Wisconsin Supreme Court Agrees to Hear Catholic Charities Bureau Challenge that it is not a Religious Organization

We have previously blogged about a Wisconsin Appellate Court ruling that Catholic Charities Bureau, Inc. and its 63 affiliated entities around the state are not “religious organizations” and therefore not entitled to a state law exemption from paying workers compensation taxes.  I noted that the holding seemed counterintuitive but was not without logical support.  Catholic Charities filed a petition and the Wisconsin Supreme Court has agreed to hear the case.  Here are the essential facts illuminating the challenged conclusion:

The Catholic Church (the Church) is indisputably a church, and therefore a religious organization.  It is also exempt under 501(c)(3).  Catholic Charities USA (CCUSA) is an independent charitable organization and it too is indisputably exempt under IRC 501(c)(3).  Each Catholic Charities agency is a separate legal entity operated under the auspices of the Bishop of the diocese in which the agency is located (a “sub-unit”). CCUSA has no control over or ownership interest in any sub-unit and CCUSA has no ownership interest in any member agency.

CCUSA does not claim to be a church, but because it is operated under the supervision of the Bishop of the diocese in which it is located, and because its charitable activities are carried out in accordance with the Church’s teaching, it claims religious status.  All of CCUSA’s sub-entities are exempt under 501(c)(3), but they need not be a church or have a religious purpose.  

According to the Wisconsin 3rd Appellate Court:

CCB [CCUSA]’s role is to provide management services and consultation to its sub-entities, establish and coordinate the sub-entities’ missions, and approve capital expenditures and investment policies. CCB’s executive director, who is not required to be a Catholic priest, oversees each sub-entity’s operations. Nonetheless, CCB’s internal organizational chart establishes that the bishop of the Diocese of Superior oversees CCB in its entirety, including its sub-entities, and is ultimately “in charge of” CCB. New CCB employees are provided with CCB’s mission statement, statement of philosophy, and code of ethics, and they are informed that their employment “is an extension of Catholic Social Teachings and the Catechism of the Church.” Employees of CCB and its sub-entities are not required to be members of the Catholic faith, but they are prohibited from engaging in activities that violate Catholic social teachings.

To be exempt from having to pay into the state’ workers comp system, an organization that is not a church must be “operated primarily for religious purposes and operated, supervised, controlled, or principally supported by a church or convention or association of churches.”   CCUSA and its affiliates meet the requirement for supervision by a church but the appellate court ruled that neither the CCUSA or its affiliates are operating for a religious purpose.  Affiliates become sub-units of CCUSA by application, requiring only that they comply with CCUSA’s implementation rules.  Sub-units need not adhere to any particular faith, or even be religious at all.    

CCUSA argues that its activities are motivated by the Catholic faith and that makes it, and all its sub-entities religious organizations.  The State argues that it is the activities of CCUSA and its sub-entities that determine the outcome, not the motivation.  The appellate court sensibly held that both motivation and activities are determinative.  “Neither consideration alone is sufficient to prove religious purpose.  Citing Living Faith Inc. v. Commissioner, the Court noted that motivation could make any charity a religious one, so long as the fiduciaries were moved by religious belief to render charity.  The Court finally relied on the following quote from Living Faith to determine that neither CCUSA or its sub-entities operated for religious purposes:

Typical activities of an organization operated for religious purposes would include (a) corporate worship services, including due administration of sacraments and observance of liturgical rituals, as well as a preaching ministry and evangelical outreach to the unchurched and missionary activity in partibus infidelium; (b) pastoral counseling and comfort to members facing grief, illness, adversity, or spiritual problems; (c) performance by the clergy of customary church ceremonies affecting the lives of individuals, such as baptism, marriage, burial, and the like; (d) a system of nurture of the young and education in the doctrine and discipline of the church, as well as (in the case of mature and well developed churches) theological seminaries for the advanced study and the training of ministers.

The Court boiled it all down to whether “the organization exist primarily to worship and spread the faith.”  A simple affiliation with a Church is not sufficient to prove a primarily religious purpose, according to the Court, citing analogous language under IRC 3309 (relating to exemptions from the federal unemployment tax act, FUTA).  Since neither CCUSA nor its affiliates engage in activities that might be described as “spreading the faith,” but rather just plain old charity without religious undertones, neither CCUSA nor the sub-entities operate for a religious purpose.  

The reasoning seems sensible enough but the application to CCUSA, as opposed to the sub-entities is faulty because it gives no weight to CCUSA’s motivations and too much weight to its activities.  Charity is both secular and religious so when a religious motivation is unquestionable, its a religious purpose.  By contrast, the sub-units affiliated with CCUSA without any sort of profession of faith but merely to take advantage of CCUSA’s vertical and horizontal integration leading to lower costs by the sub-entities and more charitable output.  Sub-entities’ employees are not CCUSA employees nor is a sub-entity part of CCUSA or the church as a strictly legal matter.  The sub-units in the case where all organized and established separately from any church or religion and only became affiliated by application designed to achieve economies of scale.  Seems to me, CCUSA operates for a religious purpose but the sub-entities do not.  Should be interesting to see how the Wisconsin Supremes rule.

darryll jones