In Re Gem State Academy Bakery

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 *535period 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 *536any 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 takén 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 exemp*537tion 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 Reform Federation v. District Unemployment Compensation Board, 76 U.S.App.D.C. 282, *538131 F.2d 337; and Commissioner v. Orton, 6 Cir., 173 F.2d 483. Oklahoma State Fair and Exposition v. Jones, D.C., 44 F.Supp. 630, 631, concerned the liability for contributions of a fair organization. Amusement activities, vaudeville, rodeo, etc., were carried on to augment its funds used for exempt purposes. These amusements were offered to the public, in competition with private concerns. The court said:

“The problem is thrown back upon the Court as to whether the amusement program, which undoubtedly from the broad scope and analysis of the evidence is being carried on as auxiliary and as supplementary financial aid to the wider range of the scientific and educational program of plaintiff, shall exclude plaintiff from the classification of operating exclusively for scientific and educational purposes.”

“This Court has found no particular solace in the argument that statutes concerning employment and social security should require a narrower construction than those concerning income taxes where the language being construed is virtually identical. There is no satisfying basis for the suggestion.”

The U. S. Court of Appeals for the District of Columbia in National Rifle Ass’n v. Young, 77 U.S.App.D.C. 290, 134 F.2d 524, applied the strict rule of construction. This case is cited and followed by the municipal court, D.C. in Better Business Bureau v. District Unemployment Compensation Board, 34 A.2d 614 (cited by respondent) . In addition to the binding force of the decision of the circuit court, the municipal court points out that the charter of the Bureau gives it definite business-purposes. On this latter ground the case is-distinguished by the municipal court from Jones v. Better Business Bureau of Oklahoma City, 10 Cir., 123 F.2d 767, 769. In that case the court said: “While the general rule is that tax-exempt statutes are to be construed strictly in favor of the government, the rule does not apply to exemption statutes of the character here involved. Such a statute should be liberally construed so as to further rather than hinder its beneficent purpose. The purpose of this exemption is to encourage religious, charitable, scientific, literary, and educational associations not operating for the profit of any private shareholder or individual.” See cases cited in the footnote.

State Courts have likewise quite generally followed the rule in favor of the exemption. Santa Fe Lodge No. 460 B.P.O.E., v. Employment Security Comm., 49 N.M. 149, 159 P.2d 312; Temple Lodge v. Tierney, 37 N.M. 178, 20 P.2d 280; Scripps Memorial Hospital v. California Employment Comm., 24 Cal.2d 669, 151 P.2d 109, 155 A.L.R. 360 and note; Virginia Mason Hospital Ass’n v. Larson, 9 Wash.2d 284, 114 P.2d 976. This court in Big Wood Canal Co. v. Unemployment Compensation Division, 61 Idaho 247, 100 P.2d 49, 50, states the rule applicable to exemption from "a *539general tax” and then applies the rule favoring the exemption of agricultural labor.” This is in harmony with Stromberg Hatchery v. Iowa Employment Security Comm., 239 Iowa 1047, 33 N.W.2d 498. The Iowa court held that the exclusion of agricultural labor was not intended to exclude certain classes of employees from the benefits of the act, but was to exclude the industry from its burdens.

Respondent cites, Talley v. Unemployment Comp. Division, 63 Idaho 644, 124 P.2d 784; Webster v. Potlatch Forests, 68 Idaho 1, 187 P.2d 527; and Carnegie-Illinois Steel Corp. v. Review Board, 117, Ind.App. 379, 72 N.E.2d 662. These cases are concerned with claims of unemployed workers seeking to establish eligibility, and do not involve the question of covered employment under the exemption provisions. Hence the rule they announce has no application here.

Respondent also cites, Maine Unemployment Compensation Comm. v. Androscoggin Jr., Inc., 137 Me. 154, 16 A.2d 252; Unemployment Compensation Comm. v. Harvey, 179 Va. 202, 18 S.E.2d 390; and Unemployment Comp. Dept. v. Hunt, 17 Wash.2d 228, 135 P.2d 89. These cases involve the question of whether the particular employment is covered by reason of the master and servant relationship. We are not concerned with that provision of the statute in this case. In Murphy v. Concordia Publishing House, 348 Mo. 753, 155 S.W.2d 122, 136 A.L.R. 1461 and note, and Northeast Osteopathic Hospital v. Keitel, 355 Mo. 740, 197 S.W.2d 970 (also cited), exemption was denied because charter provisions included non-exempt purposes. The words of the statute, “organized and operated” import two distinct propositions. Accordingly, exemption has been denied where the charter or articles of incorporation declare a purpose which is not exempt. Exemption is also denied, without reference to the charter, where) the organization is operated for a non-exempt purpose. In such cases, however, the courts do not deny the exemption if the non-exempt activity is merely incidental to the main purpose of the organization, and all of the income from the activity is devoted to such purpose. Trinidad v. Sagrada Orden De Predicadores, supra.

In the case before us, charter provisions are not referred to. It is admitted that the organization’s general purposes are entirely within the exemption, and that all of its income is devoted to such purposes. The sale of its surplus 'bakery products appears to be incidental only to such purposes.

In 1945 the question was again before the Supreme Court in Better Business Bureau v. U.S., 326 U.S. 279, 66 S.Ct. 112, 114, 90 L.Ed. 67. Referring to the rule of the Trinidad case, the court said, “It is unnecessary to decide that issue here.” The petitioner’s claim of exemption, as an organization devoted exclusively to scientific and educational purposes, was denied on the ground that its activities were largely devoted to commercial ends, and that its *540charter provided for these non-exempt objects. The court said:

“ * * * it 'being apparent beyond dispute that an important if not the primary pursuit of petitioner’s organization is to promote not only an ethical but also a profitable business community. The exemption is therefore unavailable to petitioner.” and

“ * * * Petitioner’s activities are largely animated by this commercial purpose.”

The general proposition is stated by Cooley as follows: “While in some states exemptions of religious, charitable and educational property or institutions are strictly construed, the better rule seems to be that laid down in some states requiring a liberal rather than a strict construction in such cases or at least that the same strictness of construction will not be indulged where the exemption is of such institutions.” 2 Cooley, Taxation, 4th Ed., page 1415.

However, the question as to “Liberal” or “strict” construction is secondary in importance to that of uniformity with the federal decisions. Both the federal and the state statutes contemplate cooperation, each with the other, and in interdependent operation of the two administrations. Both are directed toward a single objective, and both having used the same language, a common meaning should prevail. As urged by respondent, section 72-1302, I.C., containing the legislative declaration of public policy, requires a liberal and broad interpretation of the act as a whole, in order to accomplish its humanitarian purposes. Webster v. Potlatch Forests, supra. It is none-the-less evident that the exemption, with which we are concerned here, was intended to encourage religious, charitable, scientific, literary, and educational organizations by relieving them of the burden of the tax, and thus promoting the accomplishment of their beneficent purposes. This also calls for a liberal interpretation. Thus we are confronted with a clash of two worthy objectives. If a choice must be made between the two, then that choice must be made by the legislature, not the courts. The same conflict has arisen in the application of the exemptions under the income tax law, and the same or similar exemptions under the Social Security Act. The problem is stated and the remedy suggested (as to charities) by the compiler of the note in 55 Harvard Law Review 1056: “ * * * A liberal interpretation under the income, estate, and gift taxes encourages charities at the expense of the general taxpayer, while the same interpretation of the exemption under the Social Security Act encourages them at the expense of their employees. * * * But the difficulties inherent in overcoming the coincidence of phrasing suggests that the remedy lies only with Congress. * * If interpretation is to be uniform, courts should not deny exemptions under the Social Security Act without carefully examining the tax consequences of its inter*541pretation under other federal taxes.” Here, also, it would seem that if a different rule of exemption is to be applied to cases coming under our state income tax law than is to be applied to those within the purview of the Employment Security Law, the differentiation must be supplied by the legislature.

The determination and the wisdom of such policies rests with the legislative department. “ * * * The wisdom of omitting from the coverage of that Act those people who are employed by religious corporations is a matter for the Congress and not for us.” O’Leary v. Social Security Board, 3 Cir., 153 F.2d 704, 707.

We conclude that the appellant is not required to make the contributions claimed by respondent. The order is reversed. Costs to appellant.

HOLDEN, C. J., and KEETON, J., concur.