has not fought this claim, but in 2018, the Jerusalem municipality decided — citing the legal opinion of Gabriel Hallevy, whom it described as an international law expert — that the exemption for churches applies only to properties used “for prayer, for the teaching of religion, or for needs arising from that.”

The church argues that the guest house functions as a religious institution, and should be exempt from the taxes....

Last Defendant In Poway Synagogue Tax Fraud Scheme Sentenced

The U.S. Attorney's Office for the Southern District of California announced on Friday that attorney Elliot Adler, the eleventh and last individual being prosecuted for the tax fraud scheme connected with Chabad of Poway, was sentenced to one year and one day in prison, fined $20,000, and ordered to forfeit gold coins purchased with funds used in the fraud. According to the announcement:

Beginning at least as early as 2010 and continuing through October 2018, Adler participated in a so-called “90/10” tax scheme with Rabbi Goldstein. Specifically, Adler gave money to Rabbi Goldstein that purported to be a donation to Chabad of Poway. Goldstein then secretly funneled ninety percent of the funds back to Adler, keeping ten percent of the funds as his fee. None of the donated funds was actually given to the Chabad as a charitable donation. Adler then falsely claimed that the fraudulent donations were tax-deductible on his tax returns, allowing him to reduce his personal income tax liability by approximately $500,000 (cumulatively) for tax years 2011 through 2017.

(See prior related posting.)

Fetus Now A Deductible Dependent On Georgia Income Tax Return

Georgia's Living Infants Fairness and Equality (LIFE) Act amends the definition of "natural person" in Georgia's statutes to mean "any human being including an unborn child". Last month, the U.S. 11th Circuit Court of Appeals upheld the constitutionality of the Act. In light of that, Georgia's Department of Revenue has issued Guidance related to House Bill 481, Living Infants and Fairness Equality (LIFE) Act (Aug. 1, 2022), reading in part:

[T]he Department will recognize any unborn child with a detectable human heartbeat, as defined in O.C.G.A. § 1-2-1, as eligible for the Georgia individual income tax dependent exemption. The 11th Circuit’s ruling made HB 481’s amendment to O.C.G.A § 48-7-26(a), adding an unborn child with a detectable heartbeat to the definition of dependent, effective as of the date of the court’s ruling, which was July 20, 2022.

[Thanks to Scott Mange for the lead.]

Israel's Supreme Court OK's Non-Profit Tax Status For Messianic Congregation

 All Israel News reports that a 3-judge panel of Israel's Supreme Court, sitting as the High Court of Justice, last week ordered the Knesset Finance Committee to grant non-profit status to a Messianic Jewish organization, Yachad, which operates a Messianic Jewish congregation.  Last year, the Finance Committee had rejected non-profit status for the organization. The court said in part:

The decision of the Finance Committee was based on an incorrect assumption, that they had the authority to take into consideration that a nonprofit is engaged in ‘controversial’ activity. Based on the tax authority’s examination, the organization’s missionary activity is not bound to illegal activity. The representatives of the Knesset also confirmed that the decision was value-based, that it is improper to finance a religious organization seeking to convert Jews, even if their activity is legal. … This confirms that the committee overreached in its authority.

Christian Organization Appeals IRS Denial of Non-Profit Status

In a determination letter (full text) issued May 18, 2021, the Internal Revenue Service preliminarily concluded that it should deny a Section 501(c)(3) non-profit exemption to Christians Engaged because the religious organization "plans to participate ... in political campaigns on behalf of or in opposition to candidates for public office." The letter continues:

You instruct individuals on issues that are prominent in political campaigns and instruct them in what the Bible says about the issue and how they should vote. These issues include the sanctity of life, the definition of marriage, and biblical justice. These issues generally distinguish candidates and are associated with political platforms. These facts preclude you from exemption under IRC Section 501(c)(3).

... While you educate voters on what the bible says about issues, your educational activities are not neutral. The topics typically are affiliated with distinct candidates and specific political platforms.

First Liberty, on behalf of Christians Engaged, has filed an appeal with the IRS. (Full text of letter dated June 16, 2021). It contends:

... [B]y finding that Christians Engaged does not meet the operational test, Director Martin errs in three ways: 1) he invents a nonexistent requirement that exempt organizations be neutral on public policy issues; 2) he incorrectly concludes that Christians Engaged primarily serves private, nonexempt purposes rather than public, exempt purposes because he thinks its beliefs overlap with the Republican Party’s policy positions; and 3) he violates the First Amendment’s Free Speech, and Free Exercise, and Establishment clauses by engaging in both viewpoint discrimination and religious discrimination.

UPDATE: On July 7, First Liberty announced that the IRS had granted Christians Engaged tax exempt status.

 

Judge May No Deduct Litigation Expenses Borne By His Legal Defense Fund

As previously reported, in 2018 the Oregon Supreme Court suspended state circuit court judge Vance D. Day from his judicial office for three years without pay. The suspension was based in part on Judge Day's refusal to solemnize same-sex marriages.  Now in Vance v. Department of Revenue, (OR Tax Ct., March 13, 2020), the Oregon Tax Court held that Day improperly claimed as a deduction on his state income tax $128,000 in legal fees paid on his behalf by his legal defense fund.

Church of Atheism Not A Charity Under Canadian Tax Law

In Church of Atheism of Central Canada v. Minister of National Revenue, (Canada Fed. Ct. App., Nov. 29, 2019), Canada's Federal Court of Appeal held that the Church of Atheism of Central Canada is not entitled to registration as a charity under Canada's Income Tax Act.

Because the Act does not define “charitable activities”, we must turn to the common law to answer this question. At common law, there are four recognized charitable purposes, the two relevant to this appeal being “the advancement of religion” and “certain other purposes beneficial to the community” ....

Turning therefore to section 2(a) of the Charter, the appellant is correct to point out that the courts have found that this section does protect the rights of atheists.... However, I find in this case that the Minister’s refusal to register the appellant as a charitable organization does not interfere in a manner that is more than trivial or insubstantial with the appellant’s members ability to practise their atheistic beliefs. The appellant can continue to carry out its purpose and its activities without charitable registration....

Law & Religion UK reports at greater length on the decision.

9th Circuit Rejects Free Exercise Challenge To Tax Injunction Act

In Samaj v. County of Riverside, (9th Cir., July 15, 2019), the U.S. 9th Circuit Court of Appeals rejected petitioner's free exercise challenge to the federal Tax Injunction Act ("TIA"). The court said in part:

Samaj contends that by stripping the district court of its ability to entertain First Amendment challenges to state taxes, the TIA amounts to a law prohibiting the free exercise of religion. We disagree.... Although a more difficult question would be presented if Samaj were altogether precluded from suing to enjoin an allegedly unconstitutional tax, that is not the case here. The TIA only withdraws federal jurisdiction where the party has a “plain, speedy, and efficient remedy” under state law.

New Report On Payment of Church Taxes In Europe

Last week, the Pew Research Center released a new Report (full text) on public attitudes in European nations on the payment of church taxes, saying in part:

There is evidence that some Europeans are leaving the church tax system, but there does not appear to be a mass exodus. The survey finds that between 8% of adults (in Switzerland) and 20% (in Finland) say they have left their church tax system.... At the same time, majorities still support the tradition of paying taxes to religious institutions.

Canadian Court Invalidates Limits On Charities' Lobbying Expenditures

CBC reports on a July 16 decision by the Ontario Superior Court of Justice which invalidated provisions of Canada's Income Tax Act which limit expenditures for political lobbying activities by charities to 10% of its resources. (Background.)  According to CBC:

The decision by Justice Edward Morgan of the Ontario Superior Court of Justice is a reprieve for the tiny Ottawa group that launched the challenge — Canada Without Poverty — which has been under formal notice of losing its charitable status since 2016....

Morgan's decision does not alter the prohibition against charities engaging in partisan activities — that is, supporting particular candidates or political parties. Charities have not challenged that section of the Act....

But he did rule the 10 per cent rule was an arbitrary and unjustified infringement of freedom of expression as guaranteed in Section 2 of the Charter of Rights and Freedoms. And he said Canada Without Poverty needs to engage in political activity, such as buttonholing ministers and encouraging Canadians to contact their MPs, to carry out its charitable purpose.

Tax Objector's Strategy To Prevent Garnishment Does Not Constitute Tax Evasion

The Oregonian last week reported on a partial court victory by Christian tax objector Michael Bowman who for the last nearly 20 years has refused to file income tax returns unless some accommodation is made so none of his tax monies support abortion.  When in 2012 Oregon tax authorities began to garnish Bowman's bank account, he moved to keep only a small balance in his checking account by cashing his pay checks rather than depositing them.  This led federal authorities last year to charge him with felony counts of tax evasion.  However, last week an Oregon federal district court held that merely cashing pay checks, when his income was fully reported to the IRS, could not constitute tax evasion.  However Bowman still faces four federal misdemeanor counts of willful failure to file tax returns.

Mosque's Property Tax Challenge Barred By Tax Injunction Act

In Islamic Center of Nashville v. Sate of Tennessee, (6th Cir., Sept. 20, 2017), the U.S. 6th Circuit court of Appeals held that the federal Tax Injunction Act (TIA) bars suit in federal court challenging Tennessee's application of its property tax exemption rules to property of an Islamic Center.  To finance construction of a new school, the Islamic Center entered a 5-year ijara agreement-- an Islamic financing method that relies on a temporary sale and lease-back arrangement with a bank to avoid borrowing at interest.  The county removed the property's tax exemption for the period that title was technically held in the bank's name.  The court held that because state law provides a plain, speedy, and efficient
alternative to federal court review of the county's assessment of taxes on the Islamic Center, that is the route that plaintiff must take. There is no special exception to the TIA for First Amendment claims.

State Tax Deduction Available To Father Who Objected To Social Security Numbers For His Children

In Larsen v. Indiana Department of State Revenue, (IN Tx. Ct., July 31, 2017), the Indiana Tax Court held that a taxpayer who had religious objections to obtaining social security numbers for his children could still take dependency deductions for them.  Because federal tax authorities allowed alternative documentation for federal tax purposes, that suffices for state tax purposes as well.  The state tax statute merely requires that the dependency allowance was allowed by the IRS, even though the state tax form calls for more. Indiana Lawyer reports on the decision.

Ark Encounter Land Transfer Jeopardizes Tax Incentives

WHAS reported Saturday that Ark Encounter theme park may not get the $18 million in sales tax rebate incentives previously promised to it because the land on which the theme park sits has been sold for a nominal amount to a non-profit entity owned by the theme park's founder. The sale for $10 of the theme park land to Ken Ham's Crosswater Canyon-- a breach of contract-- means that Grant County, Kentucky where Ark Encounter is located will lose $700,000 in expected revenue from Safety Assessment fees as well as property taxes, even though the theme park has cost the county $715,000 for extra police and fire personnel. The Safety Assessments do not apply to non-profits. Officials are hopeful that negotiations will resolve the dispute.

UPDATE: According to Cincinnati.com, in  order to preserve its tax incentive, Ark Encounter on July 24 sold the theme park property back to its for-profit entity.

EU Ban On State Economic Subsidies Invalidates Some Applications of Tax Exemption Treaty with Vatican

Article 107(1) of the Treaty on the Functioning of the European Union prohibits EU states from granting aid that "distorts or threatens to distort competition [between Member States] by favouring certain undertakings or the production of certain goods..."  In Congregación de Escuelas Pías Provincia Betania v. Ayuntamiento de Getafe, (CJEU, June 27, 2017), the Court of Justice of the European Union held that this provision may invalidate some applications of a treaty between Spain and the Vatican exempting from taxes the property in Spain of Catholic dioceses, parishes and religious orders.  At issue is a municipal tax that would apply to the renovation and extension of a building at a school operated by a Catholic order. According to the Court, the ban on favoring certain "undertakings" applies only to "economic activity."  To the extent that the building is used for educational activities subsidized by the Spanish government, the religious order is not engaged "economic activity" and the EU Treaty does not bar a tax exemption.  However

it would seem ... the Congregación’s educational activities that are not financed by the Spanish State, corresponding to early-years teaching, extracurricular activities and post-compulsory education, meet all the criteria ... of the present judgment for classification as ‘economic activities’....

Law & Religion UK has more on the decision.

European Court Says German Church Taxes Do Not Violate Religious Freedom

In Case of Klein and Others v. Germany, (ECHR, April 6. 2017), the European Court of Human Rights in a Chamber Judgment held that Germany's church taxes do not violate Article 9 (freedom of religion) of the European Convention on Human Rights.  The holding is summarized in the press release on the case issued by the Court:

[I]n these cases the taxes/fees had been levied not by the State, but by the applicants’ churches – which the applicants were free to leave under German law. As such, in most of the cases the levying and calculation of the taxes/fees had been an autonomous church activity, which could not be attributed to the German State.

However, in one case the State had been involved in levying a special church fee on an applicant who was not a member of the relevant church. This was because the fee which had been levied on the applicant’s wife had been subtracted directly from the applicant’s tax reimbursement claim by way of an off-set – therefore subjecting the applicant to his wife’s financial obligations towards her church. However, this off-set had arisen because the couple themselves had chosen to file a joint tax assessment....

European Court of Justice Advocate's Opinion on Tax Exemption For Catholic Church

In Congregación de Escuelas Pías Provincia Betania v. Ayuntamiento de Getafe, (CJEU, Feb. 16, 2017), an Advocate General's opinion recommended that the Court of Justice of the European Union hold that a construction tax exemption for a school building to which the Catholic Church is entitled under a 1979 agreement between Spain and the Holy See does not violate the the ban on anti-competitive state aid set out in Art. 107(1) of the Treaty on the Functioning of the European Union. The opinion allows the exemption only where any commercial educational services are merely ancillary to non-profit offerings. The exemption is allowed if at least 90% of its services are educational offerings in the context of the Church's social, cultural and educational mission.  Law & Religion UK has more on the decision.